In the trading field, nobody likes to lose, but how one responds to these losses makes all the difference in one’s long-term success. Too many have fallen into the trap that is revenge trading—a self-destructive behavior wherein they execute a series of fast trades in trying to recover their losses.
This knee-jerk reaction is driven not by logic, but purely for emotional release and often leads to even greater financial damage and emotional hurt. Revenge trading can, in less than a cycle, drain accounts and shatter confidence, even for the most seasoned traders.
what is Revenge Trading?
Revenge trading is a predisposed action when the trader has to execute several fast trades subsequent to an aggregate drawdown. It is very natural because it comes from instinctive human nature: when somebody has been wronged, he or she wants revenge on his or her nemesis—the market, in this case. The problem with revenge trading is that it often puts the trader deeper in the hole. Instead of taking a careful look in the market and making informed decisions, he acts impulsively, driven by emotion rather than logic.
Some critical psychology is attributed to revenge trading through the fight-or-flight response—an evolutionary mechanism to protect us in times of danger. When a loss is encountered, a series of increased heart rate, adrenaline rush, and urgency arises in traders. In this response, the physiological would prepare one for action: either to fight—to make more trades—or to flee—by closing positions. Unfortunately, in the context of trading, this precipitates with hyperaggressive risk-taking and poor decision-making.
problem with Revenge Trading?
While revenge trading appears natural in an effort to make up for losses as fast as possible, the goal of it is darker. Instead, it often represents the snowballing effect: building losses, increased emotions, and inability to make rational decisions. A trader might not recognize the degree of risk he or she is taking in the heat of the moment, which later turns catastrophic in terms of finances. Revenge trading is a lot like the concept of being “on tilt” in gambling.
When an on-tilt gambler is emotionally compromised, he really can’t see the reality of his situation. A revenge trader is blinded by his need to win back losses and often looks over key market signals and overextends his risk. This may lead to blown-out trading accounts and deep regret.
One of the most famous examples of the risks of revenge trading was given by a trader after he had lost big one day; he attempted to make it all back by taking huge and increasingly riskier positions. Instead of regaining the losses, he managed to lose his complete account. This action has stuck in minds as a grim reminder of emotional control and the avoidance of impulsive trading judgments.
The Fight-or-Flight Response in Trading
The fight-or-flight response is how one automatically reacts to a perceived threat. In trading, after a loss that is out of proportion, one may go into the fight-or-flight mode with the result of one’s body immediately getting a burst of adrenaline and an overwhelming desire to act right away. This worked fine in physical confrontations our ancestors encountered. However, in the financial markets, this can be devastating.
When a trader is in a losing position, for instance, the body gears up for either flight from the situation by closing positions or to fight the market by making more trades. Neither of these responses is helpful to the clear and calm thinking needed to be a successful trader. The fight response tends to lead directly to revenge trading. Meanwhile, the flight response causes many traders to close positions too early and miss potential opportunities for recovery.
More knowledge with respect to the fight or flight reaction might, in turn, allow the trader to see when it has been activated and allow them to take a step back and reevaluate their situation in a more objective way. By understanding this normal response, one can build in practices that will offset its effects and avoid revenge trading pitfalls.
Overcoming Revenge Trading Strategies
Fortunately, there are some effective ways traders may use to defeat revenge trading and regain control of their emotions; two of the most important methods for doing this are discussed here.
1. Take a Break
Perhaps the best revenge trading avoidance strategy is to take time off from the market following a big loss. This gives you an opportunity to collect your thoughts, clear your head, and come back with a clear mind. Going for a walk, hitting the gym, or spending time outdoors are just a few ways you can get away from the mental anguish and reboot.
For example, once one just suffered a heavy loss, he should not rush back to the market. Take an hour or two or even more to cool off and use this as time for a little hindsight: what did I do wrong? Do not think about the loss one has incurred. Sometimes, the time taken to recover may help you get in a better frame of mind to make decisions when you return to trading.
2. Install Fail-Safes
Another great counter to revenge trading is the use of failsafes that prevent you from acting impulsively. Perhaps a wonderful failsafe that might come in handy includes day-to-day or week-to-week stop-loss limits. You can actually automate such limits with your broker so that you cannot remove them when you get emotional.
You can have, for example, the maximum daily loss that stops you from trading for that day when reached. That will force you to take some time out and re-think your strategy so that you are not trading in an emotionally impaired state. In this manner, once these limits are implemented, your capital is partially safeguarded, and you are given an opportunity to recover mentally prior to making a fresh trade.
You can also put loss limits on individual trades, meaning no trade can wipe out a large portion of your account. Such an approach does not only limit the potential damage coming from bad trades but it will also make you plan more carefully for a trade and manage the high risk.
Importance Of Perspective in Trading
Perspective is essential in trading. When you enter that fight-or-flight stage, you have to shift perspectives and approach that market with calm rationality. Good traders know a loss is the name of the game; they seek long-term success, not short-term recoveries.
One good way to regain a bit of perspective is to keep a trading journal in which everything concerning your trades should be documented: why every particular trade was taken, the outcome, and how exactly you felt at that point. Revisiting such a journal every now and then may definitely help you pinpoint some patterns about yourself, like going into revenge trading, and think of methods for overcoming them.
For instance, you may notice that after you are on a losing streak, you revenge trade. Well, you could make a rule for yourself where, after three losses in a row, you must take a compulsory break. That way, you can regain your composure and not fall into emotional trading. Another way to keep perspective is to be realistic about expected trading performance.
Not every trade is going to end up a winner, and sometimes it is just a case of probabilities catching up such that a loss occurs. By preparing for this possibility, and with attention to the wider trading strategy, the trader is able to avoid the need for revenge against the market in case of a loss.
Conclusion
Revenge trading indeed can be hazardous and may lead to serious financial and emotional trauma. Basically, the drive for recovery in a short time stems from human nature, but it works almost against the trader in the world of trading. The fight or flight response is healthy, so essential in many aspects of life, yet clouds judgment when it comes to the markets by fostering impulsive and irrational decisions. Overcoming revenge trading requires a trader to map out all the psychological triggers and come up with a mechanism that controls such situations.
We have found taking time off after a loss and setting failsafes, such as daily stop-loss limits, vitally help in preventing revenge trading and saving your capital. Keeping perspective and focusing on long-term success rather than recovering a short-term setback can also help you avoid the emotional pitfalls of revenge trading. Knowing such risks and applying techniques described above will enable you to break the evil circle of revenge trading and make you a more disciplined and successful trader.
After all, where trading is concerned, long-term success has little to do with making money; it has everything to do with making smart, thought-out decisions. And next time a loss is incurred, refrain from seeking your revenge on the market. Conversely, take a step back and reassess; go into your next trade clear and rational.
