How To Overcome FOMO in Trading?
What is FOMO in Trading?
FOMO, short for ‘fear of missing out’, refers to a state of mind which is common among crypto and financial asset traders.
It stems from the practice of trading on emotion, using gut instincts to guide investment decisions which can often make a trader miss out on profits or lose capital.
Crypto markets are notorious for FOMO thanks to their inherent volatility and ability to react quickly to internal and external triggers.
Experienced Bitcoin and altcoin investors seek to minimize collateral damage from volatility by avoiding the urge to react emotionally to unexpected market movements.
Understanding FOMO in Crypto Trading
Though widely known in crypto, FOMO originated over twenty years ago in traditional financial markets. Discover other top 5 fear factors of traders here.
The phenomena the term refers to have played out for centuries, and include events such as tulip mania from the 17th century — also a commonly heard phrase in crypto circles.
Market psychology is a key component in understanding what FOMO is and why it happens.
Even in less volatile conditions, an asset can spark knee-jerk reactions from traders simply by entering a new uptrend or downtrend or passing a psychologically significant price point.
FOMO is also tied to the concepts of ‘smart’ and ‘dumb’ money in the market, with traders in the former cohort seeking to make the latter bear the brunt of losses or unfavorable market turns.
Once a market participant feels like they are at a disadvantage in current market conditions and chooses to act on instinct, this is typically classified as FOMO. The effect of traders executing the same trading pattern en masse is what allows smart money to succeed in the market while FOMO traders are left to deal with the consequences. They could, for example, end up victims of a bull trap or bear trap.
Factors Contributing to FOMO
FOMO is arguably an inevitable result of collective participation in markets and herd mentality. As such, forces which act on an individual, despite that individual being free to make their own decisions within the group, ultimately cause many to enter into copycat behavior, even if this ends up being to their detriment.
Social media and FOMO
Herd mentality is ever present on social media, and novice crypto traders in particular tend to take market cues from informal sources such as those found on popular platforms. Thanks to their structure, these platforms can give the impression that every market participant thinks the same, increasing the temptation for a trader to follow suit.
The influence of the community
A trader may be tempted to act on impulse simply by viewing enough posts offering a similar opinion. If what seems to be a large number of market participants believe a given asset will behave in a certain way, this can offer a sense of reassurance to a trader who may otherwise be too scared to enter or exit at all. This is all too often an illusion, however, and the herd ultimately offers no protection against a wrong trade.
Anxiety and regret
As its name suggests, FOMO centers on the idea that inaction is the worst possible reaction to the market. Traders can feel this pressure to act intensely — especially if a crypto token surprises by making a move no one thought possible. The opportunity to capitalize on that move, or alternatively to de-risk and avoid substantial losses, they think, might come just once and never again.
Recognizing FOMO in Crypto Trading
FOMO displays practically the same characteristics throughout market cycles, and it can appear anywhere, independent of the asset or type of market involved.
A distinctly human phenomenon, its various phases are closely tied to the psychology of a market cycle. Here, inexperienced traders constantly lag price action, becoming confident enough to act only when the trend is already about to reverse.
The image below shows how FOMO plays out as price rises, plateaus and reverses, then bottoms and repeats.
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The key market events — long-term tops and bottoms — are always in place while sentiment is euphoric and desperate, respectively. A FOMO trader thus fails to sell due to excessive confidence in the uptrend, and fails to buy due to having lost that faith entirely.
Such traders may even ignore technical signals supporting a buy or sell at a given price point due to the strength of their ‘gut feeling’. An example could be volume data showing decreasing sell-side pressure as price heads toward the long-term bottom level, or the presence of long wick candles.
The Dangers of FOMO
FOMO affects large numbers of traders on a daily basis, especially in the volatile world of crypto. Despite its ubiquity, however, it can have long-lasting consequences for a trader’s portfolio.
By constantly entering and exiting late, FOMO traders do not merely lose money; they risk falling victim to more experienced market participants’ liquidity games.
Here, crypto stands out, as many practices long banned on traditional markets, such as order book spoofing, remain a common phenomenon.
Here, large-volume traders deliberately shift liquidity around, putting asks above price and bids below in an attempt to guide the market up or down. This can then be pulled, leaving those who took the presence of liquidity as corroborating the significance of a certain price point at a disadvantage.
Even without such manipulative activity, repeat miscalculated trades can eventually drain a trader’s portfolio, while the dangers multiply if leverage is used. Certain trading strategies, such as Martingale Strategy, also present significant risks to those who are not absolutely confident in their market appraisals.
Combat FOMO in Crypto
FOMO is by no means inevitable, and avoiding it broadly comes down to one’s own self-discipline. That said, when implemented correctly, certain techniques can help minimize the temptation to act on impulse.
Below is a summary of the main things traders can and should bear in mind when battling FOMO in crypto.
Release yourself from past failures
Poor market decisions made previously should have no impact on future trades. View the market with a clear mind and acceptance of past mistakes as part and parcel of personal growth as a trader.
Buy when others are fearful, sell when others are greedy
This is one iteration of a popular mantra among smart money traders — do the opposite of what the crowd is signaling. This can help avoid falling victim to liquidity manipulation or bull traps.
No idea what to do? Be patient
If a market is not offering a clear path forward, there is no need to rush into a trade. Zoom out, consult reliable long-term trend indicators and wait for a more obvious signal.
Strategy is essential
In any market, having a trading strategy is half the battle — but it must be followed. Unless definitively proven redundant, a backtested strategy provides the key parameters for navigating mixed market conditions; it is when they abandon their strategy that traders face the biggest risk of losses.
Leveraging FOMO in Trading Effectively
Smart money is constantly looking to exploit naive traders at their expense. This has a flipside for the FOMO-averse trader — their moves can be anticipated and copied, and anyone can reap the rewards.
Consulting classic trend indicators is one method of thinking like a smart-money trader. Data which shows crowd psychology in real time, such as volume delta, can reveal the true significance of a given price point, regardless of liquidity recently placed at that level.
Popular indicators such as the relative strength index (RSI) give observers key insights into trend strength, allowing them to gauge the likelihood of surpassing a psychologically significant level.
Crypto analysis has produced various metrics dedicated to tracking the activity of whales, the large-volume traders synonymous with smart money. Their behavior can form a reliable snapshot of market trajectory, and often contrasts strongly with crowd sentiment.
Conclusion
FOMO, or the “fear of missing out”, is an intrinsic part of crypto markets and has been present ever since the first tokens and exchanges began public trading.
As much down to the human condition as the market itself, FOMO is commonplace throughout often volatile crypto trading arenas, and any investor can fall victim to it.
Giving in to emotional pressure risks poor trading decisions and financial losses as a result. The effect is made much worse if a trader is using leverage or following a high-risk trading strategy with little room for error.
While there is no foolproof way of insuring oneself against FOMO, traders can take basic precautions and make an effort to privilege self-discipline in times of erratic market behavior. In this way, they can avoid acting on impulse and entering loss-making trades while ‘smart money’ wins out.
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FAQ
What does FOMO mean?
FOMO stands for “fear of missing out” and refers to a state of mind among crypto and financial traders in which they feel regret that they are not taking a trade.
Is FOMO a good or bad thing?
FOMO can hurt a trader’s psyche — and portfolio — but market participants can leverage the phenomenon to their advantage by improving their market knowledge and discipline.
How do I avoid FOMO in crypto?
Traders can use market indicators and learn how so-called ‘smart money’ handles volatility in order to stay on the profitable side of a trade. Experienced large-volume investors are constantly looking for parties who easily succumb to FOMO to offload on while buying low and selling high.
