Revenge trading has been around for so long you’d think traders would be more adept at avoiding it. The reality is that revenge trading is not so easy to avoid because, in most cases, you don’t even know you’re doing it until your losses start piling up. That’s why it’s essential to have the discipline to steer clear when these situations arise.
Revenge trading is when you take on one or more trades in an attempt to recover an initial relatively significant loss from the previous trade.
When we lose money on a trade, the instinct is to want to get it back. Sometimes, the urge gets so overwhelming that we start to act irrationally. We place increasingly larger trades and ignore our proven trading strategies. The result is acting on impulse to get “revenge” on the market.
As you probably already know, irrational trading will almost always end badly. The higher the loss, the harder you may want to hit back at the market for taking something of yours. This principle doesn’t apply to trading alone. Anything done out of frustration or anger is unlikely to end well.
So basically, revenge trading is when you are driven by emotion to pound the market, order after order, all in a bid to recover your previous losses. The problem is that it’s never the market that takes the pounding but your trading capital.
Because you are acting on impulse and not backing your trades with strategy and discipline, the more you attempt to get back at the market, the more it will take from you. Eventually, what could have been an isolated loss becomes a severely diminished trading account or the dreaded margin call. As one well-known trading coach put it:
the markets are unforgiving, and emotional trading always results in losses.”
Many traders may not admit to it, but the fact is most of them have fallen into the trap of revenge trading at some point in their trading journey. So why do we do it, knowing full well it can significantly harm our bottom line?
It’s simple — because we’re human! We are driven by instincts and emotions when making decisions. Fear, anger, shame, greed — these are all-natural emotions after losing money in the market. Some of these sentiments might not be rational, but we allow them to dictate our actions anyway.
Most people think risk and reward are things they can perceive with absolute certainty all the time. But the reality is that things are never that simple and emotional responses to wins and losses are simply unavoidable.
Additionally, there is always uncertainty in the market. Just because the security price dropped doesn’t mean it can’t go back up and keep rising within the next trading session. While you might despair over the previous loss, there’s always hope that it will bounce back. This temptation makes uninformed traders want to go all in and revenge trade.
Example of Revenge Trading
Let’s say a trader is holding a long position in the GBPUSD currency pair at 1.4200. The price is falling, and their floating trading losses are increasing. Their stop-loss order is placed at 1.4000, and the price keeps falling, leaving the trader with a loss of 200 pips.
At this point, the trader could decide to accept their loss and exit the position or patiently wait for signs that things will turn around. But they are so consumed with anger at the market that they don’t even take the time to analyze it before placing another trade.
Their trading strategy goes out the window, and the only thing they want is to recover the loss. So the trader opens another long position with the same currency pair and in the same direction at 1.3900 based on the hope that the downturn will reverse since the prevailing belief is that what comes down must eventually go back up.
But then the GBPUSD drops down another 200 pips, and the trader is now left with a total loss of 400 pips. Now they think perhaps it’s time to call it a day, so they exit the position. A few moments later, the price recovers and glides past the 1.4200 level. It’s a trading catastrophe.
The above scenario is a perfect example of how not to trade. It also fittingly demonstrates the expression, “A moment of patience in a moment of anger saves a thousand moments of regret.”
What are the Dangers of Revenge Trading?
Unfortunately, most new traders are easily drawn into revenge trading because they’re unaware of its dangers. The most prominent is that you could wipe out all of your trading capital on a venture that you should have avoided.
Another potential danger of revenge trading is that you could also lose your confidence as a trader. Sustaining a series of heavy losses can immensely drain your confidence levels. This kind of experience can stay with you for days.
It is an emotional rollercoaster where you start off brimming with hope but then the market turns against you, and despair and desperation set in. The worst part is that when you come to your senses later, it’s not just your account balance that you need to rebuild but also your confidence as a trader.
Trading based on emotions is never a good idea. It makes you neglect proven methods like entry and exit strategies. Plus, you banish any thought of risk management because now you’re trading to beat the system.
How to Avoid Revenge Trading
The truth is it can be tough to ignore the impulse to revenge trade. But it’s not impossible. Here are some proven ways to help you avoid emotional trading and prevent compounding losses.
Just walking away is perhaps the most challenging way to avoid revenge trading. And yet, it is also the most logical. Simply walk away from trading at that moment. If you already set your stop-loss and it triggers, take the loss in stride and turn your attention to other important matters for the day.
It’s particularly challenging when trading in a highly volatile market like forex, cryptocurrencies, or derivatives. As much as possible, get used to the idea that losses are unavoidable in the market. Factor this into your trading strategy so you can keep a cool head when it occurs.
Remember Your Roots
Never stray from your trading strategy. You created it to be a roadmap to help you navigate the market. Why would you immediately abandon it just because your position turned sour?
It’s okay to feel angry or frustrated after sustaining a loss in the market, but that’s not the time to do something rash. Instead, it’s time to refocus by reviewing your trading strategy and see if there are areas you can improve. Go back to the drawing table, recheck the charts, plan entry and exit points — anything but a revenge trade.
Learn From Your Mistakes
Take the time to understand the nature of your losses. This way, you can avoid making the same mistake twice. More importantly, you’ll be able to spot similar patterns when trading in the future.
It’s a simple enough concept, but you’d be surprised at how many traders (especially newbies) fail to adhere to it.
Know Your Trading Triggers
Every trader likely has a set of triggers that push them to act irrationally. Some of these triggers could even be completely unrelated to trading. When you know these triggers, you know how to anticipate them and deal with them without taking them out on the market.
Perhaps you’re just having a particularly tough day, and then this latest trading loss comes along. If you’re already on edge or battling with negative emotions, best to take a break from trading and return later when the feeling has passed.
How Do You Stay Disciplined When Trading?
Trading without discipline will always result in poor performance. Here are some helpful tips to help you build and maintain trading discipline:
Stick to your trading routine. Eventually, it becomes a habit that dictates how you place trades in the market.
Don’t deviate from proven trading methods. It’s ok to test your luck every now and then, but only for small-sized trades where potential losses are negligible.
Learn to identify market noise. Too many chat rooms and forums can easily sway your focus and lead you to trade irrationally.
Accept that losses are inevitable. Even the best traders have a bad day in the market. The difference is they don’t go about trying to take ‘revenge.’
Know when to stop. Don’t try to force trades, especially when it’s clear that what you’re doing is not working.
Trading is already challenging on its own. Successful traders always enter each trade with a cold, calculated mentality. There’s no need to complicate things further by allowing negative emotions to dictate your trading decisions. Learn how to keep your emotions in check, and you’ll never have to worry about revenge trading.