What is FOMO in forex trading?
Whether you’re into stocks, crypto trading or forex trading, the fear of missing out on the next big thing can trigger irrational choices in a desperate bid to avoid the bitter remorse of being last to the table.
It's the anxiety traders experience when they feel that they might be missing out on significant opportunities that other traders are successfully exploiting. For example, it's the fear that if you don't trade a trending currency pair, you may lose an opportunity for profit.
When this behavior becomes a habit, it can be difficult to break the cycle and may lead to very real and often expensive consequences.
So how do we find the right balance between FOMO and disciplined trading? First, let’s look at what we can learn from FOMO in social media.
The link between social media and FOMO in trading
Trading in the era of social media is treacherous. Information overload and unqualified success stories fuel trading frenzies among those afflicted with a fear of missing out on that big windfall. This is most typically experienced in the trading of cryptocurrencies.
Cryptocurrencies are neither regulated by any central bank nor influenced by national currencies. This means that the price of bitcoin, ethereum and other cryptocurrencies is often determined by the mood of investors rather than any major economic events.
In fact, FOMO is so entrenched in crypto trading that it spawned a whole new class of investment. Think of meme coins like Dogecoin or Shiba Inu and their massive swings. In the spring of 2021, Dogecoin soared ahead of Elon Musk's appearance on the "Saturday Night Live" show because of the billionaire's enthusiastic tweets. After being referred to as a "hustle" on the show, Dogecoin then plummeted by nearly 30% over the course of the next 24 hours.
In the case of cryptocurrencies, FOMO causes inexperienced traders to buy currencies at their highest prices - as they see them performing well - or vice versa, to sell them at their lowest.
FOMO in forex trading may lead traders to ignore overbought or oversold signals on currency charts and get carried away by unverified information in an attempt to make a bigger win, while ending up making a loss.
While chasing the proverbial unicorn can be exciting, albeit volatile and fraught with risk, there is very little room for FOMO in trading.
How to identify FOMO in trading
In some ways, getting rid of FOMO when trading is more of a life skill than a trading skill. It requires strong temperament and mindfulness. The first step towards breaking the cycle, of course, is learning to identify FOMO in yourself the moment you’re presented with a hot opportunity.
Here are three quick tests to check whether you have FOMO when faced with a trading choice:
- Are you experiencing any physical changes? Is your heart racing or are you beginning to sweat?
- Are your thoughts becoming increasingly focused on past experiences of missing out on big scores?
- Would you characterize your thoughts more as an urge to make a trade than a decision to make one?
If the answer to one or more of the above is “yes,” then you’re most likely experiencing FOMO.
Once you’ve identified your FOMO, it is important to stop, breathe and acknowledge the feeling without acting on it. This is probably the most difficult thing to do when the world around you is in a feeding frenzy or panic mode. Still, it is important to stabilize your emotional state before engaging the more logical and rational parts of your mind in trading.
How to reduce the risk of a FOMO trading spiral
A stable mind alone is not enough to combat the urge to act when presented with a so-called hot trade. You need a credible point of comparison to soberly assess the opportunity amid the inevitable frenetic hype.
This starts with a trading plan. When we have no parameters against which to gauge the veracity of our trading choices, we are likely to enter a constant state of FOMO and spiral out of control. This results in a tendency to keep chasing the next big score while racking up a litany of bad trades in our wake.
A plan provides the necessary foundation on which to build a consistent growth path and resist FOMO trades. Your trading plan should include the following:
- Clear, achievable objectives – How much do you want to make and how? Test these objectives against market averages.
- Strong analysis – This should be ongoing but based on underlying historical data.
- Realistic profit and loss tolerances – Use industry averages to set your tolerance levels and don’t try to justify any deviance.
- Reasonable time horizons – This is key to avoiding FOMO trades and panic buys. Take your time.
Managing FOMO in forex trading is a skill
Avoiding FOMO in forex trading requires a measured approach that is learned and practiced. If you want to know more about how to get rid of FOMO, here are six behavioral tips to help you build a consistently performing portfolio:
1. Avoid opinion and stick to the facts. Choose verified news over social media rumors and analysis over opinion.
2. Be realistic in your expectations and avoid focusing solely on the upside. Consider your risk/reward ratio and act accordingly.
3. Don’t panic. Set your loss and profit levels and stick to them.
4. Have a plan with clear goals and keep track of your activity over time.
5. Remember that this is not the last trade to come along. If you miss this one, there is another one just around the corner that may fit your plan better.
Trade your way out of FOMO and into smarter trading
Never place trades out of fear. Concentrate on YOUR Trading, not someone else’s.
Keep your focus on your goals and play to your strengths and trading style.
Using some of the suggestions presented here (such as having a trading plan, researching credible news sources and analysis), you can develop your FOMO-busting skills and engage in fully mindful trading.
Whether you’re into stocks, crypto trading or forex trading, remember that you can maximise your trading by accessing a range of powerful tools. For example, analyze market trends using leading indicators and drawing tools, including trade through charts to visualize your optimal trade setup.
Technical analysis and risk management tools accessible on our OANDA Trade platform can help you to identify potential opportunities and build a stronger trading strategy.
Apply for a demo with OANDA and start practicing now.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell instruments. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk. Losses can exceed deposits.
OANDA CORPORATION IS A MEMBER OF NFA AND IS SUBJECT TO THE NFA’S REGULATORY OVERSIGHT AND EXAMINATIONS. HOWEVER, YOU SHOULD BE AWARE THAT NFA DOES NOT HAVE REGULATORY OVERSIGHT AUTHORITY OVER UNDERLYING OR SPOT VIRTUAL CURRENCY PRODUCTS OR TRANSACTIONS OR VIRTUAL CURRENCY EXCHANGES, CUSTODIANS OR MARKETS.