Fear and greed

“Fear and greed” is the oldest phrase in trading, and it sounds like a cliché until you feel it with your own money. In Lesson 1 you learned that losses weigh more than gains. This lesson shows the three most common ways that wiring turns into mistakes: chasing, cutting winners early, and letting losers run.

FOMO: the fear of missing out

You watch price rip higher without you. Every tick feels like money you should have made. You jump in late, with no plan, just to be part of it. That urge has a name: FOMO, the fear of missing out.

FINRA (the Financial Industry Regulatory Authority) warns investors about FOMO in several of its investor guides. It notes that scammers deliberately use FOMO, often adding a deadline that says you must act right away, because it is such a strong push. It also warns that jumping in and out of positions on impulse or FOMO can hurt your results, and that emotional reactions like FOMO and panic can make people abandon sound principles.

In futures, FOMO usually looks like:

• Entering a trade your plan does not include, because the market is moving.
• Entering after the move, at a worse price, with a stop that makes no sense.
• Taking a bigger size than planned to “make up” for being late.

The market opens almost every weekday, nearly around the clock (Runner Lesson 10). There is always another trade. Missing one move costs you nothing. Chasing it can cost you a lot.

Cutting winners early

Researchers studying real brokerage accounts found that investors tend to sell winning positions too soon and hold losing positions too long. This is called the disposition effect. A research summary prepared by the Library of Congress for the SEC describes several of these studies, including Terrance Odean’s study of 10,000 discount brokerage accounts that confirmed the pattern.

Prospect theory, from Lesson 1, helps explain the first half. Kahneman described people as tending to be risk averse with gains: once you are up, a sure small profit feels better than waiting for a larger but uncertain one. So you close the trade at the first wiggle against you, long before your planned exit.

One early exit is not a disaster. But if your losers run to their full planned size and your winners are always cut short, the math from Local Lesson 6 turns against you: your average win shrinks while your average loss stays the same.

Letting losers run

The other half is the dangerous one. Prospect theory also found that people tend to be risk seeking with losses. Faced with a sure loss, many people prefer a gamble that might get them back to even, even if the gamble could make the loss bigger.

At the screen that sounds like:

• “It will come back.”
• “I’ll just move my stop a little further.”
• “I’m not closing it until I’m back to breakeven.”

Each of those is the brain choosing the gamble over the sure, planned loss. This is how one trade turns into the loss that wipes out a week. The summary for the SEC also lists “the human desire to avoid regret” as one reason researchers give for the disposition effect: closing a loser means admitting the trade was wrong.

The fix: decide while you are calm

You cannot remove fear and greed. You can take away their chance to vote:

• Before entry, write down where you get out if wrong and how you will handle a winner (your own rules from Local).
• Place the orders with the entry, so the plan runs without a fresh decision every few seconds.
• Do not widen a stop once a trade is live. Tightening it to protect gains may be part of your rules; widening it is the loss-aversion trap.
• If a move is already underway and it is not in your plan, the plan’s answer is to let it go.

None of this tells you where to enter or exit. Those come from your own rules. The point is that the decision happens before the money is moving, not during.

Key ideas

• FOMO pushes you into unplanned, late, oversized trades. FINRA warns that impulsive, FOMO-driven trading can hurt results.
• The disposition effect: research on real accounts found people sell winners too soon and hold losers too long.
• People tend to be risk averse with gains (grab the small sure profit) and risk seeking with losses (gamble to get back to even).
• Letting losers run is the most expensive version, because it breaks your planned risk.
• Make exit decisions before entry and let your orders carry them out.