Revenge Trading

• Revenge trading is the impulsive act of entering new trades after a significant loss, driven by the desire to quickly recover losses, often leading to irrational decisions and further financial setbacks.
• Revenge trading is driven by emotions like anger, anxiety, and greed. It often leads to irrational decisions, such as increasing position sizes to recover losses.
• To prevent revenge trading, traders must keep their emotions in check, stick to a well-defined trading plan, and develop a healthy perspective on losses.

Revenge trading happens when a trader ends up making huge losses, and then, to make up for the losses, they enter into a new trade without thinking it through. Revenge trading is generally an emotional reflex in the form of anger to recover significant losses by putting your money in a trade that you believe will win.

However, the market does not operate in this manner. More often than not, a winning trade turns into another loss, which becomes way bigger than the earlier one, making it hard for the trader to recover.

Revenge trading is generally driven by strong emotions and surges of feelings of anger, rage, anxiety, guilt, and greed. Often, traders who engage in revenge trading increase their position size, sometimes doubling or tripling, believing their next trade will be a winner. This leads the traders to behave irrationally, and most traders have had to face this in their trading journey at some point in time. Revenge trading affects not just newcomers but also experienced traders.

For some traders, it is difficult to accept that they have lost a trade, and instead of accepting the loss, they try to enter into another trade right away as revenge. Another common cause of revenge trading is the shame and fear one may experience when facing clients, friends, family members, or peers when they discover the loss. Saving face becomes important for many traders as it can harm their reputation of being a good trader.

Since many traders are motivated by emotions and unaware of the potential risks, they succumb to revenge trading. The first and foremost risk is the possibility of losing all your capital on a trade that you could have avoided otherwise. The second type of risk that traders need to be aware of is that they may start doubting or lose faith in their trading skills after suffering one loss after another, which could impact their confidence. It might take a while before the trader can trust their abilities again.

Revenge trading often leads to an emotional rollercoaster where the trader enters a new trade with a lot of hope to turn their losses into profits. However, the market takes a sudden turn against your holdings, and you are left with frustration and despair. What is most difficult is that once the storm is over, you will have to start rebuilding your account balance from scratch again, along with your confidence.

Hence, it is critical to stay in control of your emotions and not get controlled by them while deciding, as it may lead you to forget all the rules in the book and disregard all the best practices, like entrance and exit strategies. Since you want to beat the system, you also end up not paying any heed to the management of risk.

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.

To stay away from the temptation of revenge trading and maintain a balanced outlook, it is important to be disciplined and keep your emotions in check. If you do not have discipline, you can get distracted easily and make the wrong decisions due to unchecked emotions.

Here are some ways to better manage your emotions during revenge trading:

• Devise a detailed plan for your trading and stick to it at all times, be it fluctuations or when you have made a good trade. Do not get carried away.
• Accept a healthy perspective when dealing with losses. You have to realise that losing at times is a part of the trade. You accept it, reflect on the mistakes, and move on.
• Determine what would be the right time for you to stop when you make losses consistently. Ideally, it is recommended to take a break after 3 trades that did not work in your favour and then come back with a fresh perspective.
• Also, be aware of market conditions. When the market's timings are not right, do not forcibly try to enter into trades that are not practical.
• Reduce the size of your trades to combat the emotional effects of reenge trading.
• Try to maintain a trading journal to plan for different scenarios and outcomes.

 
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