Managing FOMO and Confirming a Good Trade

Posted on by Henrik

Imagine you want to buy 400 shares of stock “QWERT” at $100 each, but you only manage to purchase 320 shares because the price rises. Here are two important points to consider:

  1. You are probably in a good trade as it is immediately profitable:
    • Explanation: The fact that the price rose after you placed your order indicates strong buying interest and potential upward momentum.
    • Implication: This suggests that your analysis was correct, and you are likely to see further gains.
    • Example: If the price quickly moves to $105 after your partial purchase, the 320 shares you acquired are already showing a profit.
  2. You might experience FOMO (Fear of Missing Out):
    • Explanation: The desire to complete your original order at a higher price can lead to emotional trading decisions driven by FOMO.
    • Implication: Buying the remaining shares at a higher price can expose you to greater risk and reduce your overall profit margin.
    • Example: If you buy the remaining 80 shares at $110, your average cost per share increases, potentially reducing your profits if the price retraces.

Strategies to Handle This Scenario

1. Acknowledge and Control FOMO

Action:

  • Recognize the emotional aspect of FOMO and refrain from making impulsive decisions to complete the trade at higher prices.

Application:

  • Stick to your original trading plan and avoid chasing the stock higher out of fear of missing out.

Example:

  • Accept that you missed out on the remaining shares and focus on the fact that your current position is profitable.

2. Evaluate the Trade’s Strength

Action:

  • Assess whether the price increase is supported by strong fundamentals or technical indicators.

Application:

  • Use volume analysis, news, and technical patterns to confirm the validity of the price rise.

Example:

  • If the price increase is accompanied by high volume and positive news, it might justify the initial decision to buy, but still avoid buying more at higher prices impulsively.

3. Set Clear Entry and Exit Rules

Action:

  • Define your entry and exit points before placing a trade and adhere to them.

Application:

  • Use predetermined criteria for adding to a position rather than acting on impulse.

Example:

  • Plan to add to your position only if the stock retraces to a certain support level or shows a strong breakout pattern.

4. Partial Fills and Portfolio Allocation

Action:

  • Accept partial fills as a normal part of trading and ensure your portfolio remains diversified.

Application:

  • Allocate your capital across multiple trades to mitigate the impact of missing out on a full position in any single stock.

Example:

  • Use the remaining capital earmarked for QWERT to invest in another high-potential stock instead of chasing QWERT at higher prices.

5. Review and Learn

Action:

  • Analyze the trade and your emotional response to understand and improve your future trading behavior.

Application:

  • Keep a trading journal documenting the trade, your thought process, and the outcomes.

Example:

  • Write down how you felt when you missed out on the remaining shares and what you did to manage those emotions, then review this before future trades.

Example Scenario

Scenario: You placed an order to buy 400 shares of QWERT at $100, but the order was only partially filled with 320 shares as the price quickly rose to $105.

Actions:

  1. Acknowledge FOMO: Recognize the urge to buy the remaining shares at a higher price and consciously decide not to act on it impulsively.
  2. Evaluate Trade Strength: Confirm that the price increase is supported by high volume and positive market sentiment.
  3. Set Rules: Stick to your original entry price and avoid buying more unless the stock retraces to a specific support level.
  4. Diversify: Allocate the remaining capital to another stock with similar potential.
  5. Review: Document the trade in your journal, noting your emotional response and how you managed it.

Outcome: By following these steps, you maintain a disciplined approach, avoid overpaying due to FOMO, and ensure your trading decisions are based on analysis rather than emotions.

Conclusion

Managing FOMO and making disciplined trading decisions are crucial for long-term success in the stock market. By recognizing and controlling emotional impulses, sticking to your trading plan, evaluating trade strength, and maintaining portfolio diversification, you can make more informed and profitable trades. Remember, the key to successful trading is not just identifying good trades but also managing them effectively without letting emotions dictate your actions.