Trading is hard because it requires a very calm and analytical approach and constant control over our emotions. When a trade does not go our way or leads to a loss, you will feel an impulse to make a few trades to regain the money you just lost, but you want to avoid letting this urge take over you.
In this guide, we’ll go over what revenge trading is and what you should do to avoid it.
What is revenge trading?
Revenge trading happens when a few successive trades lead to a loss, and the trader enters new trades to recoup the lost money. This is usually an impulsive decision that can lead to further losses because emotions, such as anxiety, fear, and regret, usually drive it.
Our first impulse when we lose money is to try to do everything we can to regain it, but what most traders do not understand is that this is typically a gambler’s mindset, which should not be applied to trading. Trading requires having a strong mindset, research, and an analytical approach.
When we try to place quick trades to recoup our losses, what happens is that we overlook the risks and end up taking more risks than we would normally do. This typically leads to even further losses, which makes us feel even worse, or it can even lead to overtrading.
How revenge trading works and why it happens
There’s nothing that we hate more than losing money when we are trading, and our human nature leads us to look for quick solutions to problems. This approach prompts us to try to place new trades to recoup the lost money, but this is rarely the best thing to do. Instead of rushing into a new trade, you want to take some time away from the screen and stop for a while.
Accept not only the loss but also that your judgment may be influenced by emotions that arise after a losing trade. Digesting all of these things before jumping into another trade is a better approach it allows you to put everything into perspective.
Additionally, you also need to accept that trading is all about timing, and even if sometimes you have the right call, and the proper judgment behind a trade, it can go against you if you do not have the right timing. The stock market is completely unpredictable, and oftentimes we find ourselves making timing mistakes that are difficult to predict.
The risks of revenge trading
The main risk of revenge trading is that it can lead to further losses, which can affect not only your portfolio but also your confidence and your trading mindset. Obviously, every trader wants to avoid losses at all costs, but what revenge trading can do to your mindset is far worse.
Several trading losses can lead you to question your trading strategy, and your principles and even doubt your ability. This poses a serious risk to your mindset and could even lead you to further losses. For this reason, one of the best things to do when you have a losing trade is to take some time off trading and evaluate exactly what happened and how you can overcome it.
How to avoid revenge trading
There are a few steps you can take and a system you can implement to prevent engaging in revenge trading. Let’s look at the steps you should take and a few tips you can use to prevent revenge trading.
1. Accept your loss
The first step to overcoming and preventing revenge trading is to accept your loss. There is not a single investor or trader that has not dealt with a loss in the past, but what differentiates the good and bad traders is how they deal with their own mistakes and losses.
You must accept that even if the trade setup was perfect and you have done extensive research, you may still lose money. Trading is about timing, and not everyone always gets the timing right. Accepting this will allow you to forgive yourself and look at your own mistakes differently.
Instead of seeing your loss as a failure, see it as a pay-to-learn opportunity, which should help you to improve and avoid a similar trade or loss in the future.
2. Analyze your bad trades
Revenge trading usually happens when one or a few trades end up in losses, which prompts the trader to feel like they have to make their money back straight away. This is usually the wrong approach, and instead of making a few quick trades to get your money back, you should focus on understanding and analyzing precisely what went wrong in the losing trades.
What made you take those trades? Did you do enough research? Start by asking yourself these questions to understand where you can improve in future trades. If you did not research a trade well enough, or you underestimated the risks of losing money in a specific trade, you need to understand why it happened.
3. Take time away from the screen
After a significant loss, it is important to take time away from the computer to digest and analyze precisely what went wrong. Losses convey different emotions that are hard to deal with, and it takes time for us to reorganize ourselves and start trading again.
Trading is highly demanding, not only in terms of analysis but also in how we deal with our emotions. Because of this, you need to take some time away from trading to balance yourself and refocus on your trading strategy, goals, and system.
4. Stick to your strategy
One of the common traits of revenge trading is that you through your trading strategy out of the window and start placing trades that do not align with your trading system or style. By holding yourself accountable and making sure that each trade you place follows specific criteria, it will be easier to avoid revenge trading.
A simple way of implementing this is by creating a checklist of different steps you need to confirm before placing a trade, such as:
- Does this trade align with my trading strategy?
- Did I research this trade well enough?
- What is the potential upside of this trade?
- What are the risks of this trade turning into a loss?
5. Use a trading journal
Another way to prevent revenge trading is by keeping an updated trading journal where you write down every trade you make and the thesis behind it. This allows you to structure each trade and make sure it is aligned with your strategy and goals. It also makes it easy to analyze what went right and what when wrong after you close a position.
6. Review your mistakes
One of the most important things every trader can do is to analyze and review their mistakes constantly. This is one of the simplest ways to improve your trading, prevent losses, and develop your trading skills. Analyzing your mistakes helps you to understand why your trade turned into a loss and prevent the same mistakes from happening in the future.
Revenge trading is one of the most common mistakes traders make, affecting all of us. Without the proper trading mindset, it will be challenging to overcome the desire to rush and place trades just to regain the money you lost.
Take some time to analyze everything that happened and follow the steps and recommendations in this article to prevent and overcome revenge trading.