The greatest traders are more zen master than mathematical genius. Mastering trading requires mastering your own emotions and impulses, and being able to calmly and coolly analyze every situation from a strictly objective point of view.
As you develop as a professional trader, you will face a number of hurdles and barriers to your trading that are ultimately the product of your own personality, emotional makeup and biases.
Successful traders overcome these obstacles through the diligent and rigorous development of a personal trading style and set of strategies that help to counteract and control these universal human weaknesses.
One of the most common such emotional traps is known as ‘the fear of missing out’ or ‘FOMO’ trade.
What Is a FOMO Trade?
A fear of missing out trade occurs when you notice a sharp rally or slump in a stock, and the desire to join in on the price movement clouds all other analysis of the stock’s current price.
FOMO trades are driven by the very natural bias to believe that was has happened in the recent past will continue on into the recent future, even though from a logical perspective this is an obvious cognitive bias that does not hold true in the real world, especially in the world of financial markets.
FOMO trades also hold a hint of envy, where we desire to achieve the same sudden success that those who are already in on the trade are experiencing.
Unfortunately, the more significant a price movement, the more likely a stock’s price will actually reverse or retrace, so FOMO trades are often losers that need to be avoided at all costs.
Fortunately the pros have offered a few key tips that can help new traders to overcome this common trading pitfall.
Verbalize Your Reasons for Entering a Trade
Most of the rationalization that underpins every FOMO trade takes place internally, as we make excuses for why we are ignoring analysis and logic to simply follow the herd.
Verbalizing your reasoning forces you to truly evaluate what you know or think you know about this trade, which will quickly make it clear whether you have solid reasoning behind a trade or whether you are just making excuses.
Use Your Indicators
The strict application of your trading strategy including your favorite indicators can quickly disabuse you of any overly-optimistic perspective you may have on a rapidly moving stock price.
If all your trusted indicators that you have painstakingly learned to apply are screaming stop, then this can help to break the rosy illusion that a FOMO trade can cause.
Ignore the nagging voice that is telling you to get on board before it is too late, and instead take a few moments to rigorously analyze the trade like you would any other.
Take on Online Trading Course
Online trading courses are a great way to learn all about the common errors of judgment and biases that all traders face.
Your instructors will be able to offer you a wide variety of time-tested methods for recognizing and overcoming common trading errors, of which FOMO trades are the most prolific and dangerous example.
Instead of having to learn the hard way how to overcome FOMO and other similar trades, you will have the knowledge and experience to quickly identify when you are approaching a trade from a poor perspective, which will allow you to quickly overcome the fear of missing out and instead get back to making successful trades according to your well-honed and time-tested trading strategies.