Considering the harmful effects of revenge trading, traders must take proactive steps to prevent it. Drawing on insights from various trading coaches and psychologists who have guided countless traders, here are five practical strategies to combat the urge for revenge trading.
1. Take a temporary break
After a significant loss, it is challenging to remain objective and keep emotions in check. The most practical approach is to take a step back from trading, even if only for a short while. This break allows you to clear your mind and regain composure. Whether it is taking a day or two off, pausing your trades, or limiting yourself to small trades, stepping away from the market can be immensely beneficial. During this time, you can also consider revising your trading plan, focusing on how you will proceed after the break.
2. Conduct a self-assessment
Once you have taken a break from the markets, it is time to evaluate what led to the loss and the subsequent impulse to engage in revenge trading. According to Dr. Brett Steenbarger, a noted expert in trading psychology and author of ‘The Psychology of Trading’, self-awareness is key to overcoming revenge trading and other difficult trading challenges. He emphasises the importance of stepping away from the screen to objectively analyse the situation and understand the root causes of your decisions.
3. Evaluate market conditions
Take a close look at the current state of the markets:
- Are the markets excessively volatile?
- Are clear trends or trading opportunities lacking?
- What factors are influencing the market that might make trading particularly challenging right now?
- Major economic events, such as FOMC meetings, OPEC announcements, and central bank decisions, can create significant volatility, sometimes making it practical to refrain from trading until conditions become more stable.
4. Review your trading strategy
It is equally important to assess your trading strategy to determine whether it aligns with current market conditions. This review gives you the chance to make any necessary adjustments to your trading approach. Evaluate your entry and exit strategies:
- Do you have a solid exit plan in place?
- Did you adhere to your exit strategy?
- Was your entry based on a strong setup, or did you force the trade?
- This reflection will help you refine your strategy and enhance your decision-making process.
5. Implement adjustments
After conducting these assessments, you will be in a better position to adjust your trading strategy or procedures as needed. This may also be an ideal time to refine your trading routine, identifying areas of strength and weakness.
In ‘High-Performance Trading’, author Steve Ward recommends that traders develop a ritual for managing losses. He shares a four-step strategy inspired by Jeffrey Hodges’ book, ‘Sportsmind’:
- Acknowledge that the trade did not go as expected.
- Absorb the feedback and lessons learned, then mentally discard the trade.
- Visualise how you wish the trade had unfolded.
- Affirm your commitment to applying this approach in future trades.
