Trading Psychology: How to Handle FOMO (Dr. Steenbarger)

in this video learn how to improve your trading psychology specifically how to handle that frustrating p l killer fomo hi mike bella fury co-founder of smb capital and we're a proprietary trading firm located in midtown manhattan and i'm also the author of the trading class of one good trade and the playbook in this video dr brett steenbarger our trading coach at our firm and trading coach for top hedge funds and institutional traders teaches how to handle fomo doctor steenberg presents at our prop firm for our prop traders actionable ideas to mitigate this p l killer

with one's trading let's get to work on sharing these important trading lessons from our prop desk in new york city so you can grow your trading account [Music] so we're going to be talking today about fomo the fear of missing out on trades and we're going to be specifically talking about three strategies for overcoming fomo so i'm going to be approaching this topic as a psychologist and you can see my academic affiliation there and there's my uh blog site trader feed so you know we often hear common sense advice about how to deal with fomo

you know take a break or take a deep breath or whatever no no we're going to look at this psychologically and talk about specific evidence-based psychological strategies for overcoming fomo was evidence-based mean it means it's based in the outcome research in psychology and that's why i teach at the medical school our evidence-based strategies for changing our behavior so we're going to be applying it to the training situation any questions any comments you have any smackdowns it's all good yeah feel free okay so let's get into it now here's the big idea was fomo stand for

fear of missing out fear of missing on opportunities the key word is fear fomo is an anxiety fomo is a fear fear and anxiety occur when we perceive threat the problem this is a very important concept the problem is not that we have missed a potential trading opportunity the problem is that we perceive that to be a threat to us to our success to our future so once something becomes a threat we go into stress mode and literally our brains respond with a what's known as a fight or flight response we're priming ourselves for action

how do we do that the blood flow if we were in a functional magnetic resonance imaging machine we would see the blood flow in the brain go from the frontal cortex to the motor areas of the brain priming us for action because we're perceiving an emergency right now what goes on in the brain's frontal cortex higher level thinking higher level thinking judging planning all the things we're supposed to be doing when we're trading well the blood is flowing away from those regions of the brain into the action areas so as long as we perceive threat

we're going to be shifting our blood flow to a more impulsive action-oriented mode rather than focusing our mind okay the key to overcoming fear is taking the threat out of the situation we're always going to miss opportunities where have some of the biggest opportunities been recently in financial markets yeah in crypto some big big opportunities in certain commodities european power i worked with some teams to trade that some big moves guess what all of us missed every one of those moves why aren't you upset if you're afraid of missing out you missed out on some

big moves okay you can only trade what you focus on and none of us has perfect focus so we want to take the threat out of that we which means we want to normalize that rescuing molly ruth molly ruth is a cat that we recently adopted very recently adopted and she is from thailand and she's known as a cow mani a rather rare cat but poor molly ruth was her owner died and she was no and there was no one available to adopt her and so she was placed in an animal shelter under not very

good conditions and she had never been in that sort of situation she's in a cage unfamiliar environment she was really traumatized she was really upset when we went to see her she was cowering in the back of her cage she wouldn't let anyone near her so we ended up adopting her uh and the reason for it was my wife wanted to pick her up and i said her don't do that you know she looks she's so fearful you're gonna really scare her well my wife did pick her up because my wife's much smarter than i'll

ever be and so margie picks up molly ruth and what's molly ruth do she starts purring and purring and purring because in the shelter no one had been really loving her so that convinced us okay we got to get this cap but it's been a real chore we have to create gradual experiences of safety for her she's in this totally new environment everything is potentially threatening so what we do is and this is a key psychological idea we tap into motivations that are stronger than the fear-based motivation now for little molly ruth what motivation is

stronger the motivation to eat because she wasn't given very much food in the shelter and so we took the food the cat food and i put the cat food on the my fingertips and held it close to her and she was hungry and so she goes closer and closer to the fingertips and she starts licking the fingertips and eating the food and that gives me a chance to pet her a little bit and do that again again and so gradually we create experiences of safety experiences where she sees that the fear isn't it's not really

