Regular readers are emailing me lately about the change to a longer-term Bull trend potentially, as Indian markets are rallying hard from the low made on 29 Feb at 6825 we almost have seen a 1000 point rise. The biggest aspect of trading is keeping your mindset stable so as not to Buy at the Top due to greed and not to Sell at the bottom due to fear. Today we discuss how to manage the feeling of missing out.
The most common word you will hear among traders when market are on extended rise like in current case or extended fall is this is a rally of DISBELIEF and will soon perter out.
Every trend will have its doubters, but I notice that as a trend gains strength, the doubters will slowly become converts due to the fear of missing out on profits (in addition to the pain of losses for those betting against the trend).
The fear of missing out for Investor or Fund manager is not acting based on some trading system, other than the fact that it is going up without him on board. Remember the 2000 IT Stocks Bubble stocks were rallying crazily, 2007 Real Estate and Infra Stocks and 2014 Pharma Stocks. The reality is that this is a very dangerous conversion, as at this stage investors/traders tend to essentially say ‘get me in at any price – I must participate in this hot trend!‘
The effect of the fear of missing out is a blindness to any potential downside risk, as it seems clear to the trader/investor that there can only be gains ahead, so traders/investor who enter late in trend end up taking substantial loss. GMR Infra in 2007 was trading around 1000+ now trading at 16-17.
Greed can also be thought of as the feeling of never having enough. Some traders have a problem with letting a winner ride too long, until it turns into a loser. Many Readers who are reading this post have let many big profitable trades end up in big losses as they cannot control their GREED.
Solution of the Problem
- Always have a profit target once you enter the trade, and once it comes Book out. Do not fret over after exiting stock keep going up. Its part of life in stocks market. No one can on consistent basis exit at top and enter at bottom.
- I also like to trail my stops as the stock moves in my favor, raising my stop to a breakeven once the stock is showing profits.
The key is to realize that greed can take you out of your plan to only trade stocks with high reward-to-risk ratios . In fact, many traders who succumb to greed are often getting in so late as to create very high risk situations with little reward left in the trade.
Stay focused on your plan, and when you identify the fear of missing out or the feeling that your current profits are not good enough, then you should walk away from trades which would seem to satisfy these emotional cravings and refocus on your trading plan.