Discipline in trading is crucial, although many people underestimate the importance of this skill. Following the drafted strategy when the market goes against your prognosis is a nightmare, right? Those who don’t follow their strategies are widely known as “weak hands.” On the cryptocurrency market, we have observed several occasions of the market crashing as a result of mass panic selling. What did institutional traders do during those times? They bought the dip.
The Essence of FOMO
FOMO — fear of missing out — is a widely used term in the crypto community. FOMO happens when people act based on their emotions, be it the fear of missing profits or the fear of shrinking the equity of their account balance. Usually, FOMO-driven positions result in the market moving in the opposite direction. Seems like a complot, right?
You are driven by FOMO if:
- you buy into a large green candle because you expect a higher price action.
- you sell into a large red candle because you don’t want to lose profits or your capital.And so, you place a market order driven by a “right here, right now” mindset. This is always a bad idea. But FOMO is actually one of the things that drive price action. That means that without anyone buying out of fear of missing out, there would be no reversals.
Panic Buying & Selling in the Charts
Emotion-driven buying and selling comes after indicators, such as flags, pennants, or the MACD divergence, have given a signal. Let’s have a look at the prognosis created by our client and Xena Partner Program member, Kerstin Ohlsson, at TradingView:
Based on this structure, she made the supposition that it was time for a reversal on the market: “The current structure presupposes that the price will continue sliding downward, thus leaving the buyers above $12K with their losing positions. A day or two will show how nice our picture might be on the whole way to the 1-4-6 target line of Wolfe's bear pattern.”
Actually, what we saw in the next few days was exactly what the technical indicators had said — the bears came. But what does that have to do with FOMO?
The thing here is that many traders saw BTC trending up during the first week of August and pushed the price further and further up to the point that it left the channel. Discipline-driven traders would never enter such a risky position without a clear indication that the trend will continue, but that’s what FOMO traders did. So, as soon as the chart broke through the channel, the reversal came — a typical case for professionals and a trap for everyone who bought high.
The negative aspects of panic buying & selling
As you can see from the example above, not sticking to your strategy usually results in losses. But this is not the only negative aspect of panic buying and selling.
When your trades are based on FOMO, you stop thinking logical, even though the price actions are mostly logical. You miss the setups and rely on the uncertain expectations of the price going up or down. Furthermore, if you’re lucky enough and make a couple of good trades, you even consider the FOMO approach effective. So, you either do not read the indicators at all, or you read them just enough that they show what you want to see. One indicator is never enough: You should always check and recheck your suppositions on the market.
Another bad thing about panic buying & selling is that it leaves no place for risk management, which is crucial for all professional traders.
No need to panic if you stick to the strategy
When you have a well-planned strategy, there’s simply no place for and no sense in FOMOing. The only case where it works is when you jump into a strong uptrend movement and it brings you higher. But you still could have benefited from this movement even if you were sticking to your strategy. As the price usually moves in reversals, you might have an opportunity to jump in at a reversal. Or you could trade through the dips — there are always options!
Actually, when you feel the FOMO, have a look at what happened a few ticks ago and analyze the reversal point in the future instead of panic buying or selling. If you learn to recognize certain patterns, your FOMO will vanish.
To learn more about risk management and price action, we recommend reading the following articles from our blog: