What Is Revenge Trading?
Revenge trading is when a trader takes on bigger and riskier trades in an effort to quickly recoup losses from previous trades. It is motivated by a desire to make up for previous losses.
This approach is only successful if the subsequent trade results in a profit, but as all traders know, the market is unpredictable. It is not guaranteed that a winning trade will always happen and the next trade could also end up being a loss. This will lead to an even greater loss for the trader in the process of revenge trading.
Why do traders revenge-trade?
Traders may engage in revenge trading as a result of their emotional response to a significant financial loss. The natural instinct to recover a loss can lead a trader to quickly jump back into the market, with a desire to recoup their losses as soon as possible, without taking the time to reflect on what went wrong and come up with a solid plan for moving forward.
This emotional drive and the desire to recoup a loss can override rational decision making, leading the trader to make impulsive and often risky trades.
Why should traders avoid revenge trading?
Revenge trading is driven by emotions and can lead to detrimental outcomes. Although the motivation may be to recover a loss, it is important for traders to avoid it as it may result in even greater financial losses than the original one.
Traders should avoid revenge trading as it is not a profitable strategy and it can cause them to overlook other potential trading opportunities. The drive and emotions associated with trying to recoup a loss can cause a trader to become too focused on the same market and ignore other possibilities.
When engaging in revenge trading, a trader disregards logical reasoning and allows emotions to guide their actions instead of adhering to their trading plan. A trading plan is a result of research and serves as a guide for making the most out of trades by taking into account factors such as risks, goals, and time horizon. By disregarding their trading plan, a trader exposes their investments to unplanned and unmitigated risks.
How can traders stop revenge trading?
Stick to a trading plan: A trading plan is a product of research and serves as a roadmap for making the most out of trades while taking into account risks, goals, and time horizon. By sticking to a trading plan, traders can avoid the emotional impulse to recover a loss and make logical, informed trades.
Take a break: After experiencing a significant loss, traders should take a break and step away from the market. This will give them the time to reflect on what went wrong and come up with a plan for moving forward.
Seek help: Traders who are struggling with revenge trading should seek help from a professional, whether it be a therapist, coach or mentor. They can help traders understand and manage their emotions, and develop a plan for moving forward.
Focus on the process: Instead of focusing on the outcome of a trade, traders should focus on the process of trading. This means focusing on the analysis, risk management, and execution of trades rather than the potential profits or losses.
Be honest with yourself: Traders should be honest with themselves about their emotions and their ability to make logical trades. If they find themselves struggling with revenge trading, they should take the necessary steps to address the problem and avoid making impulsive trades.
Conclusion
Revenge trading is a common problem among traders, especially those who have recently experienced a significant loss. The emotional drive to recover a loss can lead to impulsive and risky trades, which can result in even greater financial losses. However, there are ways for traders to overcome this problem and avoid the trap of revenge trading.
In summary, revenge trading is a common problem among traders, but it can be overcome with the right mindset, discipline, and a solid plan. Traders should be honest with themselves about their emotions, and take the necessary steps to avoid the trap of revenge trading.
