March 10, 2022
All you need to know about dealing with FOMO in day trading stocks
Trading stocks is a fast-paced market that requires real-time decisions. Making decisions in such a situation can be overwhelming, especially when the market is exceptionally volatile. As such, traders frequently become tempted to follow the crowd because of the fear of missing out (FOMO in trading).
FOMO is so common today that it affects about 69% of millennials’ trading practices. The FOMO paradox creates the very situation an investor is trying to avoid: they miss out. The best way to deal with FOMO in day trading stocks is to understand what triggers it and the best practices to follow when trading.
What is FOMO in day trading stock?
FOMO in day trading stock is an irrational trading decision that arises from the fear of missing a huge trading opportunity. Frequently, FOMO leads to a sub-optimal level of performance. FOMO can affect any stock trader – both new and experienced traders. Many stock traders often place trades out of FOMO because of the cognitive bias that the price rise will continue into the nearest future.
Unfortunately, the FOMO feeling traders have become greater as the market moves in that direction. And in stock trading, the farther the price moves, the more likely it will make a pullback or reverse. Most trades placed out of FOMO often end up as a loser.
Consequences of FOMO day trading stocks?
FOMO is a real problem when it comes to day trading stocks. If you do not deal with FOMO in trading, it can be detrimental to your success as a trader. While there are several reasons why you should avoid FOMO in trading stocks, here we will only focus on these three consequences:
Potential devastating losses
Placing trade out of FOMO is most likely to fail. You are scared of missing out because the stock price has already begun to rise. So, entering the trade by this time will most likely lead to potential loss because the price may be ready for a full reversal or a retracement. But some traders let their emotions drive them to enter such trades either way. Sometimes, this type of trader may be lucky to pull out of the market before the price begins to drop. But most of the time, this type of trader loses their funds.
Poor trading habit
Trading based on an emotional drive is a very poor trading habit. Letting your emotions lead is great in some situations but not the best for trading stocks. After losing a trade, some traders get frustrated and emotional that they recklessly enter another trade to recover lost funds. Even if you are lucky and the trade turns a winner, it is still a wrong trading strategy.
Difficulty in setting a stop-loss order
Another issue you may likely face if you trade out of FOMO is that you may find it hard to set stop-loss orders. Since the stock price has most likely moved when you enter the trade, setting the stop-loss order would mean risking more than you normally would or reducing your position size. And if you decide to place a small loss order, it might get your trade knocked out before the price even moves.
What are the factors that trigger FOMO in day trading stock?
Emotions are what triggers FOMO in day trading. These emotions range from greed to anxiety to impatience and so on. Understanding what emotion gets you all-winded-up when trading gets you a step closer to overcoming trading out of FOMO. Some of the factors that trigger these emotions include the following:
Sometimes, the news makes traders want to hop into a new market because they do not want to miss out. While it is great to stay up to date with the news, this shouldn’t be the only influence on your trading decision. Some news may seem alluring, but not all that glitters is gold. Take, for example, the Dow Jones Industrial market crash of 1929. Dow Jones’s value grew by about 6 folds between August and September. And during this period, investors trooped in, many of which did so because of FOMO. But around mid-November 1929, Jones Dow lost about half its value.
The stock market is volatile, meaning its price fluctuates quite often. Note that the stock market volatility is a great opportunity to make money, depending on how you capitalize it. The best way to make money with the stock market volatility is by forecasting it. But some investors panic and buy or sell anything the market takes a dip or rises. If these investors can be a little bit more patient, they could make much more profit from the stock market volatility.
A trading forum is a community of traders sharing tips and information about stocks. While it is great to be a member of such communities, sometimes it may not be very clear. Perhaps you may find frequent posts about a particular trade, but that doesn’t mean it is right for everyone. But because of the FOMO, hype, and the craze by other investors on the forum, you may find yourself investing in it as well.
A long winning streak
Another factor that can make investors make a stock trade out of FOMO is seeing others having a long winning streak. Seeing the wins of others, perhaps on a particular trade, is a common factor that gets investors buoyed up. Most investors believe it is fine since everyone else is investing in it. Unfortunately, the winning streak does not last forever. So, if you do not do due diligence before investing in any stock, you may end up investing at the wrong time.
