If we surveyed a group of traders and investors across a wide spectrum, and asked them what is the biggest obstacle they have had to overcome in markets, at the top of the list is often FOMO, ‘Fear of Missing Out’.
Fear of Missing Out (FOMO)
My view is that the number one mistake that market participants make is overtrading. A trader sees a chart or idea that looks great today, we will call it ‘Stock A’. The trader researches it, draws plenty of upside lines on the chart and takes their position. After a day or two, Stock A does not take off right away, and the trader sees ‘Stock B’. Stock B has been going up every day, it seems that everyone online has it except our trader, and for Stock B the sky is the limit.
Our trader has a Fear of Missing Out on the big move, and wants to join the Crowd. Our trader sells Stock A to buy Stock B. Nothing has changed about the Stock A idea which made it such a great idea a few days before, but Stock B looks like the bigger, better deal. Shortly after doing this, Stock B reverses sharply lower, and Stock A finally starts to move. Now our trader is losing in Stock B and realizes if they just sat tight, their original idea would be making money. Now that Stock A is higher than the trader sold it for, they don’t want to buy back in, and Stock A goes on to become a massive winner.
FOMO is likely the number one reason that traders overtrade, lose money and get mentally whipsawed in markets. There are a few ways that I have learned to deal with this:
1 Accept that you can’t be in every trade or every move, and don’t need to be to make money. To make money, our positions over time need to be profitable. There are 7,500+ symbols in the Finviz database, we can’t be in every one. I see 5 to 10 charts a day that give key technical signals, but my rules dictate that I can not trade them all, or at times, not any of them. I have seen textbook charts that go up 15% the next day, and I have no reaction. It happens every day – we can’t be in them all and don’t need to be. I am confident in my ability to find high win potential stocks, and don’t feel the need to chase new ones daily.
2 Develop a rules-based process for taking entries, which should be exclusionary. My rules have my database down to about 750 names out of 7500+, so I have ruled out 90% of the ideas that might come up, due to too small of a market cap, too thinly traded, penny stocks, small biotechs, etc. A highly skilled trader can make money trading one position over time, maybe $SPY, $QQQ or S&P futures, ES. Shorter term traders might focus on 1 – 5 at a time, and longer term position traders might go in the 15 – 25 range. There are many opportunities out there, and by reducing my universe, I am able to filter out the random thinly traded small cap stock that doesn’t fit my process, or would pull my focus away from my core group of large and mega-caps.
Key point: Have a focus group and a key entry signal. If a trade fits into the rules, it can be considered further. If it does not fit into the process, then pass on it, no questions asked.
3 Realize that there are home run trades that are setting up every single day. In the Finviz database over $2 billion market cap, there are currently 519 names that are +30% or more for the last 12 months, and 136 that are +20% YTD (7 weeks). Realize that if you follow a consistent process, you can catch some of these winners as well. If we miss one today, there is another chart setting up tomorrow as well.
4 Put yourself on a ‘pitch count’ or trading limit. Based on time frame and objectives, maybe it is only one new entry per week, or one per day, whatever you decide suits your time frame. If it is one new position per week, then that’s it. Tune out further entry ideas. You may miss some trades, you won’t catch them all, nobody ever does, but you also might wind up not selling one early that becomes a big winner.
5 Have a written journal, or trading checklist for each trade. Before taking a new entry or exit, fill out the sheet with the variables, symbol, price, signal, reason for entry/exit and P & L. Not only does it take time to go through this process, but it forces the trader to put the reasoning into the buy and sell for each name. Track the results of the names bought and sold.
6 Trade smaller. FOMO is an emotional reaction, as many dream of that ‘one big trade’ that will change their lives. Maybe, but the chances of being able to retire off one trade are very low. When traders trade too big, it puts them under emotional stress and often leads to bad decisions.
7 Develop confidence. Once you get a few big winning positions on the books, you will realize that they are out there daily. Once this realization occurs, we realize that sitting in our best idea for a few days or weeks to give it time to work often produces big winners. Don’t be desperate to catch winners and start chasing random names daily.
8 Develop patience. If you take a position in a stock today, and in 12 months it is up +50%, most would agree that was a great trade/investment. If the position grows on average less than 4% a month on average (returns can be very erratic, but on average), it is +50% in one year. That means if we buy a $50 stock on March 1, and it is $52 on March 31, that is +4%. Bigger time frames work out to bigger winners. Many traders don’t understand this math, and want the stock to go up 4% in the first day or the first hour. Think longer term.
9 Print out charts of positions that you sold too early that went on to be triple digit moves or more and look at them before speed dialing through positions. I hear from traders constantly who had $SHOP or $NVDA and sold it for a 5% – 10% gain, only to watch these stocks go up 500% – 1000%. That big career winner that we were hoping for in line 6 of this blog, might be sitting in your account right now.
10 Set up trading plans outside of market hours when the market is closed. I learned this in 2007 and it made a drastic change in my results. Although I look monitor charts intraday, I do my chart analysis and trade planning in the very early morning, at night, and on the weekends, when the market is closed. I review signals, stop placement, risk management and all aspects of the trade after hours. I will often take a new position intraday, but it won’t be a random chart. It will be an idea that has been on my watch list for a few days, weeks or months that gave me the buy signal needed. I don’t hear about a stock online, or on TV and look at the chart and just buy it. I miss some winners this way, but the end result is I stick with the plan, and this is highly profitable over time.
Some will read this and put some of these ideas into practice right away, some will not. Experience has been a great teacher for me. Once traders realize that they have a process which can consistently catch potential home run trades, they have the confidence to stop chasing and start executing. I have had better results by trading less, and making more.
We get paid to find high win potential positions and maximize them, not to randomly press the buy and sell button all day. Why would we sell a stock for a 5 or 10% gain when there is 50 to 100% to be made? Discipline, process and consistency often lead to consistent positive results over time.
Photo used with permission.