Revenge trading has been identified as one of the major causes of traders' failure. In fact, Brett Steenbarger, a well-known trader and trading coach, described revenge trading as a "dangerous and irrational way to use your trading capital". While many traders may not admit to it, the fact is most traders have succumbed to revenge trading at some stage in their trading journey as it is one of the most common trading mistakes.
In this guide on revenge trading, we will identify exactly what this common trait is, what causes it and what are the best ways to effectively stop yourself from succumbing to a revenge trade.
What is revenge trading?
Revenge trading is a natural and emotional response when a trader suffers a significant loss. Before taking time to think about their next move or looking at their strategy, they enter another trade after their big loss. The idea is to recover from the loss immediately. The thinking behind it is by putting on another trade (which is expected to be a winning trade) the losses can be recovered quickly.
But as you already know, markets are not easy to predict. And the expected winning trade would most likely turn into a losing trade. Only bigger than the one the trader is trying to recoup. Revenge trading is when you try to force a trade in order to recover from a previous loss. Most of the time, traders who do revenge trade have been in a good run until a big loss sets them back.
According to Steenbarger, “Revenge trading is caused by wrath as you are angry that you lost and have the lust to make it all back quickly".
What’s behind revenge trading and why do traders resort to it?
A lot of emotions – anger, fear, shame and greed – are behind this irrational activity which must have affected every trader at one time or another in their trading journey. Mind you, revenge trading is not limited to new traders. Even some professional traders and those with years of experience can succumb to this practice. And that’s what makes it (revenge trading) more irrational.
Trading coaches who have worked with different levels of traders attest to the destructive impact of revenge trading.
In most cases, traders who resort to revenge trading tend to double or triple their trading position thinking the next trade will be a winner.
Anger and greed
With anger (at the markets) and greed as the dominant emotion driving your decision after a big loss, a trader may automatically enter a trade without hesitation. But most of the time the trade will go against them and the trader will realise a bigger loss.
Fear and shame
For some traders, the fear of realising and accepting a loss (particularly a big one) is so real that they would rather put on a revenge trade right away. The urge to recover from a loss can also be driven by the fear of facing friends, relatives or colleagues who will know of the loss. For many traders, saving face is a strong driver particularly if they have a reputation as being a good trader who wins most of their trade.
5 effective ways to fight revenge trading
Considering the potential impact of revenge trading, it is in every trader’s interest and benefit to stop it. Based on several trading coaches and trading psychologists who have worked with thousands of traders, here are the five most effective ways to fight revenge trading.
Step back temporarily
Though it is difficult to keep an objective view and to control your emotions after a loss (particularly a big one), the best course of action is to step back from trading even for a short period of time. Take a day or two off from trading, stop trading or if you really must, place a small trade if you feel you need to be in the markets. You could also consider revising your trading plan. Instead of making trades adjust how you are going to trade moving forward after your small break.
Make a self-assessment
Once you have made that temporary break from the markets, it is time to have an objective and emotion free self-assessment to find out what led to the loss and the revenge trade. Steenbarger, who is also the author of the book ‘The Psychology of Trading’ said it is critical for a trader to be self-aware when faced with revenge trading and other challenging trading situations.
In an interview about trading psychology, Steenbarger said: “To become aware of what is happening, a trader needs to be self- aware. He/she needs to be aware first and step back from the screen and assess the situation. A trader needs an objective view of the situation to be able to rectify the revenge trade and its consequences".
Assess market conditions
It is time to assess what’s happening in the markets:
- Are the markets too volatile to trade?
- Are there no solid trends or trading opportunities?
- What are driving the markets at this particular period that makes it difficult to trade?
If you look at it closely, while major economic data and events like the FOMC meetings and OPEC minutes and other central bank decisions can present trading opportunities, they can also create volatility in the markets. And at times volatility can be too much to make it worthwhile to place a trade.
Assess your trading strategy
It is also important to assess your own trading strategy to see if it is appropriate for the current market conditions. This will give you the opportunity to make adjustments (if necessary) to the way you trade.
This is also the time to review your entry and exit strategies.
- Have you got solid exit strategy in place?
- Did you stick to your exit strategy?
- What about your entry criteria?
- Did you see a solid entry set-up or did you force a trade?
Make the necessary adjustments
After you’ve made all the assessments then you will be in a position to make adjustments either to your trading strategy or your trading procedures. It may also be an appropriate time to make changes to your trading routine once you’ve identified where the strengths and weaknesses are in your trading.
In his book ‘High Performance Trading’, author and trader Steve Ward suggested traders to develop a post-loss ritual. He shared this four-step strategy based on Jeffrey Hodges' book "Sportsmind".
- Acknowledge that the losing trade was not what you wanted/expected
- Note the feedback and what you learnt, then ‘throw’ the trade away
- Imprint or mentally rehearse what you wish had happened
- Affirm to yourself - that‘s how I will do it next time’
Brett Steenbarger and Steve Ward are two of the highly respected trading coaches in the world and their books provide useful information on different trading psychology challenges and issues. To dive deeper into the psychology of a professional trader, read their books 'The Psychology of Trading' and 'High Performance Trading'.
How to stay disciplined when trading?
In order to steer away from a revenge trade you need to stay disciplined. Trading without discipline can lead to bad results and distracting emotions. Find some helpful tips below for you to maintain and build trading discipline:
- Stick to your trading plan
- Understand that losses are a part of trading, accept the loss and move
- Know when it's the right time to stop (after 3 bad trades take a step back and a small break)
- Learn from your mistakes
- Maintain your trading routine
Conclusion
This post outlines some of the practical and step-by-step actions to fight revenge trading based on the experiences of highly respected trading coaches and trading psychologists. If you are struggling with revenge trading and want to control it, these are helpful insights to get you on the right track.
