This article will provide beginner traders with a clear definition of revenge trading, as well as a full breakdown of the meaning of revenge trading, reasons for why traders should avoid it, and how to overcome it, with expert tips on anticipating and avoiding revenge trading.
What is revenge trading?
Put simply, revenge trading refers to the situation wherein a trader makes a significant loss, and instead of choosing to revise their existing strategy, they choose to keep trading, in an effort to recover their losses. This inevitably leads to even higher losses as a result.
Typically, there are two main scenarios that tend to occur when traders choose to use revenge trading.
They will either:
- Lose even more money than they had originally intended to risk.
- They will achieve a small bit of success in terms of a few winning trades - but these trades simply reduce the overall losses they have made.
How to overcome revenge trading
Here you will find a few brief tips that will prevent you from falling into revenge trading, and will save your capital.
Walk away from trading
Perhaps the hardest, but most logical initial step is to simply walk away. The stop loss that is placed on every trade is placed there for a reason, so it's a good idea to get into the hang of committing a certain amount of capital that you are happy to risk (i.e. that if you lose, it would not be completely disastrous for you).
Moreover, one must understand that revenge trading in forex and other similar markets is a surefire way to lose capital even quicker, due to the fast and fluctuating nature of the market. Traders should get used to the idea that they will make losses from time to time, and simply factor this into their existing strategies, rather than panicking at the sight of potential losses.
Making losses is a part of the trading game, but revenge trading is not a strategy or a logical move in response to making losses. It is based entirely on ego and emotion, and therefore, cannot be something that traders choose to implement. That is, if they wish to become successful traders.
Remember, once you commit to revenge trading, you are essentially gambling your money away, without a strategy, and ignoring the concept of risk management within your trading. Therefore, you are simply gambling with luck, and you are no longer trading.
So instead, why not try leaving the room and doing something completely different? Getting your mind off of trading in the process. Once you have returned to a normal state of mind (free of the negative emotion gained through making losses), you can return to trading with a fresh, positive mindset.
Finally, before we move on. It might also be worth avoiding trades entirely if you start feeling negative emotions before major trades. For instance, if you are feeling anxious, panicky etc, this might be a good time to walk away and return later.
By doing so, you can prevent yourself from committing to trades when you're in an emotionally compromised state of mind, and therefore, more likely to revenge trade.
Learn from your mistakes
A simple concept, but often, simple is best. Analyse the data from your trading losses. Try to understand exactly what happened. Ask yourself: 'Why did I lose the trade? What could I have done to prevent it? Is there something missing from my trade?'
By fully understanding the nature of your losses, you can make sure you avoid making the same mistakes again in the future. Furthermore, you'll be able to identify similar trading patterns in the future, and should hopefully be able to anticipate them, and avoid them.
With MTrading, you can open a demo account for free, and can trade with virtual funds, using real-time trading information.
By doing so, you can avoid putting your capital at risk, until you are absolutely ready to put your strategies to the test in the live markets.
Identify your trading triggers
This might sound like a strange one, but there will likely be 'trading triggers' that occur for you personally whenever you're about to make a big trade. It could be completely unrelated things such as 'snacking excessively', consuming a lot of coffee etc.
Pay attention to the things you are doing and thinking when you are about to make big trades. By understanding and controlling these 'triggers', you might be able to avoid revenge trades, by identifying the 'warning signs'.
You could keep a trading 'log' or 'journal' that keeps track of such things. This way, you could refer to this on a regular basis in order to remember and reassess your behavior during trading sessions.
Revise the trading system
If you don't have a trading system, that's your first mistake. But if you do have one, spend time figuring out why the system failed you in this instance. Perhaps it was your use of the strategy that led to the loss, or perhaps you need to use an entirely different strategy in order to achieve success in the future.
You can figure this out by looking at basic questions such as: Is this system working? Have I made winning trades in the past by using it? If you had followed the strategy completely (through the losing part and onward), would it have made a difference? Could it have been better if you had stuck with it?
You might be tired of hearing these two words by now, but risk management is what separates the very best traders, from the rest. Even if an upturn might be on the horizon, the top professional traders know exactly the point at which they need to end the trade.
This is the best way to avoid revenge trading. Know exactly when you should continue, and exactly when you should pull out of the trade. Stick to your risk management strategy strictly, and you'll avoid huge losses. By implementing proper risk management, you can potentially maximize your potential of winning, and reduce your chances of losing.
No one wants to lose, and everyone can identify with the euphoria of winning. But remember, trading deals with numbers. Numbers are absolute, and therefore, your emotions cannot change them.
You must have your ego in check, and be in complete control of your emotions during a trade. By doing so, you'll be one step ahead of the markets, and you'll know when it's the right time to push forward, and when it's the right time to walk away.
The markets are not against you, and you must never take losses personally. This is why there are so many trading articles on 'trading discipline', because maintaining control of yourself is equally as important as the trading strategies you use. After all, your mindset will determine your actions.
Testing your strategies
If you feel confident enough that you have understood revenge trading and how to avoid it, the next sensible step for you might be to test your strategies out with a demo trading account. Demo trading accounts are not just intended for beginner traders either!
If you are regularly testing out different strategies, it's completely logical to do so in a risk-free trading environment first, before moving to the live markets. We wish you a good trading luck and looking forward to see you trading with us.
Want to get more prepared for real trading? Read our article about position sizing on Forex.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.