Trading is often very rewarding if one has appropriate skills and knowledge. However, it can also be a very emotional experience, especially when you have lots of money on the table. Sometimes trading has the same effect as gambling. If a trader is winning, he has difficulty stopping, thinking he’s invincible and trying to win some more. However, such thoughts can be very dangerous as a winning streak often changes sharply and investors lose more than they can afford.
If you want to master trading, you must first master your own emotions and impulses and be able to calmly analyze the situation from a strictly objective point of view.
However, before you become a professional trader, you will come face to face with several barriers to your trading. These are ultimately the product of your own personality, biases and emotional makeup.
Experienced traders manage to overcome these obstacles by the rigorous and diligent development of a personal trading style, along with a set of strategies that help to control these universal human weaknesses. The fear of missing out or FOMO trade is one of the most common emotional traps.
When does FOMO trading occur?
Fear of missing out on trade usually occurs when trader notices a sharp rally or plunge in a stock. At that moment, the desire to join in on the price movement overpowers all other analysis of the stock’s current price.
FOMO trades are driven by the very natural bias, believing that what has happened in the recent past will continue into the recent future. However, from a logical perspective, this is an obvious cognitive bias, and it does not hold true in the real world, nor the world of financial markets.
Besides, FOMO trades often hold a hint of envy, desiring to achieve the same sudden success that the investors who are already in on the trade are experiencing.
As experience shows, the more significant a price movement, the more likely a price will actually reverse. As a result, FOMO trades often end up losing.
While it’s quite a common problem, professionals have offered a few key tips to help new traders overcome this condition.
Always verbalize your reasons before entering a trade
FOMO traders mostly rationalize their intentions to enter particular trade internally. They make excuses for why they are ignoring analysis and logic to follow the herd.
However, verbalizing their reasoning forces people to evaluate what they know or think they know about this trade. That will quickly make it clear whether they have solid reasoning behind a trade or whether they are just making excuses.
Use your indicators to evaluate the situation
If you strictly apply your trading strategy, along with your favorite indicators, that can quickly disabuse you of any overly-optimistic perspective, which may occur due to a rapidly moving stock price.
If all your trusted indicators are saying to stop, that can help overcome the illusion of great winnings that a FOMO trade can cause.
Ignore the voice that is telling you to get on board before it is too late. Take a few moments to analyze the trade like you would in any other situation.
Try taking an online trading course
Online trading courses can help you learn about the most common errors of judgment that all investors face.
Your instructors will offer you a wide variety of time-tested methods to recognize and overcome common trading errors. And FOMO trades are the most prolific and dangerous example among them.
With courses, you will get the knowledge and experience easily instead of having to learn the hard way how to overcome FOMO or other similar trades. That will help you to quickly identify when you are approaching a trade from a poor perspective. On the other hand, it will allow you to overcome the fear of missing out quickly. Instead, you will get back to making successful trades according to your well-honed, time-tested trading strategies.