The Two Types of FOMO

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):

Entry

4-hour chart — entry setup

His entry was based on a combination of fundamental and technical analysis, with a potential double top forming using the 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.

Exit

Daily chart — exit at double top projection

He decided to exit due to the doji candle that formed on the daily, completing the double top target projection. His game plan from there was to stay out until a new clear setup formed. And guess what happened next? He gave 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 was taken out, at the first sign of a reversal candle FOMO kicked in. He jumped the gun and started shorting again on a one-hour red candle, even though he usually only trades four-hour and daily charts.

Off-strategy short entry on 1-hour candle

But then, price shot up.

Price reverses sharply against the short

Like a Pavlov Dog he shorted every red candle, as if his brain had been hijacked by the pattern. He re-entered short, doubling up again on another bearish candle, even though this was not part of his trading plan.

Re-entry short — doubling into a losing position

But once again, price shot up.

Price continues higher — the pattern repeats

Even though he was aware of a larger inverse head and shoulders forming, he refused to take the loss. He decided to ride it out, telling himself this was surely just a mean reversion trade. He stubbornly doubled up on his short positions at every big red candle. After all, he had to make his profits back, right?

On the final short failure he gave up fighting the price action and exited all his positions, asking himself how he could have been so stupid to give back all his profits. If he had stopped after his first big profit, it would have been enough to live off comfortably until the end of the year. But FOMO had crept into his unconscious, closing the gates to his logical thinking brain.

It is like needing to keep a clear head when your car spins out. You know you have to steer against the direction of the spin, but your arms resist it and do the opposite, accelerating the spin until the car crashes. That is why anyone who drives a high-performance car must do driving training to learn and practice how to deal with those tricky situations. Traders can learn it too.

The Two Types of FOMO

Moving Toward Pleasure FOMO

This was what affected this trader 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 he was on a feeding frenzy. He wanted more and more of that feel-good feeling of raking in the profits. All the trades after he closed out his initial position were reckless, not part of his trading strategy.

Moving Away From Pain FOMO

When he started making losses, the second type of FOMO kicked in. Scarcity thinking made him feel desperate when the profits slipped out of his hands. He told himself he had to make this trading thing work. He was 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 were not there, doubling up on positions, all in the pursuit of not losing any of the profits.

Breaking the Pattern

To be forewarned is to be forearmed. Be aware of the specific situations when you are at risk of FOMO kicking in so that you can immediately interrupt the old pattern before it takes hold.