I recently let fear of missing out guide my trading, and the results were dismal. I knew it would happen, too. However, like many traders and investors, I am a recovering fear of missing out (FOMO) addict, and I lapsed.
Why FOMO is so dangerous
What is it about FOMO that causes so much irrational behavior? It’s a combination of greed and fear, the two emotions that can get the best of us as traders. We don’t like to see others doing well when we are performing at a subpar level. Hence, we tend to push harder, trying to play catch up so we can enjoy the same success as everyone else. Everyone loves to join the party, even if they are late to arrive.
While some long-term investors are plagued by FOMO, it’s much rarer. They have history on their side. Park your money in high-quality stocks and watch your wealth grow. Reinvest dividends and watch it compound. After 25 or 35 years, you’ll be sitting on a nice nest egg.
Short-term trading is an entirely different game that’s based on quick movements up and down, volatile eruptions, and pinpoint accuracy. The psychology of trading is fascinating. You can miss out on an opportunity and chase it endlessly to try catch up to the crowd. This is especially true for any traders who have been out of the game for awhile. And it’s what happened to me – more on that below.
As I’ve written so many times before, your goal as a trader is to push aside FOMO. Create a bubble for yourself with shades drawn. Don’t look at other traders; just pay attention to what is important to your portfolio. If you cannot do this, you’ll forever be behind the curve. It’s a formula for disaster, and eventually, the poor house.
What happened when I let fear of missing out guide my trading
In early March, I was fresh off the plane from a fantastic vacation. The market conditions were tough and moving wildly up and down for various reasons. But it didn’t phase me much. I had plenty of firepower (cash) to work with, and though I was behind, I knew I could catch up. I just needed to make the right move and I’d be in sync with the markets. Or, so I thought.
During my first week back, I was on the right side of the trade (bearish, with mostly puts and a few calls). Yet I ended up losing money on three of the five days that week (it was just before the Fed raised interest rates, and the markets were down substantially). It was remarkable, really. I was on the right side of the trend, but I still lost money.
With 20 years of options trading for income under my belt, I am far from a novice trader. This goes to prove that even the most experienced among us can have a rough stretch. It’s how you manage your trading afterward that makes the difference.
(I can see you reading this, nodding along and saying, “Yep, I know the feeling!”)
I bring this story to you because I really felt like I was missing out that week. FOMO happens to everyone. If someone says it doesn’t affect them, they are lying. For me, it had nothing to do with the technicals, charts, or sentiment. I needed to get back in and show good results. No matter what, it had to happen. This is the wrong way to approach a trade.
I’ve since re-grouped, but I am still waiting for the moment when that need to belong to the crowd goes away.