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Trading Psychology

What Is FOMO in Trading and How To Overcome It?

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Written by Tim-bot
Reviewed by Friedrich Odermann Fact-checked by Ed Weinberg
Updated 1/11/2024 15 min read

In the world of trading, FOMO – Fear Of Missing Out – is a common yet often unspoken phenomenon. It’s a psychological trap that can entice even the most rational traders.

A classic example is the GameStop saga, which began on a subreddit and snowballed into a massive movement. Thousands of traders, gripped by FOMO, jumped into the trade, driving the stock prices to unprecedented levels. This situation illustrates how FOMO can lead to irrational trading decisions, often driven by the fear of missing out on seemingly lucrative opportunities.

But it’s not just about big movements like GameStop; FOMO can occur in everyday trading situations, impacting decision-making and potentially leading to significant losses. In this article, I’ll tell you exactly how!

I’ll also answer the following questions:

  • What is FOMO in trading?
  • How does FOMO affect decision-making in trading?
  • What psychological factors contribute to FOMO in trading?
  • How can traders overcome FOMO?
  • What are the main signs of FOMO in trading?
  • Is FOMO more prevalent in certain types of trading?
  • Can FOMO in trading be beneficial?
  • How can I control psychology in trading?

Let’s get to the content!

What Is FOMO in Trading?

FOMO in trading refers to the emotional distress traders feel when they believe they are missing out on a profitable opportunity. This fear often leads to impulsive decisions, like entering a trade without thorough analysis or investing in a stock because ‘everyone else is doing it.’ FOMO can cause traders to abandon their strategies and take on unnecessary risks, chasing after profits that may not materialize.

In my 20+ years of trading experience, I have seen how FOMO can cloud judgment and lead to decisions that don’t align with one’s trading plan or risk tolerance.

The Psychology of FOMO in Trading

Fear of Missing Out (FOMO) in trading is a powerful psychological phenomenon that can lead investors to make hasty decisions, often driven by the worry that they might miss out on profitable opportunities. This fear can be exacerbated in volatile markets where rapid price movements are common.

As an experienced trader, I’ve seen how FOMO can push investors to enter trades without proper research or strategy development. The allure of quick profits or following a hot tip can override disciplined decision-making and lead to impulsive trades.

Recognizing FOMO’s impact is essential in maintaining a rational approach to trading, focusing on long-term goals rather than short-term gains.

Understanding Behavioral Finance

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Behavioral finance teaches us that emotions play a significant role in trading decisions. FOMO is a psychological response that can cause traders to act irrationally, driven by the fear of missing out on gains. It’s a natural human response to want to be part of successful ventures, but in the stock market, this can lead to hasty decisions without proper risk assessment.

Cognitive Biases and FOMO in Trading

Cognitive biases like herd mentality and overconfidence can exacerbate FOMO in trading. Seeing others profit from a stock can trigger a fear of missing out, leading traders to follow the crowd without independent analysis. Overconfidence, often fueled by a few successful trades, can also lead traders to believe they can consistently beat the market, ignoring the risks involved.

Social Pressure Behind FOMO

Social media and trading forums like Reddit’s WallStreetBets amplify FOMO by constantly highlighting success stories. Traders often compare their performance with others, feeling pressure to match or exceed those results. This social pressure can lead to risky trades, as individuals strive to not fall behind their peers.

What Factors Can Trigger FOMO Trading?

Several factors can trigger FOMO in trading. Social media platforms like Instagram, LinkedIn, and YouTube often showcase stories of instant trading successes, which can create a skewed perception of easy money. Articles and blog content highlighting ‘once-in-a-lifetime’ opportunities can also stoke FOMO.

I tell my students to watch out for market indicators, such as unusual volatility or trend analysis, which can lead to a fear of missing out, especially among new investors. Additionally, seeing others make substantial profits can evoke a sense of urgency to jump in, often without adequate research or a solid trading strategy.

It’s important to understand that disciplined capital allocation and patience in trading are more likely to lead to return maximization than chasing the next big thing.

Bigger picture: you need to build effective trading strategies into your muscle memory. The best trading strategies are those that align with your goals, risk tolerance, and market understanding. They should be well-researched, tested, and adaptable to changing market conditions. Whether you’re a beginner or an experienced trader, finding and refining your strategy is key to long-term success. To discover and learn about the best trading strategies that can help you avoid the pitfalls of FOMO, delve into my comprehensive guide on the best trading strategies.

