The Dirtiest Four Letter Word in the Trading Language

FOMO.

Fear of Missing Out is the dirtiest four-letter word in the trading language (it’s an acronym actually, but you get the idea)

In a great podcast Dr. Gary Dayton, who is practicing psychologist and is also a trader, uses the example of a parade to show how our mind forces us to do things that we would normally never do. Most of us watch happily watch a parade from the sidelines, and while we may enjoy the floats and the marching and may even cheer on the participants, few of us have the temptation to run into the parade and become part of the show. In that situation, our mind is able to make a clear delineation between spectacle and observation — what Dayton calls mindfulness — that allows us to keep our distance from the action.

Markets, of course, are different. To trade them we need to be both a spectator and a participant and therein lies the rub. The emotional pull of price action inevitably captures us in its grip and we wind up chasing trades. Who amongst us hasn’t bought the top tick or sold the lowest bar only to see the trade rip our face off? Virtually every massive loss I’ve ever had started out as FOMO which then morphed into “add to the position” play and eventually a painful loss that was much bigger than it needed to be.

Yet, as Dr. Dayton points out the old Nancy Reagan just-say-no-use-your-willpower approach will always fail. No matter how many times we tell ourselves we shouldn’t chase — we will because our mind is controlled by emotions and suppressing them will never work. I invite you to listen to the full podcast which goes into the neuropsychology of aspects of the human brain and amygdala impact on our actions, but suffice it to say that according to Dr. Dayton the only way we can get better control over FOMO is by practicing what he terms, “mindfulness” which is another way of saying meditation.

Now if you are like me, and meditation is as appealing to you as a root canal, if the idea of contemplating your toothbrush, or thinking about the slickness of the soap as you do the dishes is something you know you will never do, then I have a better idea that may appeal to the trader in you.

I call this trick — “market mindfulness”. The idea is to imagine the absolute perfect form that your set up should take (see my column from a few weeks ago — Plato trades FX) and then open up the charts and look for at least 10 or 20 examples of that setup. Not only will this exercise create “mindfulness” because it will force you to focus on what you love, but it will also serve another much more valuable purpose. By looking through 10 or 20 charts of your “perfect” setup every day you will build up the vital psychological distance you need to resist FOMO at every turn. After all, once you know how a money making setup looks, anything that deviates from that is a lot easier to resist. And looking at the charts in the quiet of your home office is a lot more fun than meditating about your breathing.