Have you ever caught yourself rushing into a trade because everyone else was buying? Or worse yet, selling off all your positions because of a temporary drop in price? If you answered yes, you might be guilty of FOMO trading.
To help traders better understand FOMO trading and why it happens, keep reading. This blog will cover key examples and what a typical day trade looks like when FOMO drives it.
First Things First: What Is FOMO?
- FOMO, also known as fear of missing out, is a relatively new addition to the English language. Despite the acronyms infancy, the concept is not new by any stretch of the imagination. In it's most basic form, FOMO, or the need to stay connected continually, keep updated on social media, and the 24/7 cycle of being in the know of things is driven by fear. These persistent yet insidious habits are known to peak our stress levels and narrow our attention spans.
Fear of missing out (FOMO) is a very real feeling that's starting to permeate throughout our lives. It's best described as a feeling of social anxiety that other people are having fun without you.
From our social relationships, our intimate relationships, and even our career, FOMO can cause devastating effects. Beyond even that, it can have a significant impact on our trading practices.
1. Have You Ever?
- Rushed into a trade without following your trading plan?
- Rushed into a trade based on a hot tip?
- Felt regret after buying?
- Quickly closed a trade against your plan because everyone else was jumping ship?
- Panicked and sold all your investments when the stock market crashed a few months ago?
2. What Does FOMO Trading Look and Feel Like?
If I had to give a simple example of what FOMO trading is: Following the herd. Or, looking to others to time the market when you should be following your own trading plan.
From risking too much capital to getting a poor entry price, the consequence can be devastating. And FOMO is only heightened in trading by the fast-paced markets and volatility; it feels like there is a lot to miss out on.
3. Are You at Risk of FOMO Trading?
Not to be harsh, but if you can identify with the following attributes, you may be at risk for FOMO trading.
- Are you looking to get rich quick? Are you someone who wants to turn $5,000 into $50,000 as quickly, and with as little effort as possible?
- Willing to take stock tips from your golf buddy or brother-in-law at the weekend barbecue?
- Frequently trawling websites and magazines for nuggets of information you can turn for a profit?
- Eager to befriend an experienced trader for a free ride on their coattails?
4. Pump and Dump Schemes Thrive off FOMO Traders
A pump and dump scheme attempts to artificially inflate a stock price through false, misleading or greatly exaggerated statements.
And the people behind this scheme already have a position in the company's stock. Once all the hype has led to a higher share price, they sell their positions.
Typically, we see micro- and small-cap stocks targeted in these schemes, as they are the easiest to manipulate. And if you remember reading any of our posts on volatility, low float stocks are the most volatile.
Due to the small float of these types of stocks, it does not take many new buyers to push the stock price higher. Which makes them prime targets for the pump-and-dump scammers.
Anyone with access to a computer and an online trading account can perpetuate this scheme. All they need is the ability to convince other traders to buy the stock that is supposedly "ready to take off."
Unbeknownst to the other traders, the schemer is already long in the stock. And once other buyers rush in, the price runs up, which convinces other traders to buy heavily.
And guess what happens?
Predictably, the share price goes even higher, and the schemer promptly dumps his shares. Unfortunately for the fools who fell for the scheme, the massive dump drives the stock price down, and they incur significant losses because they could not sell their shares in time.
Seven Things You'll Commonly Hear a FOMO Trader Say
- "Everyone's doing it; it can't be that bad."
- "Just think of the money I could make..."
- "Sure, why not. What do I have to lose?"
- "If I don't act now, I might miss out."
- "I should have seen that coming."
- "I'm so stupid; I can't believe I did that."
- "Someone must know something I don't."
1. How to Kick the FOMO Trading Habit
"If you cannot control your emotions, you cannot control your money". Warren Buffett
Without a doubt, managing your emotions is one of the key traits of successful traders. Luckily, we have many ways to do this. You're probably familiar with the phrase: "Plan the trade and trade the plan for those of you around long enough."
Traders who face the same opportunity must trade the same; personal feelings can't interfere.
A key component of planning your trade is managing your risk.
Risk management in trading means you've planned the trade before executing it and stick to it. I can't stress the importance of this as it stops your emotions from clouding your judgement.
By planning your trade and trading your plan, you will be bulletproof. Planning your trades before you take them will be the difference between your success and your failure. You'll often find that you fail because you're letting emotions cloud your judgment when you deviate from your plan.
A successful trader is methodical in their approach; emotional traders don't last.
Ahead of time, any profitable trader knows the price they're willing to pay and sell. When the return is high enough, and the chart indicators match their criteria, they place the trade.
Take a look at unsuccessful traders. What do they have in common? Firstly, they enter trades without figuring out their profit and loss targets. Secondly, they have no idea what price they will sell at.
Unfortunately, this causes emotions to take over when the stock starts to tank. When emotion is dictating trades, you're well on your way to blowing up your brokerage account.
2. Avoiding FOMO Trading in the Bullish Bears Chat Room
Without a doubt, the Bullish Bears trading room and live screen share are the most helpful feature subscribers have access to.
During the screen share, the moderators go through the different stock picks and setups. They point out why or why not the stock would be the right candidate for a trade.
Moreover, to hear and see how a trader analyzes a stock provides members with invaluable information; way more than a simple trade room shout out where everyone rushes in blind to buy.
Bullish Bears goes out of their way to make sure you don't go in blind. In fact, they flat out refuse to shout out plays. They want you to learn how to trade so you can make your own decisions. Quite frankly, this is how a trade room should be.
The Moral of the Story
FOMO trading is real. Keep your eyes on your own lane; plan your trade, and trade your plan.
Bullish Bears offer tons of free content and courses and a free trial, so you can come in and see what it's all about. We don't pump and dump, nor do we call our plays.
We give you a full play by play analysis of the stocks, pointing out patterns, support and resistance, trading psychology, trends, indicators and more.
Make the right choice with us today.