Revenge trading is a type of trading behaviour that involves making trades based on negative emotions rather than logic or reason. It usually takes place when a trader has suffered a loss and is planning on ‘seeking revenge’ and making back the money he has previously lost. This type of trading is led primarily by negative feelings and can often lead to more losses, as traders may make impulsive decisions that are not based on sound analysis.
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Understand your emotions
One of the best ways to stay away from revenge trading is to understand your emotions and your intentions. If you have just made a losing trade and you are keen to get back in the game, it is important to approach trading in a level-headed way. You can seek to understand your emotions and approaches better when you keep a trading journal that documents how you feel, so you can take some time and stave off the impulse to revenge trade.
Use risk management tools
Another way to manage your trading and to reduce the possibility of great losses is by using the appropriate risk management tools when you trade. Set stop losses and take profit levels in advance can help to limit your losses and lock in profits, so that when you do place your trades and things do not go as planned, you can ensure you do not suffer grave losses.
Have a trading plan
Another thing you can do to prevent the impulse to revenge trade is to create a detailed trading plan. Include the kind of objectives you have for yourself, the ways in which you plan to trade, and when you will place trades. Your trading plan should also include your risk appetite, and the entry and exit criteria for each trade to ensure you make informed decisions.
Stick to your strategy
Once you have a trading strategy, it is crucial to stick to it, which can be difficult when emotions are high. Still, it is crucial to resist the temptation to abandon your strategy in favour of an emotional trade.
If you feel emotional about a trade or have suffered losses that you want to recuperate, it is best to take a break and get away from it all. Breaks are crucial so you can clear your head. Once you have calmed down, you can objectively assess the situation and decide if you still want to make a trade.
If you struggle to control your emotions, it may be useful to seek professional help. A therapist or counsellor can help you manage your emotions and develop healthy coping mechanisms instead of revenge-trading. You can also join a support group with likeminded traders to help you stay accountable and motivated. You can discuss your challenges openly with others and share tips on overcoming the urge to revenge-trade.
Consequences of revenge trading
There are certain risks you run when you place trades with the mindset and intention to seek revenge. The most notable ones are that you will fail to consider your situation and circumstances fully, you will invest in markets and products that are not suitable for you, and you may not be able to time price movements right.
With the risks you run, you may face the following consequences:
You incur more losses
Revenge trading is often done on impulse and driven by an intense need to recuperate past losses. Trading requires logic and strategy, and if you dive into the markets without a solid plan, you may find yourself incurring even more losses.
You miss out on opportunities
If you are solely focused on working one market to recuperate your losses, you will also end up missing out on some solid opportunities due to your myopic vision.