FOMO runs the markets these days; with the coming of social media, news spreads faster than ever before. As assets move, word gets around - often making them move even more. At some point it is going to be FOMO; people are going to get in for fear of missing out on the profits. But as a trader you may find yourself thinking: "is this a trade I would normally take? Am I trading this out of FOMO?"
This is a valid question because the pain that comes with losing money after FOMO-buying an asset is usually worse than the pain of missing out of any potential profit. This is especially true for those who have trading rules, and who ignore those rules, only to get burnt. Ouch!
We have all been there - at least once. To avoid going there too often, we need to be able to distinguish between FOMO and (our) valid trades.
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To Detect FOMO, Ask Yourself:
Why haven't I traded this sooner?
If a trade aligns with your trading rules, you should take it. That is what everybody does. You define your risk and time your entry. This is exactly how professionals make money in the markets. Even when they make losses, they can write it down or write it off because they did what they were supposed to. The markets just did not co-operate that time.
A bad trade is a bad trade. They Move on.
So if the trade or signal is valid, why did you not take it earlier. That is what every one of us should ask himself; a kind of filtering the trades in our minds. Placing a trade after seeing a hundred people talking about it on Social Media is easy; emotions kick in, you feel a rush, and you click buy or sell. Professionals don't do that; they have their own ways of spotting trades - their own rules.
Another Question to ask yourself is:
Why is Everyone Talking About This NOW?
Yes, very few fishermen have ever stopped to wonder where the fish come from - there is either plenty of fish, or no fish today. But let us assume that everyone was pointing further and further out into the water, telling you that there was an abundance of fish OUT in the sea, would you risk your small canoe, your life? The analogy is probably stupid - but I think it makes the point.
Real traders identify trades using their own systems; breakouts, Fib levels, Elliot Waves, FVG, and so on. They do not rely on FOMO probably created by bad actors, and spread by gullible newbies.
If everyone is talking about it, then it is probably too good to be true. People with large boats can probably afford to sail far into the sea, risking much to get much, but the same is not applicable to those of us with small accounts - ahem, boats.
FOMO Is FOMO
Without the filtration questions we are going to do a lot of dumb stuff that's going to hurt. Even if the Butterfly Effect was false, the initial hurt can still lead to more pain.
If you are taking a trade impulsively, after having seen it on social media, then you are trading FOMO. If you are taking a larger lot size than you would normally do, then you are probably trading FOMO. If you cannot explain why you are taking a trade, you are probably trading FOMO.
If it feels and sounds like FOMO, then it probably is.
FOMO makes the brain go on leave, while emotions run wild. It takes away one's ability to think critically, and puts one in a frenzy. Animals that are about to fall for a bait often go into a frenzy too.
A Bad Ending
We have seen it happen so many times, and yet we continue to fall for it. Something goes parabolic, we rush in, the price crashes, and we are left holding the bag. We refuse to sell at a loss, and so we hold, while feeding on hopium, and praying for the trend to change. Some have committed suicide due to FOMO, while others have seen themselves in very difficult financial situations.
Yet, FOMO is becoming more important in today's markets - in ways we are yet to fully understand.
Read:
FOMO The New Market Driver
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