You would think that since revenge trading has been around for so long, investors would know how to avoid it. The truth is that revenge trading is challenging to avoid because you frequently aren’t aware of it until your losses start to mount. Having the self-control to stay out of these situations when they arise is crucial.
Even though many traders might not acknowledge it, the majority of traders have fallen victim to revenge trading at some point throughout their trading careers because it is one of the most frequent trading errors.
In this revenge trading guide, we’ll explain what exactly this characteristic is, why it occurs, and the most efficient tactics to avoid falling victim to it.
How does revenge trading work?
In revenge trading, you place one or more trades in an effort to make up for a big loss from a prior trade.
Our inclination is to attempt to recover lost money when we lose money on a contract. There are moments when our desire is so intense that we behave irrationally. While neglecting our tried-and-true trading strategies, we are placing larger trades. People consequently take rash actions in an effort to get “revenge” on the market.
You already know that irrational trading almost usually has a negative outcome. Your impulse to exact revenge on the market for stealing from you may grow stronger the more substantial the loss. This idea doesn’t just applicable to trading. Anything undertaken in a fit of fury or frustration is unlikely to succeed.
So, vengeance trading is when you place order after order on the market repeatedly in an effort to make up for prior losses. The problem is that your trading capital takes the brunt of the blows, not the market.
The more you try to fight your way back into the market, the more it will drain you because you are trading on emotion rather than strategy and discipline. Eventually, what might have been a one-time loss turns into a trading account that is substantially depleted or the dreaded margin call.
Why do we revenge trade?
Although many traders may contest it, the truth is that at some point throughout their trading careers, they have all been a victim of revenge trading. So why do we do it when we are fully aware of the devastating effects it would have on our bottom line?
It’s easy; we’re all just people! Our emotions and instincts serve as our guides when making judgments. A loss in the forex market can naturally cause emotions like fear, fury, remorse, and greed. We let these emotions influence our behavior even when some of them are unreasonable.
Most individuals think that risk and reward are constants that they can know for sure and without a shadow of a doubt. But in reality, things are rarely that simple, and it’s impossible to avoid having emotional responses to wins and losses.
Additionally, unpredictability is a constant in the market. A security’s price may have fallen, but that doesn’t mean it won’t climb again in the ensuing trading session. Despite your sadness about the previous setback, there is always a chance that things will improve. This temptation causes uninformed traders to be tempted to go all in and revenge trade.
What are the dangers of revenge trading?
Unfortunately, most inexperienced traders are easily seduced into revenge trading since they are unaware of the risks. The most evident is that you run the risk of investing all of your trading capital in something you ought to have refrained from.
Retaliation trading also has the potential of making you doubt your trading skills. A series of significant losses can seriously undermine your confidence. This kind of experience could stay in your memory for days.
You start off full of hope, but then the market turns against you, leaving you with despair and desperation. It’s an emotional rollercoaster. The worst part is that you’ll have to regain both your confidence as a trader and your account balance when you return to your senses.
Never make a trading decision based solely on your feelings. It makes you reject time-tested techniques like entrance and exit methods. Plus, since you’re trading to beat the system, you can disregard good money management.
How to avoid revenge trading?
Losses in trading are nearly often the result of lack of discipline. The following tips will help you establish and maintain trading discipline.
- Keep to the trading timetable. Once you develop the habit, it controls how you place trades in the market.
- Keep to tried-and-true trading strategies. It’s might be normal to occasionally take a calculated risk, but only on little trades with negligible loss.
- Learn to recognize patterns in trading. You may quickly become distracted by too many social media sites and platforms, which could lead to irrational trading judgments.
- Accept the fact that losses are inevitable. Even the most seasoned traders have bad trading days. The distinction is that they don’t make an effort to exact retribution.
- Recognize when to stop. Don’t try to force transactions when it’s clear that what you’re doing isn’t working.
What is revenge trading in brief?
In the financial market, revenge trading is not a viable trading strategy. It entails making an effort to turn a profit right away after suffering a loss. Even though it might result in some short-term gains, it is not a smart middle- and long-term trading strategy. Trading itself is challenging enough. Successful traders enter each deal with a calm, measured mindset. There’s no need to make matters more complicated by letting negative feelings affect your trading choices. If you can learn to regulate your emotions, you’ll never have to worry about revange trading.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.