What Is FOMO Trading & How Can It Be Avoided?

Whether we like to admit it or not, we've all probably felt the fear of missing out (FOMO) at some point. 

While this may be harmless in many situations, FOMO can be harmful in the financial markets and trading, and lead to significant losses. 

In this article, we dive into FOMO trading and how it can be avoided: 

TL;DR 

• FOMO trading happens when traders make impulsive decisions driven by the fear of missing out rather than careful analysis. 

• It often results in buying high or selling low and can lead to significant losses. 

• Historical examples, such as the dot-com bubble, Bitcoin’s 2017 run, and the GameStop saga, highlight how dangerous FOMO can be. 

• To avoid FOMO, traders should follow a solid trading plan, manage their emotions, and focus on their trading strategies.

What Is FOMO in Trading?

FOMO trading is the act of making trading decisions based on the fear of missing out, rather than on reason or analysis. It occurs when traders feel compelled to join a trend or hype without considering the potential consequences or applying logical thinking. This, in turn, can lead to trading mistakes, losses, and problems. Generally speaking, FOMO may lead to buying at high prices or selling at lows. 

Examples of FOMO in Trading

While past performance does not reflect future results, historical FOMO events can help traders and investors understand what FOMO trading is and how to avoid it. Some famous FOMO trading examples include:

Dot-com Bubble (Late 1990s)

During the late '90s, investors flocked to tech stocks, driven by the fear of missing out on massive returns. As prices skyrocketed, many jumped in at inflated levels, only to be struck when the bubble inevitably burst and valuations came crashing down.

GameStop Short Squeeze (2021)

Fueled by a wave of enthusiasm on platforms like Reddit’s WallStreetBets, retail investors poured into GameStop stock, triggering a dramatic surge of nearly 2,000% in just one month which caused a short squeeze. Those who bought in at the peak—chasing the hype—were left with steep losses when the price quickly collapsed.

Bitcoin Bull Run (2017)

As Bitcoin approached $20,000, new investors jumped on the bandwagon, spurred by viral success stories and social media frenzy that caused a “Bull market”. Many bought at the height of the rally, only to watch their investments shrink sharply as the market corrected.

Dogecoin Rally (Spring 2021)

Dogecoin soared in anticipation of Elon Musk’s appearance on Saturday Night Live, driven largely by memes and online excitement. But after Musk jokingly referred to it as a “hustle,” the coin’s value plummeted by nearly 30% in a single day, blindsiding latecomers caught in the FOMO wave. (Source: Trading Strategy Guides)

Identifying FOMO Trading: What Factors Can Trigger FOMO in Trading?

Some key factors that can lead to FOMO trading include, but are not limited to:

• News: Certain market news and trends can lead to FOMO. For example, speculation and rumours regarding the potential of a stock’s fall or rise can lead to hasty trading decisions. 

• Social Media: The discourse and discussion over social media platforms (like Reddit) regarding certain markets or financial assets can lead to a shift in investor and trader sentiment, resulting in irrational FOMO trading. 

• Volatility: If an asset’s price experiences notable volatility (either goes up or down), it can lead to not wanting to miss out, thereby causing FOMO trading. 

Ways to Avoid FOMO Trading - How to Deal with FOMO in Trading?

Develop a Trading Plan 

While developing a trading strategy may not necessarily ban FOMO, it can help you control your emotions and base your trading decisions on research and logic despite any outside noise. 

Don’t Let Your Emotions Get to You

Keep your emotions at bay and do not let them affect your trading. Rather than letting your emotions drive decisions, try to remain neutral and patient to avoid FOMO trading.

Keep an Eye on the Long-Term 

While short-term trading opportunities may always arise, it is important to monitor long-term growth to minimise the potential for hasty decisions. 

Conclusion

FOMO is a powerful emotional trigger that can lead even experienced traders astray. While the fear of missing out is a natural feeling, it's essential to recognise its impact on your trading behaviour. By staying disciplined, creating a clear trading plan, and prioritising logic over emotion, you can avoid the costly pitfalls of FOMO trading and make more informed decisions in the financial markets.