Because revenge trading has been around for so much time, you would believe investors would know how to prevent it. The reality is that revenge trading is difficult to avoid since you usually don’t realise you’re doing it until your losses mount. That’s why it’s critical to have the self-control to avoid these situations when they arise.
What Is Revenge Trading and How Does It Work?
When you engage in revenge trading, you take on one or more trades in an attempt to recoup a reasonably large loss from a previous trade.
When we lose money on a deal, our natural tendency is to try to recover it. Sometimes the desire becomes so strong that we act irrationally. We’re placing bigger deals and ignoring our tried-and-true trading tactics. As a result, people act on impulse in order to exact “revenge” on the market.
Irrational trading, as you surely already know, almost always ends badly. The greater the loss, the more vehemently you may desire to retaliate against the market for stealing something from you. This principle does not apply solely to trading. Anything done out of rage or irritation is unlikely to turn out successfully.
So, revenge tradingis when you’re motivated by anger to pound the market, order after order, in the hopes of recouping earlier losses. The difficulty is that it’s your trading capital, not the market, that gets the brunt of the blows.
Because you are trading on emotion rather than strategy and discipline, the more you try to claw your way back into the market, the more it will take from you. What could have been a one-time loss eventually becomes a drastically depleted trading account or the dreaded margin call.
Why Do We Revenge Trade?
Many traders may deny it, but the truth is that they have all fallen victim to revenge trading at some point throughout their trading careers. So why do we do it, knowing well that it will have a huge negative impact on our bottom line?
It’s simple — we’re all human! When it comes to making decisions, we are guided by our instincts and emotions. Fear, rage, guilt, and greed are all natural reactions to a loss in the stock market. Even though some of these feelings are irrational, we allow them to guide our actions.
Most people believe that risk and reward are constants that they can sense with absolute certainty. But, in fact, things are rarely so straightforward, and emotional reactions to successes and losses are unavoidable.
Furthermore, the market is constantly a source of uncertainty. Just because a security’s price has plummeted doesn’t guarantee it won’t rise again in the next trading session. While you may be depressed about the prior setback, there is always the possibility that things will turn around. Uninformed traders are tempted to go all in and revenge trade as a result of this temptation.
What Risks Does Revenge Trading Pose?
Unfortunately, because they are uninformed of the risks, most rookie traders are quickly tempted into revenge trading. The most obvious is that you risk losing all of your trading capital on an investment that you should have avoided.
Another risk of revenge tradingis that you may lose faith in your trading abilities. Suffering a string of large losses can severely deplete your confidence. This type of encounter might linger in your mind for days.
It’s an emotional rollercoaster where you start off full of hope, but then the market turns against you, leaving you with despair and desperation. The worst part is that when you come to your senses, you’ll have to rebuild not only your account balance but also your confidence as a trader.
It is never a smart idea to trade based on emotions. It causes you to disregard tried and true approaches such as entrance and exit strategies. Plus, you can forget about risk management because you’re now trading to outsmart the system.
How Do You Maintain Trading Discipline?
Trading without discipline will almost always result in a loss. Here are some pointers to assist you in developing and maintaining trading discipline:
Maintain your trading schedule. It eventually becomes a habit, and how you place trades in the market is dictated by it.
Don’t stray from tried and true trading tactics. It’s fine to try your luck every now and then, but only for tiny trades with small potential losses.
Learn how to spot investing trends. Too many social sites and platforms can easily divert your attention and cause you to make irrational trading decisions.
Recognize that losses are unavoidable. Even the most experienced traders have poor days in the market. The difference is that they don’t go out of their way to exact revenge.’
Know when to call it a day. When it’s evident that what you’re doing isn’t working, don’t try to force trades.
In A Nutshell – What is Revenge Trading?
Trading is difficult enough on its own. Each trade is entered with a cool, calculated mindset by successful traders. There’s no reason to add to the confusion by allowing unpleasant emotions to influence your trading decisions. You’ll never have to worry about revenge trading if you learn to control your emotions.