What is FOMO Trading, and how to avoid It?

What is FOMO Trading, and How to Avoid It?

FOMO is a common abbreviation used in the crypto world that typically stands for ‘fear of missing out. The concept was first coined in 2000 by Dr Dan Herman when he used this term in his academic paper, “The Journal of Brand Management.”. Although he introduced the term, it was first mentioned four years later in an opinion piece in 2004 by Patrick McGinnis in an American magazine entitled ‘The Harbus’.

The term FOMO is highly used by crypto traders; however, it is used in various other places as well. For instance, when a person fears that he had missed an important piece of information or an opportunity to buy a product, he might feel a unique experience of missing out and thus face FOMO. This phenomenon is prevalent in social media when people receive feeds from others who highlight or emphasise positive parts of their life. This leaves readers to feel sad or inadequate to miss experiences like the others.

In the crypto world or any other financial market, FOMO can be used to denote that a trader feels that he/she had missed a potentially lucrative investment opportunity. The FOMO feeling occurs the most when the market foresees a bullish trend or when the asset price increase significantly in a shorter time span. Since these are the times when the market or the trading community gains the most, emotion or fear of missing out is logical and reasonable. However, FOMO can prove dangerous for the undisciplined investor as it often leads them towards situations in which traders start accumulating an overpriced asset which results in heavy losses in the long run.

How to avoid FOMO trading?

Start building a portfolio based on research and not on tips

Using a small portion of your investment in a highly volatile crypto market is feasible as it might provide you with high returns, especially if you can hold the asset for the long term. However, you must avoid building your portfolio based on market tips or hot tips found on social media or from peers. Rather, build a portfolio that is based on robust research and a long-term thesis. Think of building a profitable business investment scheme from sound market trends instead of short-term fads. Once you have made initial research about a group of holdings, consider adding speculative growth investment opportunities which might build you a durable investment model with time.

Investing strategically

One way to avoid FOMO trading is making a well-thought plan or a sound investment strategy without considering a FOMO mindset. This way, you will get prepared for an unseen circumstance and gain from investment outcomes. Do research on how to value a stock or a token worth and establish your risk tolerance to determine how many losses you can bear at a time. Stick to your plan and avoid ‘word of mouth in the marketplace which develops a FOMO feeling.

Stay calm in a volatile market and trade sensibly

Most of the time, impulsive traders trade fast in the volatile market which usually ends in huge losses. Make sure you trade a volatile market with a strategic mind rather than an impulsive one. Always keep in mind that a single crypto token or a group of holding can never manipulate the entire crypto market, you will always find some or the other even if you miss an opportunity on your way. Just stay calm and avoid the token if the price has already rallied and you have missed it. Wait for another opportunity to grasp rather than fall into the surged price trap.

Never invest money you cannot afford to lose

This is an old saying which means we must never play with money we cannot afford to lose. Since many investors tend to invest more with a FOMO feeling, this saying instructs them not to risk high which may result in severe outcomes.

Do not take social media insights as an investment research strategy

Undoubtedly, social media have emerged as an important communication tool where investors get a great deal of information, but we must never completely rely on them. Many short sellers, touts and penny stock promoters often use social media to inflict a certain mindset to influence new investors. Most of the time, social media would talk about gains but rarely mentions losses which create a FOMO temptation in many.

Bottom line

FOMO trading is a behavioural financial investment technique in which traders trade emotionally due to fear of missing out. They replace their logical reasoning and strategy with emotions and usually end up making losses. Thus, avoid FOMO trading as much as possible and consider research-based investment along with a good understanding of your own financial goals and risk tolerance.

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