FOMO – Fear Of Missing Out.
(Go straight to the 5-step battle plan)
Wikipedia says that FOMO is “a pervasive apprehension that others might be having rewarding experiences from which one is absent”. In other words: the nagging feeling that other traders are making big profits and you’re letting the trading opportunities slip through your fingers. To counter this feeling, you enter trades way too quickly.
Afraid to miss the next big move.
Stanford research has shown that what investors fear the most is not the risk of a loss per se, but the risk that they may do poorly relative to their peers.
Even Mark Douglas touches on the subject in Trading In the Zone:
You will gather evidence for the trade if your fear of missing out is greater than your fear of losing. And you will gather information against the trade if your fear of losing is greater than your fear of missing out. In either case, you will not be in the most conducive state of mind to produce consistent results.
It’s very common with traders and can cause substantial losses to a trader’s account. Consider this scenario: we’re looking at a chart for a couple of minutes, find the perfect setup (which – coincidentally – just happens right now) and enter the trade without a second thought. Patience doesn’t come into play because, let’s face it, if we wait any longer we might miss our entry and lose our only shot at this trade!
I know I’ve done it.
It’s usually followed by regret.
The FOMO trader in action
Let’s see what happens when the FOMO forces come into play.
Here, we have a chart of EURUSD, with the pair being in an uptrend on first sight. We spot a potential price action pattern, the pin bar. The pin bar is a clear sign of rejection of a price level, so it’s fair to believe that this uptrend might be over and the price might move lower, no?
Oh no! Markets ignored the pin bar and moved higher anyway! But meanwhile, two other pin bars have formed. Surely this must be a sign that a reversal is imminent, so it’s safe to enter a short trade!
Again, our FOMO trader would be on the wrong end of the trade. Price showed some indecision and finally a new pin bar showed up. That’s 3 pin bars in a short time, the FOMO trader would be nuts to ignore this! Time to give it another go and enter short.
Against all FOMO odds, price moved higher yet again with no sign of slowing down! What’s happening?
On Price Action Trading
Have you noticed how not once, the price of the bar following the pin bar closed below the pin bar? This gives you a clear indication that bulls are still in control. The sellers don’t have enough power (yet) to push price further down and trigger a reversal!
If you would’ve waited for this confirmation (price closing below the pin bar), none of these trades would have been a valid entry! Our FOMO trader wouldn’t have been stopped out multiple times either!
The FOMO Mindset
One of the hardest things for most investors is to sit
and watch other people make money
The above price action scenario is just one example of forex fear of missing out. It usually results in entering a trade too early or just taking sub-optimal trades. If we know what causes forex FOMO, we can train ourselves to look out for the signals and take better trades. Broadly speaking, fear of missing out stems from 2 things:
1. Instant gratification
Our brains are wired to want instant gratification once in a while. We do this because it gives us pleasure, it makes us feel good. It’s why we sometimes go for fast food. Waiting is hard, and there is an innate desire to have what we want when we want it, which is usually without any delay.
Entering a trade will give you that satisfactory rush. Remember though that even though not all instant gratification is bad, in the context of forex trading it’s highly unlikely you’re going to become profitable if you want instant gratification. Patience and discipline are very important concepts in forex trading, for good reasons.
2. Opportunity loss
As a forex trader, being risk-averse is a good thing. In this case however, the FOMO trader doesn’t want want to take the risk of missing out! In the FOMO mindset, we’re scared that our window of opportunity would pass, so we’re quick to enter the market.
It’s an understandable reaction. How often don’t you think: “this opportunity is too good to let go!”. Instead, remember that trades have a better chance of succeeding when there is more confirmation. Other opportunities will always come by. And if you’re not in the markets, you won’t lose any money either!
There are three ways you could deal with a trade opportunity:
- Enter too early – with a reasonable chance you lose
- Enter prepared and on time – with a reasonable chance you win
- Don’t enter at all – you get to keep your money. great!
The 5 step plan to battle forex FOMO
Below, I’ve outlined the steps you should take before every trade. These steps will help you with the fear of missing out and will also make you a better trader overall. Take the image below, print and laminate it and make sure it’s close to you every time you want to enter the markets.
1. Follow your trading plan
This tackles FOMO in more than one way!
Firstly, when you follow your trading plan, you’re not leaving room for interpretation. You take trades according to your trading plan rules. If those rules are not valid yet, you shouldn’t take the trade. Easy!
Secondly, using a trading plan and a trading journal creates a habit. Over time, these habits will control the urge to take spontaneous trades. One of the reasons you’re prone to take impulsive trades is because you lack structure. The habit of following your trading plan provides that structure.
2. Wait for confirmation
As the above example has shown, it’s important to wait for confirmation. This confirmation can be in the form of price action patterns, indicators, retests of certain support & resistance levels, …
It’s much more important to time your entry right than to just be in the market. Don’t be afraid to miss out. Often, price will retrace to important levels and provide a much better time to enter the market!
3. Use limit and stop orders
Stop placing market orders, there’s hardly a situation where it’s really necessary. It enforces the impulsive trading behaviour that is so common with FOMO traders. There’s only a small chance that the price is at the exact level you want anyway.
Instead, you should do your market analysis up front (I do mine the night before) and know exactly at which price point you want to enter the market. Limit and stop orders allow you to do so in advance. Additional benefits are that you don’t have to monitor the markets 24/7 and I find it also limits (pun intended) the stress involved in forex trading!
4. Use price alerts
Once you start using price alerts, you won’t know how you could ever do without! Instead of staring at the charts continuously, place price alerts at the critical levels you want to keep an eye on. It’s ridiculously easy to do with MetaTrader 4 (find out here), and other software packages have similar alerting features.
When price hits the alert level, I can receive an email, play a sound or even get a push notification on my phone. This allows me to easily go out of the house and still be kept up to date of what is happening in the markets.
5. Know yourself
Finally, know what kind of a trader you are. Be aware of your urge to trade. Be disciplined enough to wait if you know deep inside that this is not yet the right opportunity. If you know you might enter a FOMO trade anyway, just step away from the charts. Go outside or watch a movie. Chris Capre recommends meditation.
Other opportunities will always come along.
Have you ever had fear of missing out? Share it in the comments!