FOMO trading means, in the simplest terms, trading in an undisciplined way. FOMO is the acronym for Fear of Missing Out. Sudden rises and falls in the markets have been attributed to FOMO trading recently. So, what is this FOMO trading? Most people want to know answers to these questions. Therefore, we decided to help you to know all about FOMO trading. In fact, our today’s guide will also help you learn how FOMO affects traders and the ways to avoid it. So, let’s dive into the FOMO.
What is FOMO and FOMO trading?
We already know that FOMO stands for Fear of Missing Out. What does that mean? Does it sound familiar to you that we want it all and we want it as soon as possible? If it sounds familiar to you then you probably know what FOMO is. Yes, you are right. It is FOMO that leads us to trade in an undisciplined and unplanned manner. FOMO blinds us to jump in or out of the trade without confirmation. In other words, when we enter a trade to get a piece of the profit and risk too much without giving a second thought, it is FOMO. On the other hand, when we jump out of a trade too early because of fear of losing, it is also FOMO. So, FOMO is a huge enemy of traders that affects their trading catastrophically.
That was the formal explanation of FOMO. Let’s see the FOMO picture in a bit informal way. For example, you are staring at the price charts and doing your analysis. Alright, fine. Now, you have your plan for the day. You have to wait for the price to reach the level you chose. However, half an hour passed and you start to get bored. Another half an hour flies away and now you aren’t just bored but also annoyed. Lots of thoughts start to come into your head. You start to think about changing your plan. Another half an hour goes and now you are desperate to jump in as you don’t want to miss out. Eventually, the emotions get better of you and make you enter the trade in an undisciplined way. You risk your money to get a piece of the cake but what happens? Prices begin to fall. What is it? It is FOMO and FOMO trading.
FOMO trading explained with real-world examples
FOMO trading has surely become a very common phenomenon nowadays. Most of the sudden rises and falls are attributed to FOMO and rightly so. Because there are a multitude of examples that prove it. For example, rallies in DOGE and various other meme stocks in 2021 are good examples of FOMO trading. Millions of traders jumped into those rallies despite the risk of buying at high and selling at low. That happened eventually. There were huge downfalls after dramatic rallies. Thus, millions of FOMO traders lost millions. That’s how FOMO trading can cost you.
What are the triggers that lead to FOMO trading?
FOMO trading doesn’t happen without any triggers. There are some triggers that cause FOMO. These triggers lead traders to make irrational decisions. So, what are those triggers?
1. Missed opportunity
A missed opportunity is one of the most dangerous FOMO triggers. Why so? Because of human nature! Let’s try to understand it.
In simple words, human beings want gains every time without losing anything. Isn’t it? Yes, it is and lots of studies have proven this fact. For example, the Loss Aversion bias study states that losses affect humans twice as compared to profits and gains. For instance, a trader makes twenty profitable trades in a row. But just one bad trade may derail him/her and make him/her lose momentum. In other words, it is human nature that we want to gain every time while we hate to lose anything.
So, we got it that losses affect us more but how does a missed opportunity lead us to FOMO? The answer is that we don’t want to sit idle while others are making money. Having said that, even a temporary rise in prices may lead traders to jump in. That means watching others making the most of the opportunity makes us enter trade irrationally. That’s why the missed opportunity is the number one reason for FOMO trading.
2. Volatile markets
Volatile markets also lead traders to FOMO trading. For example, the cryptocurrency market is among the most volatile markets. How do such markets cause FOMO trading? Let’s suppose that you are closely watching price charts. All of a sudden, a rally begins and tempts you to ride the rally. When you enter the trade without confirmation, it is FOMO trading.
News is also a big trigger that causes FOMO among traders. For example, a press release or a guru’s prediction may cause a sudden rise or fall in prices. Traders may wish to avail themselves of the opportunity of making big profits after a press release. What is it? It is FOMO trading.
4. Social media
Social media also plays a huge role in FOMO trading. Reports on social media platforms such as Twitter or Facebook make us behave irrationally. For instance, we enter a trade without confirmation after seeing a tweet. Because we don’t want to miss opportunities. So, this is also FOMO trading.
5. Other triggers
There are also some other triggers that cause FOMO. For example, impatience is one of the main triggers that makes traders jump in without confirmation because he/she is impatient. Other triggers include lack of trading rules and strategies, high expectations, lack of confidence or overconfidence, and so on.
The role of emotions in FOMO trading
Emotions are part of human nature and they play a huge part in the downfall of traders who don’t keep them at bay. In fact, emotions may move the market in one direction or another when millions of traders are driven by emotions. Having said that, emotions also play a huge role in FOMO trading. For example, there are two most influential emotions that cause FOMO among traders. These emotions are fear and greed. Fear of missing out on opportunities or fear of losing money makes traders fall into the clutches of FOMO. On the other hand, making lots of money and riding on every opportunity also leads to FOMO trading. That is how emotions play a big role in FOMO trading.
How to deal with FOMO?
Unfortunately, FOMO is a disaster that often appears when we are doing better in trading. How to avoid this emotional reaction called FOMO? How to deal with the temptation that makes us enter or exit trade irrationally? It is absolutely imperative to know answers to these questions. Here are a few tips that can help you abstain from FOMO trading.
1. Market never stops presenting opportunities
The fear of missing out leads traders to make irrational and rash decisions. They think that this is the last opportunity and prices will never pull back. However, this turns out to be incorrect. But, it is always useless to cry after milk is spilled. Therefore, there is one thing that you should understand and that is “market never stops presenting opportunities.” When one opportunity is gone, another will surely follow. Those who are a bit experienced will understand this fact. Therefore, you should remain disciplined and stick to your plan. The market will surely present many and perhaps better opportunities. That’s how you will be able to get rid of this emotion called fear.
2. Be disciplined and focused
In order to stay away from FOMO trading, being disciplined and focused are keys. Firstly, you need to understand that there aren’t any shortcuts to success. Everything worth having always takes time. Therefore, developing self-self-discipline and staying focused is important. When you are disciplined and focused, you ultimately achieve success not only in trading but in all spheres of life.
3. Trading strategies and systems
Building and having a viable trading strategy and system are your shields against FOMO trading. When you follow predetermined rules of your trading strategy, you don’t make decisions impulsively. In short, rules ensure that you are consistent in your trading campaign.
4. Avoid impulsive behavior
Avoiding impulsive behavior is also important to avoid FOMO trading. Making decisions without giving a second thought often leads you to catastrophe in every field of life, not only in trading. How can you do that? For example, you can do it by creating the rule that you won’t ever enter a trade during the formation period of a candle. You will only enter after the completion of a candle.
As we have already discussed, social media platforms are among the major FOMO trading triggers. Therefore, it is also crucial to stay away from social media. If it isn’t possible, then at least you need to stop trading based on ideas, news, or anything else shared on social media.
6. Use automated trading facilities
Automated trading tools are the best options to avoid FOMO trading. As we know that emotions are part of human nature even in professional life. There are some traders who aren’t able to keep their emotions at bay. Therefore, automated trading helps them avoid decisions based on emotions.
7. Keeping a trading journal
Keeping a trading journal also helps you avoid FOMO trading. When you record everything in your journal for future reference, the chances of making irrational decisions significantly reduce.