Trading Psychology – FOMO (Fear of Missing Out)

There are number of ‘Fears’ that a trader will experience in his/her career. The most important three fears that often manifests themselves are: Fearing of Missing Out (FOMO), Fear of Loosing Money (FOLM) and Fear of Being Wrong (FOBW). In this article, I will specifically focus on FOMO, what it is, how it can affect your trading and how to prevent it (as much as you can).

Fear of Missing Out (FOMO):

Fear of Missing Out is a well researched psychology topic that is not only true for trading but also for every day life. Most scams (and well scripted marketing) work due to recipients’ FOMO ‘triggers’.

If you want to understand FOMO better, I strongly suggest reading two research paper by Kernis (2003) and Ellion (2007). They argue that self-determination theory (SDT) a macro-theory of human motivation provides a useful perspective for framing an empirically based understanding of FoMO. According to SDT effective self-regulation and psychological moods are based on the satisfaction of three basic psychological needs:

  • competence – the capacity to effectively act on the world,

  • autonomy – self-authorship or personal initiative, and

  • relatedness – closeness or connectedness with others.

Today’s retail investor is a social animal. We are following each other on social media (twitter, facebook, instagram, etc.) and also bombarded by emails and other media channels. We are being sold ideas and concepts every single minute of the trading hours (and pre-trading and after-hours). What we are really trying to do is to feed the three psychological needs above and/or try to get confirmation (and comparison).

We follow each other, we hear news that this is the must have stock (or the stock that needs to be shorted immediately). We see so many people are doing the same thing and we feel left out (the feeling is: everyone will make big bucks and if I am not doing anything! I will simply loose out on a great trade!) or worse,  in some circumstances, you might be already in the trade but you start doubling your position (just because everyone else is doing the same) and pay the price later. We all know that if everyone is doing the same thing, the trade becomes crowded and thinks start to turn for the worse…

Realization and Action

As traders, we need to realise something very important as early as possible  in our trading career. We simply can’t catch every stock move and we can’t trade stocks every minute of every day. This is a fact! If you can accept this fact then you have ultimately accepted that you will miss some trades (this is perfectly OK!). The real rule to be successful in trading is to have a working strategy. Everyone trades differently, no two traders trade exactly the same way so your strategy will be different then my strategy however there might be similarities that puts us on the same set (i.e. short trader, long trader, momo trader, stock trader, fx trader and so on..). Don’t feel like an outsider or feel being wrong just because you are trading differently to someone else or to a group of people. Don’t forget there is money to be made  in so many different ways from the same stock.

All traders struggle with FOMO time to time. If someone is saying they don’t struggle, they are simply lying to you. Trading experience of course helps with this immensely. My simple rules that help me to stay in check are:

  • The Action Plan: Always have a plan before entering in a trade. Ask yourself what is your edge for entering in this trade. You need to KNOW why you are entering, what size you will be using,  when you will be exiting and what you will do if the trade goes against you. You are not going into this trade just because some guru or a friend thinks it is a good idea. KNOW your trade and KNOW what you want from it EVERY SINGLE TIME YOU TRADE!

  • Be Disciplined: As you now have an action plan, the truth is executing that action plan is more difficult than to have an action plan in the first place. This requires discipline and determination. Don’t forget that HFT algo that you are trading against doesn’t have emotions and will follow rules to the letter. You should try to do the same (as much as you can).

  • Learn to be happy with your achievement: We all want to make a killing from a trade. Reality is trading is extremely difficult. Once you have executed your plan effectively, either you made a profit or a loss. Either way, you have done what was necessary for the trade and successfully filtered out the noise – well done on that. Even though it was a loss, you cut it on time as per your action plan. This is great news. If your trading strategy is profitable, in the long term you will make serious money from trading. As you are following your rules, you WILL be consistent and you will achieve consistency in trading.

I hope this helps. Have a nice weekend.

MT

 

 

 

 

A simple strategy for your trading toolset: After Hours Trading (AHT)

After Hour Trading (AHT) is one of those mystical (if not scary) words that most day traders will equate to gambling. However, there are (growing) number of players in AHT including human traders and algos.

You can see that  AHT volume in specific stocks often surges upon the occurrence of market-moving events, such as earnings reports, pre-earnings announcements or M&A activity or sector specific news (such as shipping rate changes, etc.)

Let me make this clear, I do not do too much AHT trading however, I certainly do quite a few trades (mostly successful ones) during earnings seasons. I specifically like after hours earning announcements and I listen to their conference calls however most companies publish their results just before the conference calls on their websites (or file a SEC report before the call).

My AHT trading strategy is extremely simple. I only play longs for positive earnings. I also like the stocks which generally have a good volume day time (the same day as the earnings announcement). After the positive earnings have been announced the price of the stock generally spikes (I call this the first wave) and then it normalizes (generally within a few minutes). This is when I buy it. It is then very likely to spike once again (I call this the second wave) when more people hear or read about the earnings news. Generally it can take about 15-20min between first and second wave (can be longer or shorter). I then sell my positions near first wave highs and call it a trade! I don’t like keeping it overnight (nothing wrong with doing so) but I find it risky. If I play, make money and get out, that is the way I like it.

Please note, I go for a LONG play ONLY if the earnings beat the estimate at least with 10% or more. If not, I simply leave the stock alone and don’t go for a trade. I am extremely selective with AHT trades – the way it should be. Finding the stocks to fit with the above criteria could be somewhat challenging (and time wasting) but it is better to waste your time then your money!

Please note, after-hours trading is busiest in the first hour or two after markets close, before disappearing sharply. As financial markets become increasingly integrated with the advent of globalization, I expect the after-hours trading is likely to expand going forward. Watch this space.

I hope it helps.

MT

PS: Zacks is a very good source that I use to see earnings calendar, estimates, etc. There are tons of other free websites where you can find all earnings related information.