Revenge trading is like trying to douse a fire with gasoline: It’s a rash decision that creates a bigger problem and increases your chance of losing everything. Still, most traders have made the common mistake of chasing a losing trade.
What are the consequences of revenge trading and how do you avoid it? This article answers those questions to help you sidestep this detrimental trading behavior.
How Does Revenge Trading Work?
The behavior known as revenge trading rears its head when you suffer a loss while trading and, out of frustration or anger, you take a larger position or enter multiple trades to recoup your loss. Too often, this leads to a bigger loss, potentially wiping out all your capital.
Revenge trading is a common behavior among traders. However, it can be devastating to your account and your trading performance. Revenge trading is an emotional response – typically to a bad trade – of fear, anger, perhaps even greed and shame.
Your emotions can drive your decisions after suffering a big loss or a series of losses. Executing a trade poorly, hitting your stop or missing a chance for a profit might be scenarios that trigger revenge trading. Your emotional state may lead you to increase the size of your position, ignore stop-loss orders and abandon your trading plans.
You might be frustrated that your trade idea didn’t work out or angry with the market. Reacting negatively to a loss, believing you can fix what is broken or struggling to accept you were wrong are natural responses to a setback.
Instead of stopping to think about what to do next or reviewing your strategy, you might enter another trade, believing you can quickly recover the loss. However, letting emotion take the wheel instead of following an analysis strategy can drive your trading into a ditch.
Causes of Revenge Trading
Fear, anger, desperation, greed and guilt are among the emotions that can trigger a desire to seek revenge against the market. Losing money is not easy. You may get angry at yourself. You might even feel ashamed if your family and friends know you lost a bundle.
Your ego or disposition might play into revenge trading behaviors. The direction the market moves is the sum of all investors’ knowledge and opinions. The market moving against you means that you were wrong. If you’re overconfident or hypercompetitive, an outsize emotional response could lead to even larger losses.
Consequences of Revenge Trading
Revenge trading can lead to amplified financial losses, but it also can impact your trading performance. Your emotional response can open the door to rash decisions, leaving your risk management and trading plans outside on the stoop. The ensuing cycle of poor choices can compound your losses.
Acting impulsively goes against the three fundamentals of sustainable trading success: plans, preparation and discipline. Without this foundation, you are likelier to trade on emotion rather than clearheaded strategy.
In your attempt to recover your losses, you may enter positions at a bad price, hold a loss too long or double down on a losing position. This can zap your capital, making it even harder to recover.
Pursuing losses in an emotional state can contribute to stress, leading to burnout and impaired judgment. This downward spiral can have lasting effects, as you abandon strategy and develop bad habits. Ultimately, the loss of discipline and lapses in risk management plans can lead to unrecoverable losses.
How to Stop Revenge Trading
Fortunately, there are ways to combat revenge trading. Consider these five practices.
1. Establish and Stick to a Solid Trading Plan
A well-defined trading plan can help you stave off the desire for revenge. Relying on your plan takes the emotion out of trading. Its clear rules are your road map, leading your decision-making and keeping you disciplined when losses come or when you feel emotions starting to rise.
2. Cultivate Emotional Discipline
Wins and losses are inherent in trading. Learn to accept that you will lose sometimes. By developing emotional discipline, you can distance yourself from the outcome of individual trades. Instead of devoting all your attention to results, focus on the overall trading game. This can help you accept any losses you incur.
3. Implement Risk Management
Risk management is critical to sustainable, successful trading. Set your stop-loss orders before you begin trading and know the percentage of capital you plan to risk on each trade.
Consider setting boundaries on the amount of losses you are willing to take before exiting a trade. Deciding on a specific number – and sticking to your decision – can prevent you from chasing the trade and possibly losing all your capital.
4. Keep a Trading Journal
In a trading journal, you document your trades so that you can reflect on and learn from them. Regularly reviewing your journal allows you to recognize patterns, analyze mistakes and gain insight into your trading habits. This insight can help you develop strategies to control your emotions while trading.
5. Take a Break
Stepping away after a loss, especially a big one, can give you time to recover emotionally, even if the break is brief. After a day or two, you might feel refreshed and ready to review and adjust your trading plan.
Additionally, you don’t have to trade every day. Consider assessing market conditions before deciding whether to trade that day. While economic events, central bank pronouncements and other news can create opportunities, they also can create volatility. There’s nothing wrong with sitting out sometimes.
Understanding Revenge Trading Can Help You Avoid It
Revenge trading can devastate you financially and hold you back from success. Understanding the psychological impact of trading losses and knowing the signs to watch for after a loss can help you avoid this self-destructive behavior.
Frequently Asked Questions
How to get rid of revenge trading?
If you catch yourself revenge trading, stop trading and walk away, allowing your emotions to settle. To prevent revenge trading in the future, consider these steps: (1) Build discipline, accepting that losses are part of being a trader, (2) implement good risk management strategies, (3) review your trades and learn from your mistakes, (4) stick to your trading plan and (5) talk to more experienced traders for support.
Why do I always revenge trade?
A loss can trigger an irrational state where you might feel compelled to recoup the loss with a larger position or multiple trades. You might begin revenge trading because you don’t want to believe you’re wrong about a trade, forgot to set a stop before you began or didn’t stick to your trading plan.
What is the no. 1 rule of trading?
Don’t lose more money. Many traders find this deceptively simple principle hard to follow because they become attached to a trade idea or respond emotionally with anger or frustration to a loss. Instead, preserve your capital and minimize your losses, allowing you to come back and fight another day.
About Sarah Edwards
Sarah Edwards is a finance writer passionate about helping people learn more about what’s needed to achieve their financial goals. She has nearly a decade of writing experience focused on budgeting, investment strategies, retirement and industry trends. Her work has been published on NerdWallet and FinImpact.