TRADING WITH FEAR
In this series we are discussing:
- The fear of losing money.
- The fear of being wrong.
- The fear of missing out (FOMO).
- The fear of leaving money on the table.
In the last edition the fear of being wrong was discussed, this week we will discuss the fear of missing out (FOMO).
“The market is a device for transferring money from the impatient to the patient.”- Warren Buffett
The fear of missing out.
Traders will testify about a little voice in their head that says, “hurry, you are about to miss out”, when markets suddenly move very quickly.
We are scrolling through the charts, nothing looks good, then suddenly a candle breaks a level of resistance or out of an area of consolidation, the market is finally moving, our hearts start racing, we hit the trade button, and as we get in, the market reverses. We are now stuck in a trade we did not plan because we could not stand the feeling of being left behind.
“If you feel compelled, you are probably wrong”- Paul Tudor Jones.
The fear of missing out or FOMO is not just a trading problem, it is a human problem. It taps into something very deep; it is a fear that everyone else is getting ahead, and we are being left behind. In trading that fear reveals itself as urgency and impatience, so the click of the trade button is so that we don’t feel excluded. We don’t want to be that only idiot excluded from the party while everyone else is making easy money. Here is the irony, the more we chase the more we miss because chasing trades means we are no longer following a trading strategy or plan, we are following the crowd, and the crowd is usually late and is often stupid.
There is science behind this, our brains are wired to overreact to things that are loud, fast and flashy. A giant green candle is like a fire alarm, it is noticed instantly and is referred to as the availability bias, which means whatever grabs our attention feels more important than it really is. This is followed by recency bias which our mind assumes that what has just happened will continue to happen, and this is all based on voices in our heads. There is no guarantee the market will keep going up, but we believe it will, so we buy and then that is added to the heard effect, which is a false comfort that everyone else is doing the same thing.
How do we overcome the fear of missing out before our trading accounts are destroyed?
The simple solution is:
- Slow down, if a trade does not adhere to the rules of the trading strategy, if it doesn’t tick all the boxes that we have defined in our trading plan, it is not a missed opportunity, it’s a trap.
- We need to flip the script, every time we don’t chase a trade, it’s a win, and every time we miss a trade that was not according to the strategy, we are protecting our trading capital and our confidence.
- We may say to ourselves, “I missed an opportunity”, but everyone misses incredible moves every day, there are always big moves in various markets that are missed, it is what it is, we should not care.
- Our commitment should be to have a serious approach to trading, to the trading strategy and to the trading plan, then this fear will lose all meaning.
- Let’s say this to ourselves, “when the market conforms to the rules of the strategy and the plan, we will execute the trade, if it doesn’t, we won’t trade”. That one sentence becomes our shield against the fear of missing out and when a candle rips out of nowhere and our gut screams “buy now”, we breathe, step back and say, “that wasn’t our setup, we did not miss a trade, we avoided a mistake”. Do this repeatedly, because the real edge isn’t catching every single move, the real edge is knowing which moves belong to us and letting the rest go.
“The market will be here tomorrow. My job is to make sure my account is too”