scary it's not really a threat we're taking the threat out of it but we're tapping into a motivation that's stronger than the fear she wanted the food more than she wanted to avoid us okay so let's look at how that psychological principle can apply to fomo so the question is what motivation is greater than p l obviously we're motivated to make money that's a big purpose of trading but if p l is the measure of our value of our worth then anytime we lose p l any time we go into drawdown we're going to feel

worse about ourselves so that allows it to be a threat we have to find a motivation that's greater than p l for successful traders the motivation that's greater than p l is the desire to learn and grow the people who don't last in the business it's all about making a quick buck but the people who really become successful as traders they're always learning always developing some of the successful traders here at smb i worked with them when they were much younger i know how they traded back then i see how they trade now they have

learned so much they've developed in so many different ways and that's going to be true for you as well and so they keep score with their learning they keep score with their growth and they keep longer term statistics on their trading you're familiar with the statistics from trader view to document that they're getting better better they're trading more size they're trading with consistency rather than just looking at their absolute returns because if they're consistently profitable they're going to get more and more risk bumps and that's going to make them successful in p l terms so

they are measuring themselves on the basis of consistency of profitability not magnitude of profitability that learning and growing motivation is not threatened by the fact that we are human we sometimes lapse in our attention and we miss an opportunity does that change the fact that we're learning and growing i mean it's a disappointment if we miss a good opportunity i've certainly and i've traded since the late 1970s to give you an idea age-wise you know so i've missed a ton of opportunities but if my goal is to be developing and learning and growing it's a

pothole that's all it is it's just a bump in the road it's no longer a threat so how we judge ourselves how we grade ourselves determines what is a threat and what is expectable i love that quote the secret to permanently breaking any bad habit is to love something more than the habit okay there was a time in my life when i had some not very good habits and i was not real happy with my life situation and i was drinking too much and it was right around that time that i met my wife and

we started a family and did i really want to be impaired for them i i mean i could up my own life you know i certainly was capable of doing that but i wasn't going to do that for someone i loved and she had three children by a prior marriage i certainly wasn't going to do that for children that that just that's not going to happen so loving something more than the habit in this case loving your growth your development your future as a professional that's so much more important than the day-to-day p l okay

so let's go through three strategies again research-based strategies for overcoming any kind of fear or anxiety the first strategy is known as exposure therapy what we're doing in the first step of exposure work is we're training ourselves in relaxation so we're teaching ourselves visualization so we visualize something peaceful and relaxing and while we're visualizing maybe i'm visualizing myself walking on a empty beach and i'm feeling the sun and the waves are coming at my feet i'm breathing very deeply and very slowly letting it out very deeply breathing and so with the slowed breathing i'm slowing

my body down now remember the fear response is fight or flight if i slow my body down that's the opposite physical response to fight or flight right so i'm slowing my body down and i'm focusing my mind i'm not getting all frantic i'm focusing my mind on something very peaceful and relaxing okay that's stage one that's step one of the exposure work step two is we create what's known as an anxiety hierarchy we take scenarios from the least threatening at the bottom that's number one then we go number two number three all the way up

to the most threatening scenario so like the least threatening might be oh you know you miss an entry on a trade early in the session and you get back in a little bit later okay i mean it's not a huge threat but it's a little bit frustrating number two number three number four you create different scenarios that would be a little bit more threatening like a draw down scenario might be a little more threatening or market starts to move and your screen goes dead um so and then at the top would be big drawdown scenarios

big you know big threats big losses so you in the exposure work you create this hierarchy and once you have gotten good at the relaxation work and that takes practice and typically you'll be doing that for a week or more to get really good at it so it's important to master that first then instead of visualizing being on the beach and being all relaxed you are visualizing the first item in your hierarchy which is a frustrating scenario something that has a degree of threat while you're breathing deeply and slowly and keeping your body very still

