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Jul 5, 2021, 11:06 AM GMT

The Two Sides of FOMO in Trading

The word FOMO laid with aluminium letters on the US dollar banknotes background - with selective focus

Sooner or later, all traders encounter a particular psychological condition that is especially prevalent in the global capital markets - the fear of missing out (FOMO). Trading can essentially be surmised as an effort to seize the best opportunities out there - buy cheap, sell high. This is the reason why it is so hard to divorce the activity of trading from FOMO.

Traders have to deal with the cumbersome task of picking out the most suitable opportunity for themselves from a pool of virtually never-ending alternatives. It is quite unsurprising then that at some point, their emotional state will be strained by anxiety. They might feel that the perfect trade is starring them from right underneath their noses, but they are too distracted to notice. That is why FOMO in trading is so prevalent, and traders know this. However, what is not so widely recognised is the fact that FOMO can manifest itself in more than one way.

The two sides of FOMO in trading can be examined with respect to a trader's state of mind prior to and then after entering into a trade. That is so because the fear of missing out can materialise itself either as a form of anxiety of potentially failing to seize a good opportunity or later as the dread of losing one's running profits.

The More Widely Recognised Manifestation of FOMO in Trading

With regards to proactive trading, FOMO can represent a significant impediment to traders and their critical thinking. This is such a common occurrence primarily because all retail traders tend to think in a similar fashion. At the end of the day, people watch the same charts, they read more or less the same news (though different media outlets can distort information in a biased manner), and share the same rudimentary understanding of trading.

It is therefore unsurprising that due to mass-market psychology, many traders would recognise the same opportunities at roughly the same time. They'd enter the market because of these premonitions, only to be then unpleasantly surprised that they had run into a bullish or bearish trap.

One way to deal with FOMO in proactive trading is to have your own consistent system that does not allow for trading decisions to be made at the heat of the moment. Moreover, traders need to remember that it is never a good idea to place trades solely based on what they deem to be a logical outcome.

Traders shouldn't search for indications to confirm their preconceived opinions. The market is a huge beast, and if you look long enough, you will find plenty of "evidence" to justify your opinions that could be rooted nowhere. Instead, traders should build their outlook on the market based on what they read as viable information from its behaviour. In short, collect facts to build your theories instead of shooting theories to fit the underlying facts.

Do Not Lose Any Sleep Over Your Running Profits

The other way in which FOMO manifests itself concerns reactive trading, once a position has already been entered into. The fear of losing one's hard-earned running profits represents a fallacy of reasoning that concerns less-experienced traders primarily.

Newbie traders have a proclivity for making rash decisions even when things are going well for them. Imagine a position that has been opened relatively recently, which is already turning profitable. Success in trading bears its own pressure, which could grow to levels that exceed the tolerance zone of what some traders can endure. They might feel compelled to close their positions prematurely in order to safeguard their running profits from sudden changes in the market's underlying direction.

To protect yourself from making the same mistake, it is important to remember that whatever running profits your positions might be garnering at any given point in time, ultimately, they are not yours to enjoy just yet. The performance of the majority of trades is bound to fluctuate throughout their duration. This means that the running profits (or losses) could increase or decrease before the particular trade runs its course.

Once again, if you have a consistent and systematic trading strategy in place, the temporary performance of your trades should be nothing more to you than a means to an end. If you enter into trades that are justified from the get-go, you wouldn't feel anxiety about your running profits. You would know that your overall success, in the long run, wouldn't be dependent on the current performance of any particular trade.

You shouldn't have to feel compelled to terminate any of your trades prematurely in order to save whatever running profits you have at any given time if you trust the parameters of your strategy. Fear shouldn't play a part in your decision-making process under any circumstances.

That is so because one of two things could happen. Either the price does indeed go against you, in which case you'd lose your running profits, but the overall integrity of your system would not be jeopardised, or the market would continue going in your favour. If your strategy is indeed consistent, then the former should be an infrequent occasion. In contrast, the latter case should typify your consistency. That is why it is prudent to let your profits grow if you trust your own skills.