Emotions: FOMO, fear and revenge trading

Your plan is written, your risk is calculated. And then the price jumps 8% in ten minutes and suddenly you cannot see the plan. Emotions are not a bug you can switch off – they are old mechanisms that once helped us survive. In the market, though, they usually do harm.

A loss hurts twice as much#

Psychologists Daniel Kahneman and Amos Tversky found that a loss hurts us roughly twice as much as an equal gain pleases us. This is called loss aversion, and in trading it has a nasty consequence:

• we take profits too early – "so I do not lose them",
• we hold losses too long – "it will come back, then I will sell".

Researchers call this the disposition effect and have documented it in thousands of real investors. The result: small profits, big losses. Exactly the opposite of what you need.

FOMO#

The abbreviation FOMO (fear of missing out) stands for the fear that something will slip away. The price rises, everyone on social media celebrates and you buy – without a plan, without a stop-loss, often right at the top. The more the price has risen, the stronger the FOMO tends to be. And the worse the entry.

Fear#

Fear does the opposite: after a few losses you will not enter even a trade that fits your plan exactly. Or you close a good trade at the first small wave against you. Fear is often a reaction to too much risk – when one loss really hurts, you are risking too much.

Revenge trading#

After a loss comes the urge to "win it back". Right now, with a bigger position, without a plan. This is called revenge trading. It is the fastest way to turn one loss into five.

Safeguards against emotions#

• Decide in advance. Enter the entry, stop-loss and target as orders right when you open the trade. Then there is nothing left to decide under pressure.
• Risk so little that a loss barely matters. 1% of the account should not ruin your evening.
• The 24-hour rule. When something tempts you outside the plan, wait a day. Many "unique opportunities" are gone by tomorrow.
• Limits in the plan. Once you hit the daily or weekly loss limit, you stop. No debate.
• Write your feelings in the journal. In a few weeks you will see which emotions cost you the most.

Common myths#

• "I have no emotions, I trade rationally." Everyone has them. The difference is whether you plan for them.
• "This time is different, I have to buy now." That is exactly what FOMO says.
• "Just one trade to get back to zero." That is how revenge trading starts.