Revenge Trading: How Can You Overcome The Most Dangerous Trading Habit?

by Tom Black
Revenge trading: how can you overcome the most dangerous trading habit

Financial market participants involved in revenge trading may have noble intentions. Who can blame anybody for trying to recover their hard-earned money after all? There is, however, a difference between trying to recover losses and refusing to lose. 

The fear of losing can cause hasty and unexpected action, which almost definitely leads to additional losses. It could affect your account badly, because you are forced to throw out your trading discipline. Your emphasis shifts from trade and good risk management to the effort to make enough money to reclaim your losses through gambling. 

Why would you want revenge trade?

You engage in this type of irrational trading to avenge your previous losses in the market. Most revenge traders barely plan the trade, and the decline deepens after they lose the revenge trade.

Revenge trade is the act of making impulsive (usually large) transactions to make up for lost money. It happens when you lose a deal, suffer a bad beat, or have a losing streak. A “bad beat” is when it feels like you should have had a profitable trade, but you didn’t, and you lost the deal.  

The trades come in many forms but do not follow a proven pattern or risk control structure. If you win, you are seduced into believing that trading on your gut feelings works, so you are lured into doing it.

Primary sources of Revenge Trading

Taking market personal

Your innate instinct tells you to recover if you lose your hard-earned possession to an opponent. This mindset could create a situation in which you try to “beat” and overcome the market after a loss. It’s revenge trading when you act on such impulse and put an order after order on the market. The main issue is that market is not your enemy. It has no purpose to steal the money from your pocket. The only rival in trading is yourself.   

Greed

You’ve had a profitable day, but there is a feeling, that you should’ve earned more? You’ve fixed your position and took some reasonable money from the table. But what if the market continues to move in your direction? The feeling of unrealized opportunities may lead to the greed awakening in you. This can create a devastating effect, as revenge trading may erase all your previous profits and cause a loss. When you experience losses, you are ready to even double or triple your stakes. Usually, this ends up with serious damage to your trading account.

To overcome this problem – just remember: no matter what direction the market is going – initiate trades and cover losses/profits according to your strategy. 

Ego

Ego is one of your biggest enemies in trading. Losing a trade is inevitable and happens to everyone even professionals, but the point is how you can deal with it.  A big ego can make you forget hundreds of successful trades and focus on a major one that went wrong. Feeling, that you’re not gonna lose a penny can make one trade a starting point of your failure if you succumb to the feeling of revenge.

Anger

Wrath and anger run-heavy, often making you double into a bad trade or switching to a new deal to return losses. Evaluation and strategy are replaced by frustration, tilt, and the need to act fast.

A revenge trader is going to dig into gambling more intensely and more in-depth. The outcome is that either he is lucky and the asset bounces back or not fortunate and has a considerable loss. Anyways coinflip is not what professional traders have to rely on.

Staying behind schedule

When you think you are lagging behind schedule, you develop a mindset that leads to unnecessary risks. It’s a wrong way of thinking when you feel like you’re too up to the mark. If you always believe that you have less, you’re going to act like you’ve got less. Remember: trading is a marathon, not a sprint. To win you need to be well prepared for a long-distance without executing “all-in” trades. 

Why is revenge trading dangerous?

The motive behind the revenge trades is usually to avert previous losses. The biggest danger here is when you get lucky and earn profits that way – it can develop a devastating habit. One day it can cause a margin call because in the long run emotional trading never ends up well.

How to defeat the habit

Shutdown Rule

It is still challenging to maintain an objective view and manage your emotions after a significant loss, even for a short time. The right course of action is to take yourself out of the market.

If you’re tempted to double your usual risk, take a day off or two from trading. Acknowledge that the money is gone and that the future attempt will have its own merits. 

Turn the volume down

Use less volume to trade with lower risk, until you figure things out. Remember, smaller stakes means lower risks.

So often, revenge trade involves a more significant stake than the first, because you want to win back what you lost and turn into profit just so quickly. The best way to do this is to increase your stake level, according to your rationale. Once more, you ignored the risk entirely.

Cue and Reward Technique

Cue and reward pattern is the backbone of every habit. A cue will trigger you to initiate any behavior. If you figure out what inner sense you are trying to satisfy with revenge trading – you can replace this habit with another reward. Angry at yourself or at the markets? Go to the gym and let the steam off! Feeling, like you’ve done everything right, but your position didn’t bring what you wanted? Feed your ego by doing something else, what you’re also good at. The best way is to mix this technique, with shutting down your trading platform for a while.

Remind yourself the chances in revenge trading (it is like playing the lottery)

The trouble with revenge trading is that it always starts a spiral. If it wins, you have succeeded by gambling, so you might attempt to replicate it again. It runs contrary to all trading rules and causes you to blow up your account. 

Just like winning a lottery, the odds of benefiting from a revenge trade is minimal. The losses can lead to even more aggrieved deals. 

The Bottom Line

Remember that all the advice will help if you implement them in your trading routine and behave accordingly. If you have a good understanding of risk management, you will find points where you no longer take risks. You should avoid making ridiculous errors and acting rationally by adhering diligently to risk structures.

Finally, it is always important to understand your triggers if you find yourself giving up profits in revenge euphoria.  

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