YES! It’s another blog post about FOMO (Fear Of Missing Out). Many of you are rolling your eyes because you hear us talk about this all the time in chat.
Why another post on the subject? FOMO is one of the hardest obstacles for many traders to overcome. FOMO rears its ugly head in different ways and at different times. Every time it comes up and impacts our traders, I’m going to talk about it. So, this won’t be the last blog post on it either! Remember the only way any trading rule will truly become effective for you is when it becomes a habit of yours. So, if your no chase/no FOMO rule isn’t a habit yet, keep reading!
Have you seen this recent daily chart of DRYS?
How about the chart of AGLE from 11/21?
Even though these charts are similar, one is a daily chart and the other is a 2 minute chart. Keep in mind FOMO can build in seconds or sometimes it can take days. FOMO doesn’t care about your timeframe.
I share these two (2) charts because I know a couple of traders that were hurt by these stocks recently. I think there are a couple of important lessons those traders learned and everyone should pay attention so you’re less likely to repeat their mistake(s) in the future. I’m not going to go into detail on what these traders did or didn’t do. Rather, I’m going to discuss WHY they did what they did.
Every once in a while, a stock and/or sector goes manic (remember KBIO?). For traders, the enticement of making good and quick money can be overwhelming when they start see one of these moves. The problem is most traders have no idea how or when to get into one of these. As the stock keeps moving up, they start to think how quickly they could “really score” on the stock. They start thinking about all the $$$ they could have made had they already jumped in. Then the stock keeps going even higher and higher. What happens then? FOMO starts to overwhelm you. Your FOMO has been building the entire time whether you realize it or not. Now, it’s blinding you. You can’t take it anymore. You’re getting sick watching this stock run without you. And finally, you hit what I like to call “PEAK FOMO”. That’s when the rest of your trading rules are thrown out the window and you do something you will most likely regret in a major way. Keep in mind sometimes that regret is instant - the stock gets halted, the stock goes against you, etc. Other times, it’s days, weeks or even months later when that bad habit you just taught yourself doesn't work like it did last time. Last time was luck.
Peak FOMO is when you just can’t take it any longer. You can’t just continue to sit and be a spectator. You're done sitting on your hands! This stock is done running without you! You finally build up the guts to hit the buy button! You did it!
Unfortunately, that’s usually somewhere near the top. I like to call it PEAK FOMO because it usually happens at or near the peak of the chart. And it’s also the peak of your emotions. At least until your emotion changes…
So what’s my advice ESPECIALLY TO NEWER TRADERS AND/OR TRADERS WHO AREN’T CONSISTENTLY PROFITABLE? Stay away! That’s it. Simple. Just stay away. There are other easier stocks and set-ups to trade. Being a consistently profitable trader isn’t about “hitting it out of the park” with any single trade. Instead it’s a process. Taking a little “meat off the bone” with each trade, each day, consistently… Next time you see one of these and are thinking about chasing. Don't! Move along. NEXT - as Okie likes to say...
The biggest problem with a DRYS or an AGLE is it's almost impossible for you to define your risk in the trade. You should have your risk clearly defined before you ever enter ANY trade. You can't clearly define your risk when spreads are ridiculous and a stock is getting halted 8 times in a single day.
The other emotion that traders usually experience when trying to trade one of these is “hold and hope”. That usually sets in right after the stock tanks well below your entry and you just didn’t get out. Hold and hope has now replaced your FOMO. Then you start to convince yourself that the stock shouldn’t be down this much. IT HAS TO BOUNCE! There’s no way this thing keeps falling! Guess what? It doesn’t have to bounce. And the only place it HAS TO stop falling is at zero. Remember, hold and hope BUILDS as the stocks falls. The more the stock falls, the more your emotions build.
When DRYS came back down into the low teens and bounced a bit on 11/18 many traders who were holding and hoping said 'see it’s going to bounce BIGLY'. Sure there were some nice bounce trades in there, but those who bought at much higher levels never got close to even and now the stock is below $6.
Others said the same thing about AGLE. The news in AGLE was good so there was no possible way it was coming all the way back down. It’s now trading well below the price it was before that news ever came out.
Look at those charts. Study those. If they teach you one thing it’s that anything can happen.
One thing that Day Trading quickly taught me, although it took a lot longer to truly understand and take control of, it’s that anything can and will happen in the market. Anytime I’ve ever said “there’s NO WAY that XYZ will happen”, guess what? XYZ did happen. And it happened to an even more extreme degree than I ever could have imagined. Accepting this helped my trading tremendously.
DRYS could have gone to $500. I would have said “wow” but I wouldn’t have been surprised. DRYS could open at $50 tomorrow or it could open at $1. I have no idea. Regardless of what happens though, I won’t be surprised and I won’t be hurt. I'm only interested in the trade IF I can clearly define my risk. The chart will tell me that tomorrow...