The fear of missing out is underrated because most beginners focus on the stock market analysis and spend all of their time understanding the concept of how to analyse the stocks. The beginners of the stock market don’t reach the levels of understanding of the psychology of trading.
From analysis to the real trading chapters, the first emotion a trader met in his life is the fear of missing out feeling.
What is Fear Of Missing Out?
The fear of missing out or the FOMO is the emotion a trader feels when he thinks that the stock or the rally is missed from his hands. In actuality, there is not any rally going on but this emotion let the trader buy the stock.
A trader doesn’t want to miss the rally which is actually just an illusion and not a rally. Soon after buying in the hope of getting a big money, a trader comes to a realization that there was not a rally in real. It was just the thought, a fear of losing a good move, which made him buy the stock. This fear of missing something out which doesn’t exit is called a Fear of missing out(FOMO).
Few traders call it a FOMO phobia because it is just a phobia of missing the good moves or the rallies.
Why the fear of missing out feeling happens to traders?
If there had been some fixed formula or analysis in the stock market with which a trader can make profits then things would have been different.
In any other profession, whatsoever is written in studies is valid and works well. For example, Mixing cement with water will make the mixture thick and solid structure in a given interval of time. Giving paracetamol will decrease the level of body temperature in fever. But in the stock market, there is not even a single move that a trader can be sure about.
This is where the journey of emotions starts. When nothing is fixed then, of course, the emotions take place. FOMO is the starting of emotion in the stock market.
Fear of missing out happens when we are planning to trade in stock. It is obvious that a trader is getting emotional about the stock he is planning to buy or short sell.
Now, little fluctuations in that stock will drive his emotions and will make him think that what he is thinking about this stock is happening already. If he won’t trade that stock, the rally or a good move of his talent will be missed by him.
This made him trade in stock right after that. When he started facing the loss, he come to an awakening that the trade he did is purely a decision made in the FOMO.
This happens to every trader in his early life and a few times with mature traders too. The FOMO didn’t give time for a trader to think, and he act before coming into his consciousness.
Examples of Fear of missing out while trading
There are two examples I would like to share here to elaborate on the presence of the situation traders face while being in that emotion.
Dow Jones Industrial Average Index 29 Feb – 3 March 2020
The rally from 29 Feb to 3 March 2020 in Dow Jones Industrial Average Index has trapped most traders and investors with the feeling that the Index has made a bottom and now it is going for an all-time high.
I have got many phone calls from my friends and clients that if there is a time for buying. I denied it with the fact that there is no confirmation till now.
But the fear of missing outplayed its role in their mind. My clients and all near ones filled their portfolios with blue-chip stocks and made their positions in Futures of the Dow Jones Industrial Average.
After 2-3 trading days, they realized that it was nothing but just the fear of missing out on emotions.
The same has been seen many times whenever it was a time to sell on rising, traders think that it is a good buy on dips.
A good trader should not get emotional watching the ticks of the price chart. The confirmation brings an edge to trading, which can help you rid of emotions while trading.
HDFC BANK 30 March 2020
A sideways move near the bottom in the HDFC BANK of an Indian stock after 30th March 2020 was bought on dips as the confirmation via Elliott wave analysis showed that maybe the bottom is done.
But most of the traders started shorting the market those days. One of the reasons is also the lockdown because of the Corona Virus.
A temporary momentum in any side of the market draws the attention of the trader to itself and traps him.
The trouble of extreme FOMO in Trading
There are few people who don’t like standing at the red signal while driving or riding. They use shortcuts, wrong turns and rash driving.
Now a day comes when this person is shifted to a city where rules are very strict. This guy has practised driving in a very wrong way and had an experience of many years driving like this. It will become impossible for that person to stay at all the red lights. This is what wrong practice makes a person like.
Same in trading, once a trader practised the wrong technical analysis, it is not hard enough to learn the right technical analysis because, for that, the trader has to delete the previous data from the practice for years. It is again the same in the emotions while trading.
When a trader took a lot of trade and now he is familiar with the FOMO in a sense that he doesn’t catch himself being in a FOMO, then it is very difficult for a trader gets out of this emotion.
He has to believe first of all that there is a fear of missing out in him, which is hard. Once he admits it, then all it is needed is to work out for it and practise the right exercise in the right way.
So, the extreme trouble comes when a trader is used to the feeling of FOMO and the fear of missing out is not bothering him anymore.
How to deal with FOMO in trading
Fear of missing out is in all sense an emotion. Having control of emotion is a part of market psychology and the key to controlling these kinds of emotions is discipline.
Emotions like Fear or Greed come when there is a lack of confidence. As discussed above, the market is a very unstructured pattern and nobody actually knows where the coming move will lead to. Not any of the technical theories can give you a definite move that where the market is likely to go.
So, without full confidence in where the market should lead, the role of emotions starts. Now, to overcome the doubts, the only thing in market psychology can help you is discipline.
A trader should first build a process for his trading panel and stick to his process.
For example – If I look at a stock and find a pattern. I will wait for that pattern to complete. No matter how the price fluctuates while going up or down with momentum, I stick to my discipline. And once the pattern is complete, I take a trade with a proper stop-loss. The stop-loss should be planned before entering into the trade.
The second thing to overcome the fear of missing out is to observe the emotions. Traders observe their own emotions while taking the trades.
A trader or an investor is not a sage and it is not needed to be a saint to become a successful trader, as he can do mistakes and can take wrong trades. Even a good trader can fall into emotions. This is why for what there is a stop loss.
A good trader is one who keeps observing his mistakes and tries to fix them.
Books on Market psychology to control emotions
There are a lot of books from the traders who had achieved success in the life of trading and investing. Few of them wrote books on Fundamental analysis and technical analysis. Some mentors explored the part of market psychology which lead beginners of the stock market to a smooth path where they can taste the success of their journey. A few of the great books are like:
- The new trading for a Living
The book written by Mr Alexander Elder about trading is such a wonderful book in which an author tried to explain the concept of Market Psychology and Trade Management. Mr Elder has shown how trading is not different from living.
In life, there is always a choice ahead of us in which we have to choose one. At that moment, a successful person first checks the risk and reward of both choices. The same is in trading.
A wise man always places a stop-loss about what worst-case scenario he should follow the attempt. When the risk is unfavourable and the one is not able to accept the loss he is looking ahead, he should step back and observe the whole scenario to check if he really wants to do it or not.
Many more things relate to trading as a living and many real-life examples a trader can see in this book.
- The disciplined trader
Written by Mark Douglas, a trader who made many inexperienced persons into successful traders. In this book, he wrote about the psychology of the trader. From how a fresher trader feels to how a mature trader should feel, an author explored the edge in trading with many real-life examples.
To know more about trading and Investing, keep reading us. To touch on the depth of the market psychology and technical aspects of trading, contact us.