What is FOMO in Trading and How to Avoid it

FOMO, or Fear Of Missing Out, is an emotion that prompts you to do things that you would not normally do because you have an innate fear of missing out on an event or an opportunity. When this term is applied to share trade, it refers to the anxiety of potentially missing out on a profitable investment. If you are an investor who can visualise a scenario when a stock rises sharply, you can have this emotion, which further prompts you to make an investing decision. Naturally, investing based on emotion is not a wise decision, as experienced veterans can tell. The question here is how can you avoid this feeling in trading. 

In this blog, we discuss what FOMO trading is and how you can avoid it. Along with this, we shall also discuss where FOMO in trading comes from and factors that can trigger FOMO trading. 

What is FOMO in Trading?

FOMO trading is a situation where you allow your fear of missing out to influence your decisions in investing without considering other forms of insights that you may have. Any decision driven purely by emotions can cause errors including the decision on trading. That said, you do have to note that FOMO is not caused only by fear; it can also be caused by various other emotions such as fear, greed, jealousy, and impatience. 

For instance, you may buy a hot stock driven by the fear of missing out, even if the stock does not fit your investment strategy. Additionally, doing so can often cause major risks down the line. Should you purchase a stock based on FOMO, you may not have an exit strategy when a stock goes down. 

The key point here is that FOMO trading is an action that you take based on your emotions of missing out rather than logical reasoning, which may lead to unfavourable outcomes. 

Where Does FOMO in Trading Come From?

Now that you have a general idea about what FOMO trading is, let’s discuss where it stems from. Since FOMO trading is primarily associated with emotions, it has deep roots in psychology. As the modern world is deeply connected with the use of social media, you hear more news of people succeeding when compared to the past. This constant bombardment of success can lead to anxiety and jealousy, which can trigger you to make rash decisions. 

Furthermore, because of the internet, you, as an investor, have access to constant updates regarding hot stocks. These constant updates can further drive you to make decisions based on your fear of missing out on the said stocks. Furthermore, this emotion can also be driven by sudden market movements as well. However, you should also note that you can get these emotions from simple communication with another trader as well. All it takes is a simple suggestion or news to trigger a FOMO trading. 

Factors That Can Trigger FOMO Trading

From what we mentioned so far, you should have a general idea regarding what can trigger FOMO trading. That said, let’s now look at its most common trigger. The external factors which can trigger FOMO trading include: 

• Volatile Market: One of the key triggers of FOMO trading is a volatile market. When there are constant fluctuations within the stock market, it can trigger you to purchase or sell your stocks without properly researching long-term consequences. 

• Big Winning Streaks: Another key trigger of this event is when you constantly have big recent wins. This can include selling stocks at their highest point or purchasing them at their lowest point. Should this occur consequently, it can make you impulsive. 

• Repetitive Loss: On the other side of the spectrum, repetitive losses can also trigger FOMO trading. Should this occur, you may be scared of holding your stock for long for fear of losing the high point or buying stocks immediately for fear of the price increasing even further. 

• News and Rumors: News and rumours are undoubtedly one of the key contributors to FOMO. Any news regarding stocks and trading can make you feel left out, which can further trigger you to buy or sell stocks without researching properly or making long-term plans. 

• Social Media: Social media is all about making yourself look good, and when it comes to trading, it only has news of success. Therefore, should you be too involved in the trading side of social media, it can drive your jealousy and greed, further promoting you to make rash decisions without making long-term plans. 

Effective Ways to Deal with FOMO 

Knowing the common triggers is a key step in dealing with FOMO trading. Once you know the triggers, it is a relatively straightforward process to deal with FOMO in trading. Although the specific methods may vary, there are some general effective ways to deal with FOMO. Some of the common effective ways to deal with FOMO include:

Invest With a Plan

One of the most effective ways to deal with FOMO is to invest with a plan. If you do not invest in stocks and assets with a specific plan in mind, it can easily lead to bad outcomes. For this, you should control your instincts and make a thorough plan before investing in any stocks, be it hot stocks or not. You can research how to value a stock and establish your own risk tolerance level before dealing with any exchange. 

Stay Calm 

Along with making a plan for every asset you purchase, you should also stay calm, especially during times of volatile markets. While it may be tempting to make purchases and sales during the high fluctuations immediately, you should always act according to your plan with some adjustments regarding the existing situation of the market. 

View The Big Picture 

While trading in stocks, you should note that a single trade cannot make or break your portfolio, regardless of how profitable it may be. Should you hear about a “can’t miss out stock” you should take some time to slow down and investigate it carefully to ensure that it fits in well with your portfolio and if the stock is really what it claims to be. Then, you should carefully plan on how to deal with it before proceeding to either ignore it or purchase it. 

Avoid Investing Money You Cannot Lose. 

While viewing the big image, you should also be careful not to invest the money you cannot afford to lose. Always keep a base amount of sum as a backup before investing. If a good and tempting investment consumes all your money, then it is not worth the risk. That said, if you see a good investment opportunity and are assured that you still have a decent sum to fall back to, you can make the investment. The key aspect here is careful planning. 

Take Social Media Lightly

Along with having a backup sum to fall back to, you should also avoid taking social media seriously. While there is some genuine advice on social media, do note that the ones who provide this advice have their own best interest in mind - not yours. Furthermore, social media posts are designed to garner views and engagement- not to provide detailed information or suggestions. Therefore, regardless of whether you see advice or a news item, you should always take it with some amount of scepticism. 

