CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.00% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Imagine learning that a specific asset’s price, for example oil, is set to rise dramatically. Are you tempted to trade it, even though you barely understand the energy market or what moves oil prices? Well, your temptation to trade might be driven by the fear of missing out or FOMO. Fear is one of the strongest emotions in the human psyche. Its primary purpose is protection against danger. Fear is essentially a survival mechanism that keeps you ready to avoid perceived threats to your life. While necessary in some situations, it can have negative consequences in others.
As a beginner, you may have the urge to jump on every trade you see others making, fearing that you may lose out on the opportunity. The threat of losing out on something desirable is driven by under confidence, lack of experience, or even greed. This is why trading decisions fuelled by FOMO could lead to devastating results. It may lead to overtrading, taking higher risk, or worse, more FOMO. That is why recognising and overcoming FOMO is essential.
FOMO trading stems from the fear of missing out on potential profits. It is triggered by:
Seeing the price of an asset surge or plummet can create a sense of urgency, urging you to enter or exit a trade.
Online trading forums and chat groups can amplify FOMO, with everyone seemingly bragging about their gains. Sometimes, these channels serve as mediums to orchestrate pump-and-dump schemes.
Hearing about a “pro tip” or a potential market catalyst can make you feel like you need to act fast, without considering whether the decision aligns with your trading strategy.
If you’ve missed out on certain opportunities or made bad trading decisions, you may be more inclined to act on others’ advice over your own strategy.
Expecting to make only profitable trades or setting targets way higher than your strategy or market conditions warrant can be an invitation to FOMO trading.
You must understand that it is an emotion and not a thought. And every experienced trader recommends that trading decisions must be based on a rationale and not an emotion. That is why you need to learn a few strategies to overcome FOMO.
If you have felt that sense of urgency to make a trade just because others are doing so, you have been a victim of FOMO. Here’s how you can fight back against FOMO:
“The best way to avoid FOMO is to have a plan,” says Michael Kitces, former practitioner editor of the Journal of Financial Planning and co-founder of the XY Planning Network. A well-tested strategy is your most powerful weapon. Create a trading strategy that outlines entry and exit points, risk tolerance, and trading goals. Your time horizon, position size, etc., must align with your strategy. Before making a move, ask yourself:
“Does this align with my trading plan? If not, abandon the trade.”
Every trader has different trading goals, risk tolerance, and available capital. Avoid getting caught up in what other traders are doing. Some trade to build a retirement fund, while others might want an income stream. Focus on what you are trying to achieve with your trading. Open a trade if the answer to the following question is yes:
“Does this drive me closer to my trading goals?”
Prioritise discipline over hasty entry or exit. Instead of rushing into trades because others are, wait for the right opportunities that fit your criteria. Even if you miss a trade, there will always be other opportunities. Note that it is better to miss a good trade than to jump on to a bad one. Ask yourself:
“Am I trading out of herd mentality or because my technical analysis confirms the opportunity?”
FOMO often leads to surpassing your risk limits. While using stop-loss orders to limit your potential losses is critical for every trade; ask yourself:
“Does the overall risk on the portfolio lie within my tolerance limits?”
Constantly checking social media, market commentary, etc., leads to information overload, which may fuel FOMO. Limit your exposure to a few reliable sources, especially when you’re feeling emotional. And keep a focus on your research and analysis. Before acting on an update ask:
“Does the news impact my trading strategy?”
Practicing mindfulness techniques, such as deep breathing, meditation and incorporating regular breaks in your trading routine, can be helpful. Whenever you feel overwhelmed, pause, reflect and choose inaction. Remember that your mental health needs breaks. This helps you stay confident and trade rationally. Keep a check on your mental state with a simple question:
“Is an emotion overpowering my rational thinking right now?”
The importance of a journal cannot be overemphasised, especially for tackling emotion. This is your guide to identifying which trades were made on impulse and which ones were based on your strategy. Document your trades, along with the motivation for entering or exiting the trade. Also, document your emotions before and after. Regularly review your journal and verify:
“Was the trade executed out of FOMO, or did I really understand it?”
Emotions are natural, so should be your ability to navigate them. One may struggle to counter the strong feeling to open more trades, follow the herd, or blindly take the advice of another trader. Take stock of your trading psyche and recognise your FOMO-driven actions with a demo account to gauge where you stand.
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