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Do You Fear Missing Out?
By Price Headley | Published  01/31/2007 | Stocks , Options , Futures , Currency | Unrated
Do You Fear Missing Out?

Regular readers are emailing me lately about the change to a longer-term bear trend potentially, sparked by the continued decline in the Nasdaq. But you have to follow your indicators, and right now my indicators are suggesting a short-term bottom is near. The biggest aspect of trading is keeping your mindset stable to not rush in too late to buy after a run up or rush into puts too late after a decline. Today we discuss how to manage the feeling of missing out.

Every trend will have its doubters, but I notice that as a trend gains strength, the skeptics 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 can also be characterized as greed of sorts, for an investor is not acting based on some desire to own the security, other than the fact that it is going up without him on board. This fear is often fueled during runaway booms like the technology bubble of the late-1990's or the more recent well-publicized bearish trend, as investors hear their friends talking about newly-found riches and want to experience the same type of gains. The reality is that this is a very dangerous conversion, as at this stage investors 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 investor that there can only be gains ahead from such a promising and obviously beneficial trend. We remember the stories of the Internet and how it would revolutionize the way business was done. While the Internet has indeed has a significant impact, the hype and frenzy for these stocks ramped up supply of every possible technology stock that could be brought public and created a situation where the incredibly high expectations could not possibly be met in reality. It is these expectation gaps that often create serious risks for those who have piled into a trend late, once it was widely broadcast in the media to all investors.

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. There are several solutions to this issue. First, in today's volatile markets which have a lot of noise, I prefer to place price targets on my positions in an effort to sell into the noise and capture profits. 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 of 5-10%. I often use a 20-day simple moving average as another form of trailing stop, as this tends to define the short-term trend.

The key is to realize that greed can take you out of your plan to only trade stocks with high reward-to-risk ratios (I prefer to trade 3-to-1 reward-to-risk or higher). 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.

Price Headley is the founder and chief analyst of BigTrends.com.