What is FOMO? How to control FOMO in trading?

In general, FOMO, particularly in financial trading, refers to the tendency to follow the crowd and make emotional decisions instead of basing them on careful analysis. Most of the time, FOMO often leads to more losing trades than profitable one.

First of all, FOMO is an acronym for Fear of Missing Out. It is used in many different fields, including finance. To help you better understand the concept of FOMO, let's take a look at a real-life example below.

In October 2023, Cointelegraph published a news thread on the X (formerly Twitter) about the US SEC approved BlackRock's iShare Bitcoin Spot ETF. Before this rumor, the global cryptocurrency community was waiting for approval of the SEC's approval of the first official Bitcoin Spot ETF in the US.. With this expectation in mind, when Cointelegraph announced the rumor, many traders blindly bought Bitcoin (BTC), believing that the price would undoubtedly rise..

In fact, this rumor pushed the price of Bitcoin above $30,000, leading to the liquidation of more than $103 million worth of Bitcoin orders. The liquidated orders were mainly on the “Short” side with more than 80% of the volume, equivalent to more than $84 million. However, after Cointelegraph corrected this rumor, all of them were in FOMO again. They sold off their previously purchased BTC. Sell off power pushed the BTC price below the $30,000.

Clearly, the lack of verification before trading and the influence of crowd psychology are important factors that make FOMO. As a result, traders with FOMO in trading often “buy high and sell low”. All traders, including you and me, are affected by FOMO. However, novice traders often fall prey to this phenomenon due to their lack of market overview and in-depth understanding of market analysis.  All of these lead to making more emotional trading decisions.

As shown in the example we just gave above, FOMO had a negative impact on traders. They rushed to buy BTC when the price was rising and suffered losses immediately after because they did not exit in time when the price decreased. However, in reality, FOMO also has both sides, positive and negative.

On the positive side, in some cases, FOMO can help traders make money in the short term if they take part in the market early, when the FOMO wave has just begun. Historically, there have been many projects that early traders had made significant profits after FOMO was triggered.

For example, history has shown that whenever Elon Musk mentioned Dogecoin (DOGE) in his tweets, the price of DOGE often recorded a sudden increase but only in a short time. Traders who caught up with this signal, they took advantage of it to buy DOGE tokens in the early stage. When the price of DOGE went up, they sold them and made a good profit for this investment. Besides that, those who also were in FOMO but participated in the stage when the wave reached its peak, just became "buy high" people and the exit liquidity for other traders.

While traders often view FOMO as a negative, they can also view it as an opportunity for growth and learning. By acknowledging the fear of missing out and examining its underlying causes, traders can gain valuable insights into their trading psychology and decision-making processes, which can help them limit potential trading failures.

First of all, to answer this question, we need to remember that FOMO focuses on the general psychology of traders. It makes them feel that they will lose a lot of good opportunities if they stand outside in trading. Based on this psychology, there are several common types of fraud in the cryptocurrency market in particular and finance in general. Specifically:

First, release positive/negative news/rumors about a token/coin. This strategy aims to instill in traders the belief that the price will increase following the announcement of the news.. Of course, these rumors and news are often fabricated and not independently verified for accuracy. In addition to the example of inaccurate news related to Cointelegraph that we shared above, in early January 2024, the news that Vinfast accepted XRP tokens as a legal payment method also got attention from the community. The price of XRP also recorded a sudden increase. 

Second, low-quality projects often leverage this unverified news to establish their reputation within the community. The purpose is to sell as many tokens as possible. Once they have attracted a large amount of assets from investors, the owners of these projects can perform a rug pull, steal all the assets and leave the project to die prematurely.

Because it is a form related to psychology, all of us whether you are experienced investors or new to the market, are victims of this FOMO problem. The key to FOMO is fear (fear of missing out on good opportunities, fear of loss...) so if you find yourself having these signs, it is very likely that you are experiencing FOMO without knowing.

• First, acting emotionally instead of rationally: If you have a habit of trading immediately based on market rumors without verifying the source of the information, it is likely that you are suffering from FOMO.

  
  

• Second, feeling sad when missing out on some news: Maybe you receive good news and intend to make a trade. However, when you are about to place an order, the price has increased significantly. Although you know that placing an order at that time may be risky, you still regret missing that opportunity.

  
  

• Third, uncontrolled trading: You see someone making money from the market and you also want to achieve success like them. So you frantically shorten the stage, speed up the execution of the transaction to achieve that goal. Such uncontrolled trading shows that you are drowning in your own FOMO.

There is no certainty that we can absolutely manage ourselves to avoid FOMO. However, if we have a methodical strategy and train our mentality to be stable, we can certainly limit ourselves to the maximum in FOMO every time we trade. Below tips are some suggestions for you to manage your emotions and help you easily overcome FOMO.

• Learn more knowledge and have a clear investment roadmap: It is the lack of knowledge, a clear investment roadmap and a subjective mentality that often causes investors to be influenced by crowd psychology. Investors, lacking a specific direction, are susceptible to the market's information matrix, leading to lower investment efficiency than anticipated.

• Determine their own risk appetite: Investors should clearly define the capital limit that they can use, determine short-term or long-term investment goals and build a roadmap that complies to that principle.

• Comply to the principle: Investors also need to know when they should stop to take profits and cut losses. When investing, the most basic goal is to make profit. To avoid the FOMO effect, knowing when to cut losses or close at the appropriate time is also important.

• Train psychology: The challenge for most investors is not to read and understand technical analysis but to learn how to control emotions, not letting them affect their trading psychology. Investors need to practice a stable mentality when facing fluctuations. Not all falling coins are losses, neither is buying rising codes profitable. Therefore, investors should carefully observe the appropriate time to buy and sell, considering similar cases that have occurred in the market to avoid "buy high" and "sell low".

FOMO in trading activities often occurs based on emotions without thought. This can significantly affect investment results. That is why it is important to have a convincing strategy and keep your goals in mind when making investment decisions. 

Although it may be difficult to completely eliminate emotions from trading activities, always keeping in mind the strategy and knowing how to control emotions can help you orient your decision-making process.

Is FOMO good or bad?

In cryptocurrency trading in particular, most cases of FOMO have negative effects. However, if investors recognize the signs of FOMO early, they can take advantage of this wave to make a profit.

What can FOMO in trading lead to?

When overwhelmed by FOMO psychology, investors tend to execute transactions without considering rational factors such as technical analysis, information accuracy, etc. This can lead to great losses for their investments.

What is the psychological impact of FOMO on traders?

The psychological impact of FOMO on traders can cause higher levels of anxiety and stress as traders obsess over the fear of missing out on profitable opportunities in the market. This constant anxiety can disrupt cognitive function, impair decision-making, and lead to emotional trading. Traders may find themselves unable to stick to trading plans or maintain discipline, instead succumbing to impulsive actions due to an overwhelming fear of missing out.