Lastly, social media is another major factor that makes investors trade out of FOMO. With so many influencers and news on social media, getting caught up with the latest craze is easy. While it is worth taking a second look at a stock everyone is hyping, you should not base your investment on the hype. Rather, invest in a stock after careful and thorough research. We recommend using social media simply for inspiration and not as a definitive planning tool.
Characteristics of a FOMO day stock trader?
You may be making day stock trades based on FOMO and not even know about it. Simply because it works for you today doesn’t mean it will consistently work for you. Investors should always keep their eyes on the long-term benefits of any trading strategy they apply when it comes to investment. But not every trader has mastered the psychology of trading. Many investors still act on FOMO, and they often share the following characteristics:
No risk management plan
Every investment comes with risk; some investments are riskier than others. Nevertheless, your ability to manage risk makes you a great investor. Traders can manage some trading risks through proper planning in day stock trading. But if you are making trades out of FOMO, you often wouldn’t have the time to plan how to manage risk. And often, these investors open a trade when the price is already extended and it becomes hard to find the right place to place a stop-loss order.
Some traders get affected by the FOMO in their research phase. Sometimes, traders see the potential of some stocks early enough but get paralyzed in their analysis. Later on, when the stock price starts to surge in the expected direction, they try to chase the trade — in such a situation, entering a trade after it has moved past its right entry-level means making the decision emotionally. Except you have a great trading strategy, it is not advisable to pull the trigger.
Predicting a winner
While it is great to be optimistic and have a positive mindset, it is delusional to think that because you are invested in a stock, the market will move in your favor. Or, if you believe that you know what will happen next in the market, it means you are a FOMO trader. While you can try to forecast the market, most traders do so with a degree of error. No one can predict a future event with 100% accuracy! So, with room for error, traders can plan a contingency plan if things go south.
No long-term perspective
If you do not approach trading with a long-term perspective, you are likely a FOMO trader. It is understandable if you are trading stock to make money. However, the right mindset here is to have a long-term outlook. Sometimes the market fluctuates, making you feel you will sustain a significant loss. But traders that see the potential in stock as the ones that hold their stock until the value reaches their expected level. So, rather than putting all your energy and focus on one trade as a FOMO trader, you should see the thousands of opportunities in other new trades.
No trading strategy
FOMO traders do not have a trading strategy. This type of trader often finds themselves doing what others are doing, and not that they understand why those are doing it. If you find yourself simply making trades based on hype or a craze, then you are a FOMO trader. Following the crowd may lead to irresponsible trading and disastrous outcomes. Trading without a strategy is riskier than you think, as you can end up losing more money than you think. If the value of a stock is moving in a direction you like, it does not mean it will keep moving in that direction.
Indecision is a very common characteristic of a FOMO trader. Most FOMO traders struggle to decide on which stock to invest in. But a key quality of a trader is good decision making. As a trader, you will find yourself consistently making one decision or the other. For example, when to enter a trade, where to place the stop loss, the position size, the profit target, and so on, and decisions a trader has to make. So, if you find yourself unable to make a decision, you are prone to FOMO.
Lack of confidence
Day stock trading takes patience and guts! If you lack confidence in putting your money where your gut tells you after thorough research, then stock trading isn’t for you. Because even after intensive research, you may still have a few losing trades. In such cases, a FOMO trader enters random trades trying to catch up to recover their losses and make a profit quickly. This type of trader does not know that they are setting themselves up for more losses.
Have you asked yourself what your expectations are from day stock trading? Do you think your expectations are reasonable? Some traders have very high expectations from trading. A FOMO trader will want to double their investment in a day or less; as such, they trade irrationally. Most of the time, traders who trade irrationally end up losing their money. Having realistic expectations from trading will help you make better trading decisions.
Patience is a virtue every stock trader needs to possess. If you are impatient, you will find yourself trading like a FOMO trader. A FOMO trader does not want to wait for the setup; rather, they want to jump right into the trade. Often, these traders are not patient when they trade because of fear that the price may drop and they will miss out. So, they end up making irrational trading decisions by rushing into trades without proper research.
Greed is a very common characteristic of a FOMO trader. FOMO traders want to have it all to themselves. Every stock they see the slightest opportunity, they jump right into it without properly understanding what it is all about or having a trading strategy when they enter the trade. Or if when you trade, you feel greedy to close a trade when it reaches your profit target, then FOMO is probably a problem for you. A FOMO trader thinks too much about how much you can make from a trade rather than focusing on executing a trade properly.
