The Two Types Of FOMOSep 22, 2023
Last week I worked with a trader who perfectly caught the short on the Nasdaq on the 31st of July riding it all the way down to the 18th of August exiting pretty much at the low.
Images below show entry (4 hour chart) and exits (daily chart) of his epic trade (displayed in replay mode on Trading Sim):
Short entry was based on a combination of fundamental and technical analysis.
TA reasoning for the short entry was based on a potential double top forming applying my favourite 'first top outside Bollinger Bands' setup with a doji potential reversal candle on the second top. Stop loss was above the high of the 4 hour doji on the second top.
He decided to exit due to the Doji candle that formed on the daily also completing the double top target projection.
His game plan from here on was to stay out until there is a new clear setup. In the event that price would 'eat the doji tail' and form another 'umbrella' short setup a la Linda Raschke, he would re-enter the short position.
What happened next?
And guess what happened next, well, you know what happened, right? He did give back all his profits and more in the following week.
Instead of sticking to his initial plan of re-shorting only if the low of the doji candle is taken out, at the first sign of a reversal candle FOMO kicked in, he jumped the gun and started shorting again on this 1 hour red candle even though he usually only trades 4 hours and daily charts.
but then you can see price shot up:
He re-entered short .. doubling up again on this bearish candle even though this is not even part of his trading plan.
Like a Pavlov Dog he shorted when he saw a red candle, as if his brain was hijacked by aliens:
But once again, price shot up..
Even though he was aware of this bigger picture inverse head and shoulders setting up, he refused to take the loss; instead he decided to ‘ride it out, surely this is just a mean reversion trade and continue to the downside.'
Plus he stubbornly doubled up on his short positions on every sign of a big red candle.
But as you can see in image no 4 price shot up again bouncing off the middle Bollinger (which is the same as the 20 sma).
The next 2 red candles he kept doubling up on his shorts. After all he had to make his profits back again, right?!
On this last short failure (image no 6) he finally gave up fighting the price action and heavy heartedly exited all his short positions, asking himself how he could have been so stupid to give back all his profits because he martingaled into losing positions even though he knows better than that!
If he had stopped after his first big profit, it would have been enough to comfortably live off until the end of the year. But FOMO creeped into his unconscious closing the gates to his logical thinking brain.
This trader started to trade recklessly, taking each red candle as a beacon of hope for a short setup. Now in hindsight it seems so clear that none of the trades were high probability setups, but when emotions kick in it is difficult keep clarity of mind especially when racing thoughts cause foggy brain!
It’s like needing to keep a clear head when your car spins out and you know you have to steer against the direction of the spin but your arms are resisting it and doing the opposite accelerating the spin until the car crashes. That's why anyone who drives a high performance car must do driving training to learn and practice how to deal with those tricky situations! And traders can learn it too!
There are 2 types of FOMO:
- 'Moving towards pleasure' FOMO; and
- 'Moving away from pain' FOMO.
Moving towards pleasure FOMO was what affected him first: It felt so good that he finally started making large profits that when he closed out the trade he felt empty, the dopamine kick made him feel like on a feeding frenzy, he wanted more and more of this feel good feeling of raking in the profits. All the trades after he closed out his initial trade were reckless, not part of his trading strategy.
But when he started making losses moving away from pain FOMO kicked in. Scarcity thinking made him feel desperate when the profits slipped out of his hands again. He told himself he has to make this trading thing work. He is in his mid 40s after all, how much time would he have left to make it a career? And so he started to push harder and harder, trying to force trades that weren’t there, doubling up on positions all in the pursuit not to lose any of the profits. He promised that as soon as he made the losses back he would stop trading and just enjoy the success. But of course, it never came to that..
To be forewarned is to be forearmed. Be aware of the situations when you are at risk of FOMO kicking in so that you can immediately interrupt the old pattern!
The good news is that he managed to make all the losses back and much much more in the recent move down from 15500..
There are a few more ways I can help you lay the mindset foundations of your trading success:
2. Create a solid foundation with this free 4 Pillars of Trading Success Masterclass
3. There are plenty of helpful videos for you on my Youtube channel
4. Join us for our next instalment of the Winning Trader's Mindset Series HERE
5. Or if you are interested in one on one coaching, simply send us an email via the contact page.