Much like professional sports, trading is a high-perfor\u0002mance activity. Traders need to be in their best possible state of mind both emotionally and psychologically, and their cognitive thinking must be free of bias or prejudgment. There is a fine line between calculated risk-taking and gambling. Traders need to be aware of and in control of some of the basic and instinctive emotions (such as fear, stress, and anxiety) that have saved humans from dangers through the centuries but can be destructive in modern life. Psychological challenges in trading are not only constrained by our instincts, but also can be affected by the influences of peers, family, and society in general. Similar to traffic jams, greed is a by-product of human civilization, and it can be extremely dangerous for traders without a keen understanding of the role and significance money plays in their lives.
FEAR OF MISSING OUT Fear of Missing Out, or FOMO, is perhaps the deadliest of all trading sins that one can make. It is wishful thinking, and it can be a very costly trading mistake to jump into a trade before a pattern has either formed or been confirmed. It can also be a very costly trading mistake to chase a pattern that is discernible but is not offering a good risk to reward opportunity. FOMO can strike at any time: in the seconds and minutes involved in the decision-making process of a single day trade; in considerably longer time frames such as when one is swing trading; even during the unfolding of a once-in-a-lifetime stock market event.
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As I wrote in another one of my books, I am sure many readers remember the tulip mania of Bitcoin at the end of 2017, when the price of Bitcoin reached almost $20,000 and then collapsed significantly. The term tulip mania refers to a period in the 17th century, during the Dutch Golden Age, when the Netherlands was the worlds leading economic and financial power. At that time, the prices of some fashionable tulip bulbs reached extraordinarily high levels and then, in February 1637, dramatically collapsed, essentially becoming the first recorded speculative bubble (a situation when the prices of assets or commodities deviate considerably from their real intrinsic values). Tulip mania, similar to the cryptomania craze of 2017, was more a socio-economic phenomenon than an economic issue or crisis, as tulip bulbs were not a significant part of the Dutch economy, just as cryptocurrency is not (or not yet at least!) a significant part of our global economy.
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Similarly, in 2017, ordinary people, uneducated investors, and people with limited financial literacy were rushing to buy cryptocurrencies. The market was unbelievable. The blockchain stocks were the hot new thing. The value of companies who simply mentioned the word blockchain in a press release would skyrocket. For example, a company named Long Island PSYCHOLOGICAL HAZARDS IN TRADING 173
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PSYCHOLOGICAL HAZARDS IN TRADING 172 173 Iced Tea Corp. (ticker: LTEA) changed their name to Long Blockchain Corp. (ticker: LBCC) and decided to shift their focus from beverages to blockchain technology. The stock ran nearly 500% in a single day (see Figure 3.2 below). Figure 3.2: Long Island Iced Tea Corp. ($LTEA). In 2017, the corporation rebranded as Long Blockchain Corp. ($LBCC) as part of a corporate shift toward exploration of and investment in opportunities that leverage the benefits of blockchain technology and reported that they were exploring blockchain-related acquisitions. Rational? No, but this was the theme at the time, as many blockchain stocks were experiencing similar moves. Many traders were victims of the cryptomania craze, investing perhaps a lifetime of savings into something for which they had developed absolutely no risk management plan.
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