Strategies to Overcome FOMO in Trading

 

After learning how to control your FOMO trading habits, let’s discuss the aspect of overcoming the FOMO itself. Now do note that FOMO is a form of emotion, and as with all emotions, they are hard to control. Therefore, while the suggestions we are about to provide are effective, the degree of effectiveness depends on your own self-control. Keeping this in mind, some of the key strategies to overcome FOMO in trading include: 

Accept The FOMO

One of the first strategies to overcome FOMO is to accept the emotions. Doing so can help you deal with the emotions that follow better. The key aspect of FOMO is the idea that everyone is having a better time than you regarding stock trading. When you accept the feeling that you feel jealous, afraid of missing out, or simply greedy about accumulating more stocks, it can help you process these emotions better. Do remember that it is not just you who feels this but everyone in the trading market at some point. 

Work On Your Trading Psychology

Since FOMO is directly related to your emotions and psyche, you should first learn to deal with these emotions and work on your trading psychology. When you start developing emotions such as deep regret over a missed opportunity, you should learn to realise that as long as the company does not go bankrupt, there is always a next opportunity, even if it may not be as ideal as the previous one. Furthermore, you should also learn to let go of your stock when the time is right instead of holding it for greed of better chances. Remember that there are constant low and high points in every stock. 

Control Your Social Media

As we mentioned previously, social media is designed to drive engagement, and the information you get on these platforms barely covers the entire aspect. Furthermore, social media are also designed to show the gains and not the losses for the most part. While there are genuine advice on social media, they are hard to find. Therefore you should be careful of what and whom you interact with on social media. 

Keep A Trading Journal

Keeping a trading journal can aid you in logging your activities, and as with any form of logging medium, it can help you analyse your past activities. You can use these aspects to analyse the events that lead to your FOMO and then make plans on how to avoid the triggers and deal with the aftermath should you accidentally enter a cycle again. 

Manage Your Risk

Learning how to manage risk is one of the key strategies to deal with FOMO. Since humans are not infallible beings, we can get into the FOMO cycle when we are aware of the risks it presents. The best way to deal with this aspect is to always have a strategy to manage your risk, even if you buy or sell shares based on emotions. 

Conclusion 

FOMO, or Fear Of Missing Out, is an emotion that everyone faces, and it is not the most pleasant of emotions. It can trigger you to make rash decisions based purely on emotions and not analysis. This is especially impactful in trading. Because of this, there is a term in trading known as FOMO trading, where a trader such as yourself makes rash decisions of buying or selling trades without prior insights and analysis, based solely on emotions. Now, FOMO trading can have many triggers, including but not limited to social media updates and volatile markets. The good news here is that there are many ways to deal with this situation. 

In this blog, we provide you with a brief overview of FOMO trading, its triggers, and how to deal with FOMO trading. We hope you found this helpful. If you seek further insights into various other aspects of share trading, do check out some of our other blogs. And if you want the best share trading service in Nepal, look no further than Secured Securities Limited. Thank you for reading till the end. 

FAQ’s on FOMO in Trading

What does FOMO mean in trading?

FOMO stands for Fear Of Missing Out in trading, is a situation where an investor makes rash decisions of buying or selling a share purely based on instincts and emotions rather than proper analysis and planning. As you can guess, it can often lead to losses in the long run. 

How do you avoid FOMO in trading?

There are many ways to avoid FOMO in trading. Some of the key methods include: 

• Invest With a Plan

• Stay Calm During Volatile Market 

• View The Long Term Outcome

• Avoid Investing Money You Cannot Lose 

• Take Social Media Lightly

How do you control FOMO in trading?

Controlling FOMO in trading can be tough as there are many triggers around you. However, there are some ways you can control it. Some of these key ways include: 

• Accept the FOMO 

• Work on your trading psychology

• Control your social media 

• Keep a trading journal

• Manage your risk 

Is FOMO good or bad?

FOMO is typically a bad thing, especially in trading. While there can be a few events of gains during trading, since you typically jump into trades without making a long-term plan or research, you often get confused and lose out when the market trend deviates from what you expect it to be. 

What is the FOMO strategy in Trading?

The FOMO strategy is a mindset where you make decisions based on the fear of missing out on potential opportunities. This often leads to impulsive trading when you see rapid price movements. Some of the key aspects of FOMO strategy include:

Impulse driven trading

Emotional decisions

Chasing trends

Late entry

Who are FOMO Traders?

FOMO traders refer to individuals who make rash trading decisions based purely on instincts and emotions rather than rational decision-making. This form of decision is typically made when one sees rapid price movements or is influenced by outside sources. 

How do I stop overthinking in trading?

There are many ways to stop overthinking in trading. Some of the key methods include: 

• Accepting that you have FOMO

• Keeping a trading journal

• Acknowledging that FOMO does not affect you but all traders

• Making a plan before making any sales or purchase

• Assessing when to give up and when to grab a stock 

• Controlling your social media 

Who is most affected by FOMO?

FOMO can affect a wide range of people. Some of the most common types of people who are affected by FOMO include:

• New and inexperienced traders

• Traders who are heavily influenced by social media

• Emotionally driven traders

• Short-term traders 

• Investors in highly fluctuating or hype-driven markets

How does the fear of missing out (FOMO) affect investor behaviour?

FOMO essentially creates a sense of anxiety, which can drive you to make rash decisions. This sense of anxiety can be caused by a wide range of emotions, such as greed, jealousy, and fear. Regardless of the cause, it drives you to make impulsive decisions, chase trends, trade excessively, take increased risks, ignore fundamentals, and miss out on long-term gains.