10 tips to overcoming FOMO in day trading stocks
Overcoming your FOMO is an ongoing process. You may probably battle it through your trading career, but it gets easier with time. There is no one simple solution to controlling your emotions in trading. But these few tips will help you keep your FOMO under control.
Understand the market you are trading.
Knowledge of the market you want to trade-in is essential. A trader that wants to overcome FOMO trades should study the market they are interested in. Studying the market will help you better understand if the hype and craze of a particular stock are worthwhile. So rather than making trades out of FOMO, you should do your analysis to make more informed trade decisions.
Develop a rule-based process for entering trades
Another way to overcome the FOMO trades is by developing an exclusionary rule-based process for entering a trade. In it, you will rule out trades that might come up due to too thinly trade, penny stocks, too small of a market cap, small biotechs, and so on. It’s important to have this because there are so many opportunities. If you do not filter some trades, it will pull your focus from the core group of large and mega caps. If a trade does not fit into the process, then pass on it, no questions asked.
Accept you can’t and don’t need to be in every trade.
To make money trading stocks, you do not need to be in every trade. The FOMO on some trades should not matter as much as your trading position over time. For example, you may find 10 to 15 charts a day that give key technical signals. But your rule of entering trades may dictate that you cannot trade any of them or trade them all. You should have confidence in your ability to find high win potential stocks and not feel pressured to change every single trade.
Realize there are trades every single day.
The stock trading market is vast, with numerous names you can analyze and trade. So, you must have a trading strategy. When you follow a consistent entering trade, you increase your chance of catching a winner. And even if you miss one today, realize that there will always be another chart setting tomorrow as well. So, come to terms quickly when you miss a trade while waiting for the next best trade.
Verbalize your reason for entering a trade
Before entering any trade, you ought to have a reason. However, some traders enter trades out of FOMO and rationalize why they ignore analysis and logic. To overcome this internal rationalization, verbalize why you want to enter a trade. Verbalizing your reason forces you to evaluate what you think or know about the trade. And at the end of the day, it clarifies whether you have a solid reason behind the trade or whether you are simply making excuses.
Give yourself a trading limit.
Importantly, having a trading limit is very effective at dealing with FOMO. Although it is important to note that trading limits will help overcome FOMO when you are strict with it. While setting a trading limit does not only involve how much you are willing to win but also a profit margin or stop-loss margin. When you attain your set profit for the day, you should close all trades for the day. Similarly, if you reach the maximum amount of money you can afford to lose in a day, you should close all trades for the day.
Keep a trading journal.
If you have not been keeping a trading journal, it’s time you start keeping one. A trading journal is an important document that will help you overcome FOMO trades. A trading journal makes you more disciplined when making trading decisions. The trading history of all your last wins is kept in your journal. So, when you constantly refer to your journal, you will find yourself not making trading mistakes you normally make earlier in your trading journey.
Automate your trading plan
Many traders spend long hours in front of a screen because of FOMO. This is unhealthy and a time-waster. So, rather than waiting for that one random news or event to automate your trading plan with a trading bot. The trading will perform trades for you based on set parameters. As such, when you are away from your screen, you will not miss out on anything. Automating your trade will also help you overcome the issue of making emotional trades.
Study your trading history at the end of the day
At the end of a trading day, it helps to study the trading decisions you made for that day. It is important to do this at the end of the day as it will equip you with things to do and the ones to avoid the next day. More appropriately, you learn from the decisions you made. Trades you missed, the ones you won, and the ones you lost will all help you know how to adjust better your trading strategy such that it is highly profitable over time.
Take a trading course.
If you are not savvy with day trading stocks and don’t want to miss out, you can consider taking the trading course. This course will teach you everything you need to know to become a highly-skilled expert trader. Your instructor will even be able to offer you a wide variety of time-tested methods for recognizing and overcoming common trading errors. So feel free to register in any of the several trading courses you can take online from the comfort of your home.
The FOMO in day trading stocks is a fact of life. Allowing your FOMO to motivate your investment decision will often lead to emotional trades. And when you make emotional trades without proper research will lead to significant losses. FOMO encourages traders to buy stock while high – this is a bad investment strategy. If you find yourself practicing characteristics of FOMO trades, ensure you take the necessary steps to overcome them.