Trader Psychology and FOMO when trading
by FP Markets team
How do you explain traders desperately buying at high prices as stock prices continue to rise? Or, those who buy Bitcoin at a very high price – even when they are unsure what cryptocurrency is?
The markets are fast-paced and require real-time reactions. This can become psychologically overwhelming, especially when the markets are experiencing exceptionally high volatility and it becomes tempting to follow the crowd, resulting in Fear of Missing Out (FOMO).
What is FOMO in trading?
FOMO is common among traders. It stems from feeling that other traders are more successful and creates an urgent need to succeed as well. FOMO can lead to a lack of long-term outlook, overly high and unrealistic expectations, too little confidence or overconfidence, and impatience.
For instance, the feeling of missing out can cause traders to close trades at inopportune moments or risk too much capital. It can even make traders enter trades with little thought.
What causes FOMO when trading?
FOMO is primarily caused by hindsight bias. In psychology, this phenomenon is used to describe "people's tendency to overestimate their ability to perceive events that have already occurred when the outcome could not possibly have been predicted.”
For example, a trader may think “I could have doubled my account today.” In hindsight, this is obvious, but there is no way of knowing this until after the trade has been made.
Emotions are also a key driver of FOMO. They can lead to trading which is characterized by excessive risk levels and neglecting a trading plan. Common emotions that feed into FOMO include impatience, greed, fear, anxiety, jealousy, and excitement.
External FOMO triggers
FOMO is psychological but it can be triggered by several external factors including:
• Social media especially Twitter. Being inundated with trader success stories on social media can be toxic. It’s important to research influencers and social media posts to avoid being pressured into making poor decisions.
• News and rumours. The world of trading is affected by news and rumours and this can heighten the fear of being left out.
• Volatile markets. No trader wants to miss out on good opportunities and this can lead to hopping on a trend regardless of the direction of market movement.
Overcoming FOMO when trading
Dealing with FOMO hinges on discipline and good risk management. The following are some tips to help overcome the fear of missing out.
1. Sticking to a trading plan. Know your strategy, create a plan based on this strategy and stick to it. A robust plan can help you react to market movements in a controlled way. It also improves trading confidence by curbing emotional trading.
2. Knowledge of the markets is essential. Every trader should study and understand the markets and do their own analysis to make informed trades.
3. Waiting for other trades. You need to realise that other opportunities will come along and it’s worth waiting for the right ones. Accept that trading has its ups and downs and not every trade will be a winner, even with a good strategy.
4. Interact with other traders. Sharing experiences with other traders and understanding that they are in similar or relatable positions can make FOMO less intense and improve trading psychology. Trading forums and professional groups are a good place to start.
5. Keeping a trading journal. A journal is widely used by successful traders and is one of the most effective tools for performance management. Keeping a journal helps with recording and reviewing trades for improved trading and future reference. It also helps with tracking progress and studying mistakes. Some important statistics to record in the journal include:
• Risk/reward ratio
• Win percentage
• Trading mistakes
6. Embracing JOMO (Joy Of Missing Out).
Trading professionally requires regularly disconnecting from the market to do some analysis, refining your trading plan, or just enjoying the day. This will make you less anxious about missing out on trades.
FOMO contributes to psychological trauma in the markets and embracing JOMO can lessen or eliminate this stress. This will go a long way in improving your trading performance.
Has FOMO affected your trading? How have you dealt with it? Join the discussion, share your thoughts, and help someone who may be suffering from FOMO when trading.