Many traders are their own biggest enemies when it comes to their accomplishments as they often use their losses as fuel for anger and frustration that results in revenge trading. Revenge trading is one of the deadliest sins in the trading industry and a big challenge for forex traders. This detrimental behavior can result in significant financial losses and harm a trader’s mental well-being, setting off a vicious cycle of impulsive decisions and further losses.
Revenge trading has existed for as long as trading has, so it is a well-established practice. You would think that traders would be more adept at avoiding it, yet it still rears its bad head and can even damage trading careers in some instances.
Here is a detailed look at what revenge trading is, why it devastates traders so much, and how you can stop revenge trading if it ever happens to you.
What is Revenge Trading?
Revenge trading, in essence, is an act of recovering losses incurred from a bad trade by immediately entering a new trade without a clear trading plan or strategy. It is driven by powerful emotions, such as disappointment, anger, shame, greed, or frustration, to recoup losses. These emotions impair judgment and override logical decision-making, often leading to more financial setbacks and irreversible damage to a trading account.
While revenge trading may appear like a trap only new traders would fall into, this is not always true. Even experienced traders with decades of experience can fall victim to this dangerous habit.
The Downward Spiral of Revenge Trading
Revenge trading can result in greater and more frequent losses. Revenge traders frequently double or triple their trading position in the hopes that the next trade will be successful.
Unfortunately, these trades frequently end up in even more significant losses due to the absence of proper analysis. Additionally, a trader’s reputation can be damaged, which can cause them to dread “losing face” in front of their peers, especially if they have established a reputation as a successful trader.
Why Revenge Trading is so Disastrous for Your Results?
Revenge Trading spells disaster for your trading capital. Trading is a high-risk activity, even slight changes in the market have the potential to turn a lucrative trade into a loss. Losses are an inherent aspect of trading and a trader’s cost of doing business. The problem occurs when traders get too emotionally attached to the market, fail to adequately manage their losses, or don’t follow their trading strategy when markets affect their trades.
Revenge trading can cause other lingering problems.
- You trade according to emotions instead of carefully worked out strategy and logic. This will never work and can eventually lead you to lose more money in the heat of the moment.
- You will lose track of any entry and exit strategy you may have created. These can have worked well for you in the past and kept you safe, however, these can be forgotten when you revenge trade.
- All notions of risk management will be abandoned as your mind turns to how to go around the system.
It’s crucial to keep in mind that giving in to revenge trading can lead to a very unpleasant day. You’ll ultimately trade “how you feel,” which equates to nothing more than financial gambling.
Why Does a Trader Revenge Trade?
To avoid revenge trading, it is important to understand its root causes:
- Emotional Rollercoaster: Revenge trading frequently happens when emotions are high. Impatience, shame, anger, or frustration can cloud judgment and result in careless trading. After a significant loss, traders could become angry with the market and give in to greed in the hopes of a speedy rebound. A trader may also turn to revenge trading as a result of fear or embarrassment. Traders may make rash and ill-considered trading decisions that further sink them into the loss pit due to their fear of recognizing and accepting a loss as well as embarrassment from others discovering their shortcomings.
- Inability to Accept Losses: Traders who experience difficulty with revenge trading may have trouble accepting losses. They seek instant gains rather than accepting that losses are a part of investing.
- Overconfidence: Overconfidence in one’s trading skills may result in excessive risk-taking. Traders can falsely believe they can instantly recover losses, resulting in revenge trading.
- Fear of Missing Out (FOMO): Traders may immediately jump into the market even when it goes against their plan out of fear of losing out on lucrative trading opportunities.
- Lack of Discipline: Usually, revenge trading results from a lack of discipline and commitment to a well-considered trading strategy. Strategy is replaced by rash judgments.
How to Avoid Revenge Trading?
Revenge trading can be difficult to avoid, however, with a long-term perspective, self-awareness, discipline, and dedication, it is possible. The following strategies are some of the most effective ways of avoiding revenge trading:
Take a Break
After experiencing a loss, it is necessary to step back from the markets. A temporary break may help clear your mind, reset your emotions, and enable you to approach the trade more objectively.
The idea is to stop trading until you are convinced that you are not in an emotional state and your next trade is not an angry one. In case you lose money just accept that money is gone and the next trade you will make will be based on its own merits and not on the results of the previous one. This is the only way to progress and achieve long-term success.
Develop more Awareness
Recognize your emotional triggers, behaviors, and thoughts while trading. Identifying the signs of revenge trade is an important step to stop it. Notice when you feel frustrated, ego-driven, or angry and how they impact your decisions. You may maintain a trading journal to record your emotions, thought processes, and trades to help check your trading psychology.
Conduct a Self-Assessment
Once you regain composure, asses the decisions that prompted towards revenge trading objectively. Identify the cause of the losing trade, review the trading plan, and learn from your past errors. Besides, check whether you carried out your plan, executed your strategy, and adjusted for the market conditions. Assess your performance using objective data, such as statistics, charts, and indicators. Focus on long-term targets instead of short-term losing trades.
Develop a Robust Trading Plan
Trading plans are crucial for any trading strategy. Devise a clearly defined trading plan that incorporates entry and exit points, risk management techniques, and a realistic evaluation of profit targets. Stay true to the plan even when things are difficult.
Seek Support
Assemble a network of traders who share your values or look for mentors who can offer valuable guidance and a fresh point of view to prevent rookie mistakes. Moreover, sharing insights and experiences can help build emotional resilience.
Practice Discipline and Patience
Revenge trading often results from the burning desire for quick gratification. Embrace trading discipline and patience that involves waiting for the appropriate setup that aligns with the trading technique.
Manage your Risk
Managing risk is another effective method a revenge trader can use to combat this devastating path. It is what separates the successful traders from the rest. Even in cases where an upturn appears imminent, top expert traders know when to exit a transaction. Therefore, it is essential to adhere to risk management rules by establishing stop-loss orders and sticking to position size limits.
Determine how many losses you can sustain in a day or in a row before you give up trading. For instance, you quit trading for the day if you lose two consecutive trades or 2% of your money. This 2-strikes rule helps you avoid overtrading as well as risking too much.
Reduce Your Trade Size
Another way for a revenge trader to control risk and lower the harm caused by revenge trading is by decreasing the trade size. The idea is never to risk more than you can bear to lose. Therefore, you should risk only a minor amount of your account on a given trade.
Demo Trading
You can improve your trading techniques and develop discipline by practicing trading in a demo account. This will allow you to protect your real capital.
Employ a Positive Market Metaphor
Select a metaphor, which helps you see the market positively and constructively instead of in a destructive and negative way. For instance, you can view the market as a partner, an instructor, or a game instead of an adversary, an opponent, or a place of conflict.
Conclusion
Revenge trading is a formidable enemy in the trading business that can destroy the career of even the most successful traders. Traders should learn to control this emotional response and accept the losses as a part of the trading routine. By comprehending its reasons and implementing practical solutions, you can safeguard your trading account and begin a more prosperous trading journey. Keep in mind that trading is a long-term game where your success is more dependent on your overall discipline and attitude to trading than it is on any one trade.
