For those who are not up with the current vernacular FoMO apparently refers to Fear Of Missing Out. According to Wikipedia FoMO is defined in the following way –
Fear of missing out or FoMO is “a pervasive apprehension that others might be having rewarding experiences from which one is absent”. This social angst is characterized by “a desire to stay continually connected with what others are doing”. FoMO is also defined as a fear of regret, which may lead to a compulsive concern that one might miss an opportunity for social interaction, a novel experience, profitable investment or other satisfying events. In other words, FoMO perpetuates the fear of having made the wrong decision on how to spend time, as “you can imagine how things could be different”.
In the somewhat demented and narcissistic life of your average millennial FoMO is somewhat of an artificial construct since you can never be certain that you have missed out. All your fears of people having a better time than you are largely imagined. In trading you definitely know that you have missed out and missing out can have serious consequences both financially and psychologically. What prompted this exploration of missing out is that I was reviewing my universe of tradeable instruments and noticed that for some reason Robusta Coffee had dropped off the list for reasons I cannot fathom. This is particularly annoying when you look at the chart of Robusta Coffee and realise it is one of the best performing commodities of the year.
Experience now largely insulates me from the effect of seeing this. The problem is rectified by simply adding this entity back into the trading mix and moving on knowing that somewhere at sometime something within my universe will exhibit the same magnitude of move. It is simply a matter of time and it is this notion of time that catches traders out – trading success is dependent upon longevity not lottery winning luck. In fact in the list of things I wish I had known before I started trading high on the list would be a better understanding of the probabilistic nature of trading. When you start trading you have the perception that you will make money all the time and that your time making money starts the moment you do. What does take time to get a grasp off, particularly emotionally is that trading is a simple probability exercise. If your system makes on average $X dollars per trade then that’s what it will do over time and it is this notion of over time that catches traders out. They simply dont hang around long enough to see this occur.
Implicit within this discussion is the notion of actually taking every trade that the system generates because you do not know where the returns are going to be generated. My own observation has been that the majority of money is made each year by a handful of trades and if you miss out on any one of these then the results suffer accordingly. To give you a broad sense of this consider the chart below which is the year to date returns from a variety of commodities.
It is obvious that throughout the course of a year some instruments will do better than others. What is perhaps not so obvious to traders is the dichotomy between the commodities that do well and those that have average performance. Outliers are the bedrock of the performance of any trading system – they do all the heavy lifting, all the other trades are simply there to make up the numbers. To give you a very ugly and basic indication of the impact of missing these outliers consider the chart below which looks at the average performance of this basket of commodities with the best performers removed.
What is interesting in this instance is the disproportionate impact of removing the best two performers from the mix. Implicit within this discussion is also the understanding that no single trade sends you broke and this reflects the truncated distribution of returns. Trades that go wrong are quickly closed whereas those that go in the right direction are left alone. But without the having the good trades in the mix because they have been missed the returns of any system are muted. We can see this when we look at a hypothetical system. The equity curve below represents a hypothetical system that is coming out of a drawdown. I selected the notion of a recovery from loss because it is often in this sort of market phase that traders begin to second guess themselves and in doing so they begin to ignore trades that they would have otherwise taken.
What I have done in constructing this curve is to look at the impact of removing the best trades as the system recovers from its downtrend, the system then continues to trade as normal post the removal of the trades. As such you can see the long term impact of missing strong trends. The idea of missing out has at once a strong financial impact but it also has an emotional effect on the trader. Regret is often a companion of every trader, somewhere at sometime there will be a trade that you miss. This is the nature of the game and it is this treating trading as a game that keeps this event in perspective, this combined with a knowledge that trends are constant and ever repeating can help mitigate the feeling of having made a catastrophic error. But the overriding lesson is that you must as a systems trader take every trade because you do not know which one will be this years big winner.