Trading Fears: The Fear of Missing out (FOMO)

There are various fears associated with trading. Let’s focus here on “The Fear of Missing Out”, referred to as FOMO.
FOMO takes on two distinct forms:

1. Trading without a plan, diving in “willy-nilly” when something is moving.
2. Having a trade plan but ignoring it when something is “kinda my setup”, but not quite. In short, knowing what to do, but not doing it due to a lack of patience.

FOMO #1 is by far the more serious, because it’s really (at least) three problems:

1. Not having a trade plan, which almost certainly reflects the lack of solid trade criteria
2. It involves an unthinking, emotionally-driven dive into a position
3. With neither planning nor a justifiable reason for entry, there’s usually shoddy risk management associated with the process, so losses are often outsized.

Technically speaking, this is “a mess.” Avoid trading until there’s at least the rudiments of a plan covering the key elements of a solid trade: entry criteria, the trading environment, risk management, position-sizing and exit criteria (for both taking a profit and accepting a loss). FOMO #1 leaves one exposed to getting badly hurt, since the trade is built on hope. Hope is not a strategy.
This brings us to FOMO #2. You’ve got at least a passable trading plan, but you sometimes (or often) ignore it in whole or part:

• You dive into a position on a hunch or simple emotion. But since you normally have some solid basis to your trades and understand risk management, it usually doesn’t turn into a train-wreck. But it’s a subpar trade with a much lower probability of being profitable, and when you push the button to enter you know it. You know you do.
• You know what your trade is supposed to be and what it should look like, i.e., your “picture-perfect setup.” But for various reasons, you “need” to get into it. Perhaps you’ve not had as many trades as you normally have, you’ve not made enough money lately, you’re emotionally antsy and need to be “in action”, or other reasons.

Below’s a recent chart that initially looked interesting but was then found to have numerous flaws. Responding to FOMO, this would be a typical example of diving in for the sake of diving in & ignoring what the “picture perfect” setup was supposed to be. At that point it’s a trade based on a flimsy resemblance to what a quality setup looks like (for the style we trade at PTL).

For your consideration:

• If you trade stocks/ETFs, there are really infinite opportunities taking into account viable trading symbols, trade styles and charting timeframes. There will always be another setup. If not, we have far bigger, existential problems.
• A dollar not lost in a bad or mediocre trade setup has precisely the same value as a dollar made in a winning trade

On every trade, pretend you must truthfully justify your trades to someone else, especially another trader who knows what s/he’s doing. You need to tell them your trade criteria and show them what you did. Key to this is you must respond to the inevitable question, “But isn’t that different than what you just told me you do?” Usually, if you try to justify why you violated your own rules, your reasons will sound weak.

There’s a good reason for that…

​They are. Give it a try!