so think about what you're doing you are pairing the threatening scenario with the slowed breathing and you're focusing your mind on that scenario so you're staying focused and staying calm while you're vividly visualizing a threatening situation now what's gonna happen if you do that one time two times three times ten times twenty times what's going to happen it becomes automatic it becomes natural it's no the repetition and the pairing of the repetition the p i'm sorry the pairing of the threat with the relaxation response means they become paired in our mind and so we learn

a new connection and actually there are changes in blood flow as a result of doing this kind of work this is the number one psychological treatment for phobias for ptsd you know whenever people have significant anxieties okay so it takes daily practice and many times we'll do it more than once a day but once you create that connection you've got it for life it's the repetition that takes the threat out of it you're literally training mind and body to stay chilled even in a situation that could be a frustrating situation okay that's exposure work and

by the way you know as we go forward in our working together you know if these are techniques you would like to use for yourself i can help walk you through them and adapt them to your particular situation i'll put food on my fingertips and you can no that's a little too kinky man can you kind of correlate that to like pavlovs basically um it's a very good question and it yes because it is a behavioral therapy and you are teaching a stimulus response connection you can think of it in pavlovian terms and so it

is a kind of behavioral training it's cbt right it's cognitive behavioral it is one form of cbt now cbt is cognitive behavioral and the second techniques we're going to be talking about are purely cognitive techniques but the two are joined together cbt because both are learning techniques in therapy yeah so yes if you were looking up exposure therapy you or if you were looking for a book you might look at a book on cbt and this would be in the book but you can google exposure therapy and you'll see a ton of things so in

cognitive work we are not changing our behavior patterns in that pavlovian way we are changing our thinking patterns we're changing how we think about these missed opportunities the idea being as we talked about earlier is that our thinking creates our responses that if i view missing opportunities as a sign that i'm no good or i'm such a failure or if i view it as a threat to my development of course i'm going to react negatively so the idea of cognitive work is that we can learn new ways of thinking and we can process in our

thinking so it's not with the body and the relaxation work it's by reprocessing in our mind we can take the threat out of the event okay the way that this is traditionally done is by keeping what's called a cognitive journal and the journal consists of four columns on sheets of paper a b c d column one is a the activating event so that's the specific situation that got you upset in this case it would be missing the opportunity right b reflects your beliefs about that event your beliefs mean your self-talk why is this upsetting to

you i'm telling myself it was such a great opportunity other people you know got the opportunity i didn't they're going to get you know ahead of me and their development you know i'm it means i'm not as good as them all the negative thoughts going through your mind that's what you put in column b okay so you're writing out the negative thinking so you have the activating event what happened yourself talk column eight see this is very very important are the consequences of the negative thinking how is it making you feel how is it affecting

your future your subsequent trading you know i'm so bummed out and i'm beating myself up over missing an opportunity i go ahead and miss the next one you know you are tracking the negative consequence and some of the negative consequences might be that you're just stressed out you're unhappy you're upset but all the different negative consequences and that's where you start the journal is just with abcd i'm sorry abc so that you get very good at recognizing in real time when activating events are activating you and you're getting really good at identifying your negative beliefs

and you're getting very good at identifying the consequences of those the idea here is that we change our patterns of thinking we change our patterns of behavior often because the consequences become so front and center to us that we just don't want to go back there again like i can't keep doing that to myself i can't keep beating myself up over miss trades because that's making me worse it's making me unhappy so interestingly and this is something i teach the students in syracuse one of our best motivations to change is hate because if we hate

our negative patterns we're going to push them away we don't want any part of it if i hate something i don't want it in my life okay you want to be so aware of the consequences that you hate them that's what gets people you know an aaa past their alcohol problems at some point the consequences build up and i've lost my job i've lost my marriage i've lost you know my health i can't do this anymore i gotta change this is killing me so that's what c is all about and you get better and better

and better at identifying the negative least but also emotionally connecting with the consequences column d stands for disputation means you're disputing the negative thinking it's like you talking back at that negative thinking and as i've written in a couple of my books one of the favorite ways i have of doing the disputation is just to think about how you would talk to someone else you care about who is in that situation okay so if someone who you're in a team and your teammate misses an opportunity how would you want to talk to them if you're

