Beware these 2 FOMO traps

 

We’ve seen big rises across stock markets since the crash last month, and it can be confusing to see what’s driving it forward.

The coronavirus isn’t going anywhere fast, and despite the talk about relaxing of lockdown restrictions, any hope of a return to ‘normal’ is a long way off. And in the midst of all the human tragedy around us, and the threat of the worst global recession since the 1930s, the stock markets are just a few percentage points off their highest highs.

What is going on?

Human beings have a long history of investing in things with no inherent value – look at bitcoin … in fact, look at gold. And that lack of inherent value doesn’t mean that there isn’t good, real money to be made from buying and selling it.

And in markets, fear and greed can drive prices way above and way below any concept of what ‘real’ value would be.

So, if we’re aware of these traps waiting to catch investors with a fear of missing out, we can ensure we don’t fall into them …

FOMO trap 1: chasing profits

This is what happens when we jump into a market after a significant move, hoping to catch the ‘tail end’ at least. We can see that investors have already made a lot of money there, and we want a share of it.

And why shouldn’t we?

The reality of this is that sometimes this is the right play to make, but we need to be sure the set-up is right.

We’re often told to ‘follow the trend’ – but that’s subtly different from jumping onto a move that could be running out of steam.

Following the trend is a sound trading strategy, but it should be done by looking at charts for the right signal, and the right entry opportunity (usually after a pullback or a consolidation). It should never be done because markets are moving quickly, and we don’t want to miss out.

As I showed in my last post, if you’re concerned that you’ve missed a move – wait. Markets will often pull back to give you another opportunity.

FOMO trap 2: predicting market tops and bottoms

There’s something delicious about market tops and bottoms that investors find hard to resist. The bargain hunters come out predicting bottoms, while the doom-sayers like to tell us prices have topped out.

And when one of these groups gets their prediction right – they like to make a lot of noise about it and pat themselves on the back a great deal. The 99 times they got it wrong before this … well, they’re quieter about those times.

Substantial changes in market direction come along very rarely, often with months or years of bull or bear market in between them, so the exercise in locating these turning points is a pretty futile one.

So how do we dodge the FOMO traps?

The safest way to avoid falling into these traps is to stick with your technical rules – trade what you see, not what you think.

I have plenty of opinions about what I think markets will do, and which way they’re headed. And (despite the fact that I can’t visit the barber at the moment), I’m pretty confident that other people have their opinions too.

And opinions can be quite devious. We think we’re just following the facts in front of us, but our opinions can affect the way we take facts on board – it’s called confirmation bias. So, be especially careful when you’re watching your charts that this isn’t creeping into your trading decisions.

When you place a trade, ask yourself: Am I taking this position because the set-up is right? Or because I think I know what the market will do?

If it’s because you think you know more than the next guy, then you need to get your ego in check before it empties your trading account!

To enjoy more content and get it faster Follow @TradersBulletin