Monday, May 14, 2018

Cognitive Behavioral Techniques for Changing Your Trading Psychology - Part Two: Overcoming FOMO

In the first post of this three part series, we looked at specific techniques traders can employ to overcome procrastination.  These methods, backed by significant research, can very much help traders approach their work in a more decisive, positive mind frame.

One of the most commonly recognized trading psychology challenges, especially for developing traders, is a fear of missing out on possible opportunity.  That FOMO leads to overtrading, as the fear of missing leads to the taking of marginal trades.  In the work I'm doing with Mike Bellafiore at SMB, combining mentoring and psychological coaching, we have the traders enter all of their trades into a platform that automatically calculates a wealth of statistics:  number of long and short trades taken; number of winning and losing trades; average sizes of winning and losing trades; winning percentage and P/L as a function of time of day; as a function of relative volume; etc.  A common pattern is that win percentage goes down when the number of trades placed increases.  This is often because the additional trades are made from a FOMO mindset.

In the previous post, we looked at Dr. Seth Gillihan's recent self-help book on cognitive behavioral techniques and how those can help with patterns of thought and behavior.  The FOMO mindset is grounded in that F word:  fear.  Techniques that help people with fear and anxiety can be tremendously helpful in overcoming the overtrading that arises from concern over missing trade opportunities.  Here are three especially useful techniques traders can employ on their own:

1)  Mindfulness - Dr. Gillihan points out that our breathing tends to mirror our anxiety when we're getting worked up.  By becoming aware of our breathing, slowing it down, and deepening it, we can place ourselves in a much more calm and focused mindset.  He recommends doing an exercise in which we a) breathe in gently for a count of two; b) breathe out slowly for a count of five; c) pause after exhaling for a count of three; and d) repeat this process for 5-10 minutes.  Notice how this creates a rhythm for your mind and body that counteracts the chaos of anxiety.  What I have found is that if you practice such an exercise daily, you can become proficient in the method and then can just take a few even breaths during trading to re-center yourself.  The focus on breathing keeps you grounded in the present and builds your self-awareness, so that you're less likely to act on impulse.

2)  Reassess the Severity of the Threat - Many times, we get worked up about something that we tell ourselves is a threat, but that actually can do us little harm.  One way of reassessing that I have found to be very helpful is actively telling myself that *of course* I'm going to miss opportunity.  I miss opportunity in every market I don't trade and in every time period (such as overnight) that I don't trade.  No matter how many opportunities I miss, ones always end up appearing later in the day or the next day.  The goal is not to trade every possible opportunity, but to identify the best opportunities and trade those as well as possible.  By reframing the opportunity set and taking the threat out of missing something, I can eliminate FOMO as a motivation.

3)  Directing Attention Outward - Dr. Gillihan observes that, when we become fearful, we tend to dwell on worries.  By directing our attention outward, we can break the vicious cycle of worrying, getting anxious, leading to further worrying.  In trading, the outward focus can be a doubling down on one's trading process and rules.  When we have our trading laid out in "playbook" form, with explicit rules, we can ground our decision making in what we do best.  This helps us reframe the fear of missing a move into a fear of trading poorly.  Notice how this approach helps to transform fear into actual opportunity.  Very often, the outward focus leads us to hold off on placing the FOMO trade, helping us find better opportunities to enter and exit.

My experience in trading is that, if I'm feeling FOMO, the odds are good that others are experiencing it as well.  The trade that seems obvious is often not the high percentage trade.  Using FOMO as information that actually makes the trade *less* attractive is a great example of how we can use emotional awareness as a tool for superior decision-making.

Further Reading:  Why FOMO Fails