mentoring them if you're a teammate of theirs how would you want to talk with them what's that you want to pick them up you don't want to beat them down you want to pick them up pick up go get the next one yeah you know it is a missed opportunity you'd hopefully uh help them learn from it maybe but you're not going to beat them down there's more to you than this one trade you would be encouraging you would be caring you would be supportive you would be constructive you would help them learn from it

the irony here is that many many many many many many times we know how to talk with other people in those situations but we have trouble doing that for ourselves column d is all about talking to yourself the way you would talk to a best friend talking to yourself not in like people talk about positive thinking if you miss a great opportunity no it's not positive you know it sucks but you want to be constructive the way the way i put it with the smb folks is from everything you want to take away a learning

p l sometimes we don't take a monetary pnl we take a loss but what what do you learn from the loss what has it taught you about the market about the stock what has it taught you about how you place your orders how you size things there should always always always always always be a learning piano and so when someone misses an opportunity you would talk to them about the learning piano or what can you take away how can you make sure it doesn't happen again that's how you want to talk to yourself that's column

d okay and imagine doing that every single day abcd abcd you get very good in real time recognizing the negative thinking you get very good in real time seeing the consequences like i don't want to go here and you get very good in real time reframing talking to yourself more constructively so that eventually you get to the point where you kind of like slap yourself up there comes that negative thought again but it doesn't disrupt you you get really good at putting yourself into a more calm focused state because you've taken the threat away from

the situation and strategy number three barbara fredrickson psychologist calls it broaden and build one of the major reasons why we get caught up in pdl is because we don't have enough other positive things going on in our lives the metaphor i use in this situation is if you are investing your money you want to be diversified some of my money is in fixed income instruments like bonds some of my money is invested in our home some of it is in stocks the idea is you are diversified so that if one investment goes down the others

may be going up it gives you balance so the question becomes what is your life portfolio how balanced are you in your life if all you're doing is trading you hear people talk about oh i have such a passion for trading like when i hear that yeah i do interviews you know sometimes for people joining when i hear that training is everything to me i spent all my time like no dude get a life you know you're you're going to be vulnerable you know and so yes trading is important yes developing yourself in a career

is important but relationships are also important having personal interests outside of your work very important your physical well-being is very important your spiritual well-being you want to have a diversified life portfolio so when the trading doesn't go well you're diversifying your emotional capital if i have a loss right now in my trading and i have had losses you know i mean i've got five kids seven grandkids four rescue cats a wonderful wife a career that i love if i lose money on a trade like big effing deal i mean it's like you know it's one

piece of my life and yes i want to learn from it and yes i want to do well but it's in a perspective when we put all of our energy and all of our focus on trading we lose that perspective so we can do all the psychological exercises in the world and the exposure work is very helpful the cognitive work is very helpful but if we don't broaden and build our life if we focus only on performance in p l we're going to be vulnerable so the issue is to make trading important but not all

important and to focus on our growth in trading not just p l and to make sure that we have a p l from our life's activities what's what's our day-to-day p l in life then the ups and downs of our performance will yeah good not so good but they don't rule us and they certainly are not threats to how we feel about ourselves okay so in conclusion what gets measured gets improved you know any any time you want to develop something you want to keep track of it you want to measure it that's why the

trading statistics are so helpful but tracking yourself when you have missed opportunities tracking how you respond to those you're keeping that learning piano going so we want to focus on growth and improvement we want to evaluate our trading relative to the opportunity set so for instance i've had occasions where i get into a trade it goes my way i've got some paper profit and it all reverses what does that tell me it's not going to your direction what's up it's not going in your direction anymore it's not going my direction anymore and quite possibly there's

not enough volume and volatility to sustain a trending move i've just learned something about that market or about that stock that i thought we could go higher i thought we could take out yesterday's high let's say if i've been buying and it reverses against me and i say to myself damn that should have worked it didn't work instead of getting frustrated it's information that can help set up the next trade now if it reverses violently against my position maybe i'm going to reverse the trade if not if the volume is really low maybe we're just

