Blog #4 FOMO – when is it useful

Firstly apologies to my regular readers (do I have any yet – if so, leave me a comment below 😊). The Easter weekend has seen me focusing on family, and the creation of this blog post has taken a distinct second fiddle.

Anyway, on with the post.

Upfront in this post I talk about ASX:88E – the Author at time of publication does not hold a position in 88E and this post does not make any recommendations for anyone reading this to take a position. Please do your own research and make your own decisions as to what do with a stock like this.

So in my last post, I talked about FOMO and how managing your emotions in this aspect is an essential aspect for a consistent trader to control and provided some techniques for this
This week I'm going to talk a bit about how you can use FOMO to your advantage (well, at least how I do it). Specifically, I'm not talking about your own FOMO but that of the market. For context here, I genuinely believe the primary driving factor for the market is participants' emotion, and if you can understand this, you can work it into your trading system.
Lately, I've seen a lot of talk and chatter about a small-cap stock, 88 Energy (ASX:88E), a small oil producer (once again technical trader here, so really understanding the specifics of the company isn't my thing). The stock itself has been on a wild ride over the last few years, and it's popped up on my scanner for unusual volume a couple of times now.
As such, I decided to take a stab at trading it. Once again, for context, this is a stock I've traded before, and if I look back through my records, I have made money off before. In the past, I probably would have traded this stock in large lots of 50,000 to 100,000 shares (or larger), hoping to scalp a $0.001 off the trade. Nowadays, I'm more sophisticated (I think…) and manage my risk differently (more on that later).

So why's this a FOMO trade? Well, if you look at the chart, you can see the stocks been a real bull run from the start of March 2021, where it was trading sub 0.02, and it closed last Thursday at 0.073 (1 April 2021). A nice 3 bagger if you were in it Feb 2021. So essentially, I've been watching the charts and seeing print new highs and I've also seen increasing mention of the stock on various stock groups and forums. Both these tell me that there is plenty of FOMO trading happening.

For me the stock meet my long entry criteria at around $0.050 and bought in; I looked at the daily movements and determine my risk level and chose the position size (I think about 10k shares from memory), and took the trade, given the growth of the price I took a smaller position that I would usually take and then compounded as the price rose. By focusing on my entry criteria (i.e. my plan), I ensured that I was falling for a FOMO trade but taking a trade that met my rules. In the end, I got out for around 2x my initial when the price pulled back sharply, hitting my trailing stop.

As mentioned previously, I would traded this stock differently in the past and taken a lot more risk. In this scenario, the old me would have been day trading (or at most T+3 as it was then) the stock looking for a small scalp trade. I was doing this as I took big positions based on the hope that I would never actually need to settle the position. I think my broker loved me, and when I changed strategies, I actually got a call asking me why I had stopped trading  (I think I was one of the more active – top 20%, if memory serves – traders on their platform). This meant that I would sometimes be in and out of position in minutes.

The pros of this approach were:

• Didn’t need the cash to open the position
• Was taking advantage of the momentum
• Was quick
• Made decent money (at least sometimes…)

The Cons were:

• Risk management was difficult (the mobile platform I used didn’t allow trailing stops)
• Trading was unplanned
• Position sizing was undisciplined
• Could only hold the trade for a brief period.
• Trading performance was inconsistent.

In summary the trades often worked, but given the speeds that some these small caps pump and then dump, when your trading 100k+ shares, quick moves of 0.005 can be both very profitable and very devastating.

These types of trades have given me some of my greatest lessons learnt that I have now built into my trading rules.

• Plan the trade before I execute it (this to me doesn’t necessarily mean that its in my trade log plan the night before). What it does mean is that before I open the trade I take the time to look at the chart, look at the volatility, determine my stop and then determine my position size.
• Set a stop, before I open the position.
• Only risk 0.25-1% of available trading capital (ie not including open profits) for any trade.

So pros to taking a trade like 88E now are:

• I can still take a position quickly
• I know what my risk is upfront
• I can make decent money
• Trade is planned
• Odds are more in favour (after checking the chart)
• I’m not going to blow up my account if I get it wrong
• I can capture more of the trend.

Cons:

• I can’t trade using the brokers money
• I’m not going to make massive returns per trade.

So in summary, I’ve learnt a lot over the last few years and I can now respect FOMO, I understand it myself and I know how to take advantage of it in other market participants.

Happy trading.

​Nick the Trader Guy
April 21

​Post-Script:
Since drafting this blog post (on Monday 5 April) 88E has had a spectacular fall from grace (something to do with a well in Alaska not producing anything I think) and ended the day down around 65%. To me this highlights the risks with these types of stops and why position size and risk management is so important
 
Also, I have to admit I did briefly trade 88E today on the rebound and exited for a small profit – this was a bad trade as it wasn’t in plan. More on that in another post.