Market extremes are usually accompanied by emotional extremes for traders, and even long-term investors might be dragged into the sentiment roller coaster to commit mistakes that they will regret afterwards. One of the most common emotions is the infamous Fear of Missing Out (or FOMO) that is the strongest near market tops. Watching the price of the desired asset going higher and higher when you are not in— it sometimes feels worse than enduring a loss.
Price cycles are governed by several things, from fundamentals, the economy, central banks, and crowd psychology, but when it comes to your own emotional cycle, it’s only you, your positions and the market. That said, a market cycle usually triggers the same kind of emotions in the majority of traders, which in turn has a profound effect on the market itself.
The above “calendar” for investors contains the different common emotions in the average trading cycle. Short-term traders know that this cycle can be a really fast one, especially if the trader is using leverage, or simply having a too large position.
The Place of the FOMO in the Cycle
The FOMO phenomenon comes at the times of excitement, thrill, and euphoria and it, unfortunately, increases exponentially as prices rise. This is how speculative bubbles and manias are created, as the rising prices and the emotional pressure create a vicious circle. New investors pile in, as they see that virtually everyone is making a ton of money apart from them. When the rising prices draw the attention of the public (the so-called cover page effect) that’s where an investor should start to worry about a boom-bust event.
The media and the current “always-online” mentality just exaggerated the sentiment cycle and emotional extremes form more quickly and easily. The volatile cycles of the crypto-coin market are perfect examples for that, although a stock market or a commodity cycle involves way more people, as the investor base is much wider.
A Personal Story
Silver during the 2009-2011 bull market
As a trader, especially in my early years, there were several opportunities that I missed and couldn’t let go of. Silver’s parabolic rise in 2011 is one of the moves that I will never forget. I was investing in silver before for a long time, since central banks started using their “extreme monetary measures”. I opened a large core position at the indicated point on the chart and had a very rough ride up until I finally sold in early 2011 when a trendline was broken, and I thought that the bull market was over.
As I also had trading positions in gold as well, I was naturally looking at charts every day, and I got dumbfounded when precious metals turned around again and skyrocketed to new highs a few months later, with silver almost doubling once more—me on the sidelines, mind you. It wasn’t just emotionally taxing but it also affected my trading; I was so biased that I barely opened long positions and missed several great trading opportunities because of that.
Also read: My Year as a Perma-Bear or How to Deal With Trading Biases
The most important takeaway is that it in hindsight, it was a great investment, I followed my trading plan, and still, I feel regret anytime I think about that period. That said, it helped me in learning that you will not only have “perfect” trades in your life, and that I should focus on my trading plan rather than chasing tops and bottoms.
How to Control Your Emotions?
It’s inevitable that you will get involved with emotions during trading, especially as a beginner. And it’s not always a bad thing either, if you can channel your passion towards research and education, rather than watching prices every ten minutes. So what exactly can you do to prevent emotional troubles?
- Accept that you won’t buy at the exact bottom and sell at the exact top
- Don’t look at the charts whenever you can, try to structure the time you spend with trading
- Use a trading plan that tells you what to do with profits and losses alike
- Follow your own trading plan, don’t compare your performance with others too often
- Control the size of your positions and avoid overexposure
- If you trade, don’t count the profits that you missed because you were early or late, focus on new opportunities
- As an investor, try to place your investments in times of panic and despair, that’s how major bottoms are formed
Using technical analysis and momentum indicators helps in identifying market extremes, oversold and overbought markets, although those tools will never be 100% precise, and will only help in roughly timing your trades. And “roughly” in a volatile market can mean that you will miss a large chunk of the move, but as Linda Rashcke, one of the greatest traders, once said,
If you consistently profit from 60% of the major moves, you are a super trader.
What is your experience with FOMO? If you have a similar story than mine, please share it with us in the comments.
Featured image from Shutterstock