in a choppy range and i'm going to adjust my trading for that for to trade reversal patterns but the idea here is that we're evaluating our trading relative to the opportunity set in a choppy slow market my p l expectations won't be the same as in a nice trending breakout market okay and finally you know in terms of the learning p l what the research tells us is that you don't want to set you know how we do the monthly reviews you don't want to set like 20 goals for improving yourself that's like what people

do at new year's time you know it's like by january 15th they can't remember any of them just set a few important goals what did i do well that i want to build upon what did i do that needs improvement and i'm going to work those every single day and keep score keep track and that's going to make me better each day each week each month so the idea here is to set a few high priority goals and work them hard each week each month so that work so that our learning p l is front

and center and that helps us put our missed opportunities it helps us put our p l into a broader perspective we don't get too excited when we make money and we don't get too down when we don't make money a key to all these techniques is the consistency of working them and building new habits of thinking building new habits of behavior questions comments yes so one that i wanted to ask um so i know obviously like bella in some of his books he talks about like that traitor intuition um when it comes to fomo do

you think that there could be any kind of either like correlation or um any kind of relationship at all to sometimes that a phone like fomo that you may experience could also be some kind of trainer intuition telling you something if there's if you think that okay i'm kind of scared to get into this position i think it could go in one direction but you aren't 100 sure but sometimes you do have that traitor intuition and so i'm kind of wondering if there is some kind of either relationship or correlation um to fomo and that

like traitor intuition it's a very good question and that scenario is certainly possible that i have an intuition that this thing could break out it's getting more volatile and i'm a little skittish about getting in a lot of times that's what's known as performance anxiety and so often the best strategy there is just getting in with very small size initially and building a position if you actually get the breakup um but yes that could show up like a fomo usually the fomo occurs when the thing is already broken out and we weren't on board and

we're telling ourselves oh i should have caught that and now it's moved up up up up up and after a big move up i can't stand to see it go up anymore i lift the offer and yeah and that top ticks it um so usually that's the fomo situation but your broader point that sometimes if we have a fear there could be an intuition behind it that's a legitimate point fomo will leave if it's classic fomo it leads you to take bad trades that's how you know fomo yeah how would you link the personality traits

to fomo and what i mean by that is in terms of the big five and uh especially with for example people of course who are high in eroticism and probably have this uh this problem more than others who don't right it's a great question i do so the big five there are five dominant personality traits in the psychology research and the tendency toward negative emotions which is sometimes called neuroticism the flip side would be emotional balance some people have a very even temperament not a lot of highs or lows and some people are quite emotional

and they have a lot of highs they have a lot of lows okay and so someone who has lots of highs or lows certainly could be more affected by fomo the thoughts about you know missing out and so forth could happen to anyone but if we're more emotionally reactive then that could affect us more there's also a big five trait called conscientiousness which correlates with discipline and being rule-based and consistent and i think if we had a very high degree of conscientiousness we'd be less likely to act on fomo we may feel the fear of

missing a move but at the end of the day we're not going to break our rules and go chase a trade just because we think we're missing something so yes personality does play into these things and there's some good personality tests that you can take to learn about your strengths and to learn about your traits and if any of you are interested in those i could certainly get you some links so for instance on that neuroticism measure i end up being very low because i don't i don't like drama like in anything and so if

something starts moving away from me i'm not gonna oh and i start wanting to chase it like i just hate that drama like that's not what i want to be doing in training i want to be understanding what's happening acting on it getting out rinse and repeat so in that case i'm less likely to be influenced by the fomo and would you say openness plays a big role in trading as well or at a much lower level than neuroticism openness to experience is a another one of the big five personality traits and it's correlated with

creativity when we are more open to experience so for instance my wife and i love to travel around the world we go to different cities we go to different restaurants and try different types of food yeah we love to experiment we yeah okay that's openness to experience okay that's correlated with creativity and so that's very much uh related to our trading because if we are very open to experience guess what we are very open to new ideas and if we're open to new ideas we're going to develop new ways of trading and we're going to

