Have you once traded the crypto market out of fear, and then ended up making a bad trading decision that cost you to lose funds?
If yes was your answer, then this guide will help you to overcome FOMO while trading.
What is FOMO (Fears of Missing Out)
FOMO simply means the “fear of missing out” and it applies to the anxiety of potentially passing up a profitable investment, just as surely as it applies to missing out on a great concert or a college reunion.
For investors who visualize a scenario where coins rise sharply in value but go unpurchased, the fear of missing out might keep them up all night. FOMO trading happens when a crypto trader or an investor lets their fear of missing out drive their trading or investing decisions to the exclusion of other insights and instincts. This can trigger errors, creating problems in an otherwise well-managed investment portfolio.
For instance, an impatient trader may rush to buy a hot token even if it doesn’t fit into their portfolio strategy, or if the token risks could jeopardize the portfolio’s stability.
Fomo and Trading Psychology
The fear of missing out is a concept that is associated with trading psychology. Indeed, taking a closer look at why FOMO happens shows that there are several emotional situations.
- Fear - As the name states, fear manifests simply because participants are usually afraid of future regrets.
- Greed - There is usually greed in FOMO simply because the trader is buying without doing any research.
- Anxiety - There is anxiety in FOMO because buyers are anxious about being left behind by the rally.
- Jealousy - In many periods, FOMO traders tend to be jealous about the performance of their friends or other investors.
- Impatience - In many times, FOMO traders are usually impatient simply because they did not do a lot of research in the market.
How to Overcome FOMO While Trading
1. Good Trading Plan
As a trader, you need a good trading plan to obtain consistent trading results. However, you must be disciplined in applying it. A correct and objective trading plan can help you manage emotions well, including FOMO. Even if you have a good trading system, but you do not follow your own rules, the trading system will not bring you good results.
Although the results of trading are not as expected, as a trader you can still take the best steps without hesitation and panic. If you want to try to make a trading plan as a guide during trading, the following important points are mandatory:
- Entry strategy: You have to make sure the entry techniques you use have been tested before. Thus, you can know which one is the best.
- Risk / Reward Ratio: Adding RRR to the Trading Plan is a wise step in risk management. The goal is that you can estimate the magnitude of risk tolerance so that trading targets become more realistic and you can get a profit ratio greater than loss.
- Stop Loss and Take Profit levels: Both of these limiting levels should be in the Trading Plan – even though some traders are reluctant to install Stop Loss. The aim is to limit the amount of Profit or Loss during trading. You can implement Stop Loss and Take Profit based on Risk / Reward Ratio.
- Journals and Notes: Keep journals and notes for evaluating the application of the trading plan that has been made. By doing that way, you will be more adept at taking the next action.
2. Trading Checklist
A trading checklist refers to things that must be met for you to open a trade. For example, a checklist can have several things like moving averages, VWAP, and chart patterns like triangles and head and shoulders. This point is important because between the planning phase, maybe made the night before, and the actual implementation, there is a time lag that could lead to substantial changes. Rechecking everything before opening your trade will avoid bad mistakes and unforeseen losses.
3. Trading Routine
A trading routine refers to the process that you have developed to trade. For example, you can have a routine of waking up, doing fundamental analysis, and technical analysis before you open the trade. When you have such a strategy or routine, you will be at a good position to avoid FOMO.
4. Overcome Your Behavioral Biases
Whether we’re aware of it or not, there are behavioral biases that can influence our reaction to FOMO. Here are two of the most common ones:
- Confirmation bias We have a tendency to look for information that supports our beliefs and affirms that our point of view is correct. Read more about confirmation bias.
- Solution: Seek out information that contradicts what you think about a particular investment.
- Overconfidence Research shows that many people are overconfident in their own investing abilities. We may recognize that, on average, most people can’t “beat the market” by trading frequently. But somehow we feel that we’re the exception. Read more about overconfidence.
- Solution: Give yourself a reality check. Even professional investment advisers may struggle to achieve better-than-market returns.
For most traders or investors, investing to achieve goals is a long-term pursuit. Wealth builds gradually over time, rarely overnight. Flee from the temptation to panic at bad news or chase after the latest hype. Focus patiently on achieving your trading or investing plan and avoid making decisions out of fear of missing out.