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.
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