Impatience

Impatience, often driven by a desire for quick profits, can trigger FOMO. Traders might jump into trades without proper analysis, fearing they’ll miss the ‘next big thing.’

Continuous Winning Streaks

A string of successful trades can lead to overconfidence, making traders more susceptible to FOMO. They might start believing they can do no wrong, which can be a dangerous mindset in the volatile world of trading.

Market Volatility

High market volatility can create a sense of urgency, prompting traders to enter trades they might otherwise avoid. The fear of missing out on significant market movements can overpower rational decision-making.

Financial News on Social Media

Social media platforms are rife with discussions about market trends and ‘hot’ stocks. This constant stream of information can influence traders to make decisions based on FOMO, rather than solid research and analysis.

No Long-Term Perspective

Lack of a long-term investment perspective can make traders more prone to FOMO. Focusing only on short-term gains can lead to impulsive decisions, ignoring the bigger picture.

High Expectations

Setting unrealistic profit goals can create a sense of urgency and lead to FOMO. Traders might take unnecessary risks to meet these goals, disregarding their original trading plan.

Overconfidence

Overconfidence can blur the line between optimism and recklessness, leading traders to believe they can always ‘beat the market’ and thus falling prey to FOMO.

What Are the Main Signs of FOMO in Trading?

Recognizing the signs of FOMO in trading is crucial for any investor. One key indicator is making decisions based on emotions rather than a well-thought-out strategy. If you find yourself entering trades because of a fear of missing out, rather than based on your research and strategy, it’s likely FOMO at play.

Another sign is neglecting loss prevention measures, like setting appropriate stop losses, in the pursuit of higher returns. Additionally, deviating from your planned risk tolerance or capital allocation for the sake of jumping on a trend can be a clear sign of FOMO.

As someone who has navigated these emotional pitfalls, I’ve learned that maintaining discipline and patience in trading decisions is crucial for long-term success.

Impulsive Trades Based on Unverified Information

One of the clearest signs of FOMO is making impulsive trades based on rumors or unverified tips. This behavior indicates a departure from logical, research applications.

Doubling Down After Every Loss

Continuously increasing investment in a losing position in the hopes of recouping losses can be a sign of FOMO. It’s the fear of accepting a loss and missing out on a potential turnaround.

Making Trades Without a Plan

Entering trades without a predefined strategy or plan is often driven by FOMO. This approach ignores the importance of risk management and goal alignment.

Taking Risk Without Calculating the Potential Returns or Losses

Engaging in trades with high risk without a clear understanding of the potential returns or losses is a hallmark of a lot of FOMO-driven trading.

How To Overcome FOMO in Trading?

Overcoming FOMO in trading requires a disciplined approach to decision-making. Start with solid research and a clear trading strategy. This includes understanding the fundamentals of portfolio diversification and sticking to your planned approach to risk and capital allocation.

It’s essential to practice patience and not rush into trades without proper analysis. Additionally, setting realistic goals for profit taking and being vigilant about loss prevention can help mitigate the effects of FOMO.

In my experience, one effective method is to maintain a trading journal, documenting your decisions and reflecting on them. This practice can foster a more analytical approach to trading, helping you understand the rationale behind your trades.

Remember, successful trading is not about making the most trades; it’s about making the right trades at the right place and right time.

Overcoming FOMO is just one aspect of mastering the psychological complexities of trading. Traders often face various psychological traps that can impact decision-making and performance. These traps include overconfidence, confirmation bias, and the illusion of control, among others. Understanding and navigating these psychological aspects is crucial for maintaining a disciplined approach to trading. For more insights into the common psychological traps in trading and strategies to overcome them, explore my detailed discussion on psychological traps in trading.

Develop a Trading Plan

Having a well-thought-out trading plan is crucial. This plan should include your trading goals, risk tolerance, and criteria for entering and exiting trades. A plan provides a framework that helps prevent impulsive decisions driven by FOMO.

Identify Your Trading Goals

Understanding your long-term trading goals can help keep FOMO at bay. Whether it’s capital preservation, income generation, or wealth accumulation, clear goals provide a direction for your trading activities.

Accept the FOMO

Recognizing and accepting that FOMO is a natural emotion is the first step in overcoming it. Awareness allows you to identify when FOMO is influencing your decisions.