find some unique ways of trading and so finding new edges in markets and trading in different ways that's related to openness in terms of dealing with the learning p l and in the example that you used of when a stock goes in your favor at first uh by a certain amount and you're in profit and then ultimately goes completely against you how what is your take on potentially not necessarily uh being short-minded or like scalping the opportunity but at least kind of collecting profits along the way if you're one to kind of let that emotional

toll of having the entire position reverse against you being able to at least kind of capture size or catch a profit along the way up while you're still in the profit zone and then ultimately if it does go against you it's great at least yeah it's a great practice and something i do try to do if i identify that it's a lower volume market a lower volatility market if it goes my way right away i'm looking to take at least a piece of the position off to ring the cash register now if it's a really

slow day i might take the whole thing off i'm going to say you know the the volume's not there trees don't go to the sky you know make it take it if it's an environment where a news item a catalyst came out and the thing could really move because new players are getting involved we can see that in the volume then at most i would take off a piece of the position because i want to let the next piece run and we can let the next piece run in the form of options which helps our

risk reward because at that point we rang the cash register and now the most we could lose is our options premium right not bad not bad so now we've created a win-win because as it goes further in our direction you've got the convexity of the option position so it's moving point for point with the stock boom you've done well if it reverses against you you lose the premium but you took profits on the first piece win-win i was going to say that way you're able to not only have the learning p l in case the

position goes against you but now you're also able to have the capital uh kind of recollect or the recognition as well so that way even even if it does go eventually in the long run you're still able to mentally deal with the idea that you were correct in the short term you kind of captured your profits yep and if it goes against you after everything is all said and done you're now able to kind of balance both out by taking the um learning p l and the physical p l and that way it doesn't have

necessarily a tool and i think psychologically that consistency can work very very very well yeah um but having a strategy in your head for when you take profits when you know what you let run um what would get in the way of that would be um perfectionism so that if i don't have my total full size on you know for the whole move it's not good enough perfectionism is a habit pattern of thinking uh cognitive therapy the abcd that i mentioned works very well to deal with perfectionism but that's what we're getting away from when

we take partial profits let the rest run because we're saying for a piece of the position good enough is good enough like i don't have to be perfect i can be consistent and i can do very very well and so you're cutting yourself slack and psychologically you're creating a win-win right because i win on the small piece and if it goes my way further and it's a further win i think so many people have trouble not just making goals but just completing them i mean even with like i know new year's resolutions are hard and

stuff but um in fact so many people have issues or problems actually overcoming goals and problems in their training just in their trainings yep that's a great question and we're good at setting goals not necessarily good at reaching those uh and a big part of that is because we need not only to set goals we need very concrete plans for reaching those goals and the plans are things that we have to do daily to build new habit patterns so many times i look at a trader's journal and a trader says well my goal is to

you know i oversize positions so my goal is to you know not oversized things my goal is to not over trade and so my response to their journal is great how are you going to do that how specifically are you going to make sure you size things the right way how specifically are you going to make sure that you are taking the right trades and not over trade and how are you going to measure that and how are you going to keep score on that so many times we don't reach the goals because we don't

drill down and have very specific ways of working on those goals okay so i have a goal that i want to improve the communication in my marriage great that sounds wonderful f am i going to do that how you know how do i yeah improve the communication well maybe by spending more quality time together what does that mean how would i spend quality time together and how would we communicate in that quality time etc etc etc but i drill down so that i have very concrete things to do each day to work on the goals

every goal needs a detailed plan otherwise if you have a goal without a detailed plan what do you have wishes wishes a good intention a good intention that's all you got that's all you got and that's what a lot of traders journals are a bunch of good intentions yeah that's fine that's fine it's better than bad intentions but that's not going to change behavior well i think we're getting on in time i i want to thank everyone i want to thank smb and kurt specifically for recording this and making it available and my contact information

is available on my blog site traderfeed.org and i want to wish you the best in your trading and may you miss many opportunities and profit from many more thanks