Over the years, I have talked a lot about learning how to manage both risk and FOMO in trading (the fear of missing out on a winner). Both are key to trading success: One gets you in the game, the other keeps you in the game.
If you’re able to avoid FOMO and manage wins and losses productively, you can flourish in good times and bad.Let’s look at how these concepts support each other.
FOMO in trading
The fear of missing out is one of the four fears of trading. Mark Douglas first discussed them in his book, “Trading in the Zone,” which I consider a must-read for understanding the psychology of trading.
When the markets start to run higher, FOMO in traders sets in because no one wants to miss out on gains. You know you only have a short window to make it happen, which amps up the fear. You don’t want to be left behind, nor do you want others to make money while you sit and watch.
If you let your emotions take over the decision-making process, you will take unwanted risk with your capital.
It doesn’t stop there of course. Next, you throw analysis to the wind and start feeling your way around the trades because you want to be in on the action.
So how can you manage risk in a way that allows you to participate without blowing up your portfolio?
We’re going to use my good friend Josh as an example. Josh is an active options swing trader who has been a mainstay in our chat room for years.
He is always looking for promising trades while managing risk at the same time. But he knows that trades don’t always work out in our favor. When that happens, you need to cut the trade. THAT is how you manage risk and FOMO in trading and still make money.
Josh’s recent experience demonstrates this perfectly.
How FOMO and risk management work together IRL
Josh had long calls in Google (GOOGL) and Union Pacific (UNP). The markets were moving higher, but even then, stock picking requires precision. At the time, he believed the decay factor was going to play a big role in both names, so Josh sold them at a near breakeven. “Time to move onto the next trade,” he said.
Sadly, UNP rose higher, and he missed out on gains, Meanwhile, Google fell hard and he was spared a loss. Neither trades were perfect, Josh told me, but in the end that did not matter. He preserved his capital instead of losing it.
So there you have it. Manage your risk and your emotions, and you’ll find yourself cutting losses early and taking nice profits when you have them.
Trading is not a game of perfect, but understanding that small gains add up to create income can help you manage FOMO in trading. If you need help learning when it’s time to sell, this ebook may help.