Work on Your Trading Psychology

Developing a strong mental attitude towards trading, grounded in discipline and self-control, is key. This mindset helps in making rational decisions, free from emotional biases.

Control Your Social Media Activity

Be cautious about the influence of social media on your trading decisions. While it’s a source of information, it can also be a breeding ground for FOMO.

Keep a Trading Journal

Maintaining a trading journal helps in tracking your decisions and understanding the emotions behind them. This practice can provide insights into how FOMO affects your trading.

Manage Your Risk

Effective risk management is essential in preventing FOMO-induced decisions. Setting stop-loss orders and only risking a small percentage of your capital on each trade can help maintain discipline.

Wait for Better Trades

Patience is a virtue in trading. Waiting for the right opportunity, rather than jumping into trades out of fear, can lead to better long-term results.

FOMO Trading vs Disciplined Trading: The Cycle

The main difference between FOMO trading and disciplined trading lies in the approach and mindset.

Disciplined traders follow a well-defined plan and make decisions based on thorough analysis and risk assessment. They understand that not every trade will be a win and that patience and consistency are key to long-term success.

FOMO traders, on the other hand, are often led by emotions and the fear of missing out on profitable opportunities. This approach can lead to a cycle of impulsive decisions, losses, and increased risk-taking in an attempt to recover.

Overcoming FOMO is a significant step towards becoming a successful trader. However, there are other essential factors to consider. Success in trading requires a combination of discipline, continuous learning, risk management, and a well-defined strategy. It’s about understanding the markets, your own psychology, and having the patience to wait for the right opportunities. For a deeper understanding of what it takes to succeed in this challenging field, check out my detailed exploration of the 10 keys to becoming a successful trader.

Key Takeaways

  • FOMO in trading is an emotional response that can lead to impulsive and risky trading decisions.
  • Recognizing the signs of FOMO and understanding its psychological roots is essential for managing it.
  • Developing a disciplined trading strategy, including a solid plan and risk management, is key to overcoming FOMO.
  • Patience, self-awareness, and adherence to a well-defined trading plan can help mitigate the impact of FOMO.

Trading isn’t rocket science. It’s a skill you build and work on like any other. Trading has changed my life, and I think this way of life should be open to more people…

I’ve built my Trading Challenge to pass on the things I had to learn for myself. It’s the kind of community that I wish I had when I was starting out.

We don’t accept everyone. If you’re up for the challenge — I want to hear from you.

Apply to the Trading Challenge here.

Trading is a battlefield. The more knowledge you have, the better prepared you’ll be.

How do you resist FOMO in your trading? Let me know in the comments — I love hearing from my readers!

Frequently Asked Questions

Is FOMO more prevalent in certain types of trading?

FOMO can occur in any trading type but is more prevalent in short-term trading styles like day trading and swing trading. These styles often involve rapid decision-making and can be more influenced by market rumors and hype.

Can FOMO in trading be beneficial?

While FOMO can sometimes lead to profitable opportunities, it is generally not a sustainable or advisable approach to trading. Decisions based on fear and emotion are less likely to be successful in the long term.

How can I control psychology in trading?

Controlling psychology in trading involves developing a disciplined mindset, adhering to a well-thought-out trading plan, and continuously educating oneself about market trends and risk management. It also requires self-awareness to recognize emotional biases and the discipline to not act on them impulsively.

How can I ensure my trading account is not adversely affected by FOMO?

To protect your trading account from the negative impacts of FOMO, it’s vital to have a clear understanding of the range of your financial goals and risk tolerance. Implementing a disciplined approach to trading is key. This involves setting strict rules for entering and exiting trades, understanding the volatility of the markets, and never risking more than you can afford to lose.

What advice would you give to someone struggling with FOMO in their trading decisions?

My advice for anyone struggling with FOMO is to focus on the long-term perspective. Trading is not just about making quick profits; it’s about developing a sustainable strategy. Ensure that you’re well-versed in the products you’re trading and understand the underlying factors that drive market movements. Apply your research methodically and don’t let emotions dictate your trading decisions.

Discipline maintenance is key – set clear rules for when to enter and exit trades and stick to them. Lastly, always remember that part of being a successful trader is timing optimization — knowing when not to trade.


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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (205) 851-0506 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”