In a previous blog post on Fear in Trading, I briefly touched upon the concept commonly referred to as FOMO.
I’ve spoken to a number of traders in recent weeks and one of the biggest concerns they have is not having the patience and discipline to wait for the correct entry signal in fear of missing out on the move they ‘believe’ is about to occur, thereby taking trades against their system – otherwise known as FOMO.
So what is FOMO and why does it occur?
FOMO is simply the abbreviation of ‘Fear of Missing Out’. When we refer to FOMO in trading terms, we are in essence talking about being fearful or anxious of missing out on a potential price move, and thus taking a position without receiving a proper entry signal from our trading strategy (e.g. entering too early, before we have a confirmation signal to execute a trade). This is something that I am almost certain every trader has experienced at some point in their careers. It is likely you are reading this post because you are experiencing it in your trading right now, and I hope this post helps you on your journey to overcome it.
In virtually all instances FOMO will lead to below par performance levels. However, FOMO at its worst can lead to devastating consequences.
Sometimes traders will take a trade from FOMO and they get lucky. It might be a ‘winning’ trade. However in terms of the performance in executing their strategy, that trade was still a failure. In most cases however, if a trader succumbs to FOMO they will get an appropriate result on the trade, i.e. a loser. In some instances, traders will panic and move stops/increase risk/double down, and what could have been a small loss turns into a account destroying loss, setting them back months, years, or perhaps closing the door on their trading dreams permanently.
So how can we learn to manage FOMO?
The key word in FOMO is ‘Fear’. We can never eradicate the emotion of fear. Fear will always be present in human beings, it is a natural response and trying to ‘get rid’ of feeling fear is quite frankly a waste of time. Rather, a traders focus should be on learning how to apply techniques to help them manage and/or overcome that fear.
Breathe! – When you think of someone who is in a fearful, anxious or stressed state – what is their breathing like? Is it slow and deep? Or is it sharp and shallow? Of course their breathing becomes very sharp and shallow! If a trader can become aware of their breathing and change the way they breathe, they can change their emotional state within minutes.
One exercise I like to do is the 7x7x7. Simply breathe in for a count of 7, hold for a count of 7, and breathe out for a count of 7. If there is one thing this will do, it will slow down a persons thoughts, calm them down and neuter any anxious feelings within a few minutes. Once they have done this for 5-10 minutes, all they need to do is simply re-align themselves to their trading strategy, and carry on with their day. This breathing exercise will help keep them in the present moment and increase their level of awareness in the moment, thus reducing the probability of acting rashly and making bad decisions.
Verbalise the emotions that you are feeling – When a trader verbalises the feelings/emotions that they are experiencing, they allow themselves an outlet to express themselves, rather than suppressing the emotions only for them to be released in another way (e.g. rushing a trade).
When a person hears something opposed to simply ‘thinking it’, their brain will process that information in a direct manner and give them the presence of mind to act accordingly with the information at hand. Traders can actually go one step further and verbalise the reasons of why they are taking the trade (in fact they can do this for EVERY trade, not just when they feel FOMO is at play). If they can make this into a habit in the normal course of trading, it will become easier to remember to verbalise their reasons when the negative emotional states crop up.
Acknowledge that you don’t need to catch every single move! – In my post entitled ‘How small but consistent progress adds up‘ – (please check it out!), I show just how little is needed to make extraordinary returns IF you are willing to play a long term game. Unfortunately, the fact of the matter is most traders are NOT willing to put in the time.
They say trading as a short term get rich quick scheme, and trust me when I tell you, I’ve been through this phase, and I most certainly did not get rich quick! When I accepted that I need to be in the game for long haul, things changed significantly and my performance improved greatly. As shown in the above mentioned blog post, even a small goal of 25 pips a week (yes, a week!) over time can give you remarkable results. The turning point for me was I actually created my own spreadsheet showing how my capital would grow when I utilised compounding over time. When you do this task yourself and play around with the figures, it’s amazing the effect it has on your mindset.
Warren Buffet himself states that the single most powerful factor behind his success is compound interest. So if arguably the greatest investor of all time rates compounding that highly, why shouldn’t us traders utilise it also? See, in my younger days I always had in my mind that I wanted to make 50 pips, or 100 pips a day – and I did achieve this on many occasions. However inevitably, on days where markets where not quite as volatile, I used to force things, and inevitably lose. Then I used to gear up, and lose more. It was a vicious cycle. So understanding that even if i make, 25, 50, 100 pips a week, I could still hit all of my financial goals. All I needed to do was be patient, and be consistent.
Rise above it – Every human being has the ability to control their behaviour. We experience many urges, but in many instances we do nothing about them. For example, when a friend or relative makes an inappropriate comment, or a neighbors kid keeps kicking a ball into your flower bed – sometimes you want to get angry and speak your mind, but in most instances you just smile, bite your tongue and calmly get on with the rest of your day, realising it is not a big deal and not worth the trouble.
Similarly, when a trader experiences FOMO, it is just an urge to behave in a certain way, or to execute a specific action. They may not be in a position to control their emotions, but one things is for sure, and that is that they can always control their behaviours. Just like in executing a trading opportunity, a trader cannot control the outcome of the trade, as he has no control over the market – he can only control his risk. Similarly here a trader cannot control what thoughts or emotions they experience, but they are in a position to control their behaviour. They just have to develop the will power, over time, to make the correct behavioural decisions. They need to develop themselves as a trader to try and always make the correct decisions, not necessarily the easy decisions.
The above scenario all stems from habits that the trader has picked up over time. If he has picked up bad habits, then these habits will be executed unconsciously more often than not. They need to understand what their bad habits are, and try to replace them with the desired behavioural outcome over a period of time.
Remember to trade what the Chart is telling you – This is a fairly obvious statement, but is one that is one that is frequently forgotten by Traders.
Don’t try and predict where the market is trying to go. Rather allow the chart to tell you what the most likely direction is going to be, and just follow the flow.
“Those who have knowledge, do not predict. Those who predict, do not have knowledge” – Lao Tzu
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