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Decisions in the high-stakes trading world are frequently influenced by emotions. Revenge trading is an example of an emotion-driven phenomenon. The term’s serious and potentially disastrous implications for traders contradict its dramatic name.
When you study revenge trading, you’re not merely picking up a new word; you’re also learning to spot a pattern that can sabotage your trading success.
The article delves deeply into revenge trading, discussing its origins, effects, and, most crucially, solutions.
What is revenge trading?
Both inexperienced and seasoned traders are susceptible to the psychological trap of revenge trading. It’s when you make hasty and unreasonable trading decisions because you’re trying to recoup losses from earlier deals. Many times, this emotional reaction is set off by a losing trade or string of losses.
Traders can get revenge-driven after even minor losses, leading them to lose sight of their trading strategy and risk management principles in their pursuit of a quick recovery.
Example
Imagine a trader named Rahul. Rahul has a well-planned strategy that he usually follows. One day, he makes a trade that doesn’t go as planned, and he loses ₹500. Instead of sticking to his strategy, Rahul, driven by frustration and the desire to quickly recover his loss, decides to place a much larger trade hoping to make up for the loss.
He disregards his usual risk management rules and places a trade worth ₹2000. This impulsive decision, fueled by emotion rather than rational analysis, is a classic case of revenge trading.
Unfortunately, the market is unpredictable, and this larger trade could result in an even bigger loss. Understanding and avoiding such behaviour is crucial for maintaining long-term success in trading.
Causes of revenge trading
- Anger: Anger and a desire to “get back” at the market can lead traders to make rash trades after suffering a loss.
- Greed: After suffering a loss, traders may be more prone to taking risky trades in their pursuit of quick profits.
- Poverty mindset: To swiftly recoup losses, traders who think in terms of scarcity may resort to revenge trading.
- Fear: Market participants may act rashly out of concern for potential losses.
- Shame: When traders experience humiliation due to a loss, they may attempt to cover it up by achieving a rapid win.
- Lack of awareness: Traders can make decisions based on their emotions without realising it.
- Overconfidence: Making hasty judgements because you think you’re good at trading is a recipe for disaster.
Consequences of revenge trading
- Larger losses: Losses in revenge trading tend to be larger because the trades are usually riskier. Retaliatory trading is characterised by irrational decisions made out of anger rather than rational consideration of potential consequences.
- Account drain: When revenge trading goes on for too long, it can wipe out a trading account’s funds. A trader’s capital can be rapidly depleted due to the compounding effect of successive losses.
- Career impact: Retaliatory trading can have far-reaching monetary consequences. It may cause traders to feel emotionally and mentally unstable, which in turn can make them doubt their skills and even want to quit trading altogether.
How to avoid revenge trading?
- Taking a break or trading smaller until you figure things out: It is wise to step away from trading for a while after suffering a loss to collect your thoughts. Reduce the size of your trades until you recover if you can’t afford to take a break.
- Developing more awareness while trading: One way to avoid making hasty trading decisions is to keep an eye on your emotions. Remain fully engaged in the here and now by cultivating mindfulness.
- Reviewing your strategy, execution, and market conditions: Keep an eye on how you’re trading and how often you review your strategy. Be aware of the state of the market when you make trades. Finding patterns and improving your strategy can be aided by this.
- Implementing the 2-strikes rule: Put a cap of two losses in a row per day. Pull the plug on trading for the day if you reach this limit. This can stop a chain reaction of losses from getting worse.
- Increasing your heart coherence: You can improve your decision-making abilities by increasing your heart’s coherence through practices like meditation and deep breathing.
- Identifying your cue and reward: Get a handle on the things that motivate you to trade revenge (the cue) and the benefits you reap from doing so (the reward). With this, you can end the pattern.
- Implementing behaviour conditioning: Substitute a more constructive action for the destructive one (revenge trading). Instead of making more trades after a loss, try doing something relaxing like going for a walk or meditating.
- Using a positive market metaphor: Try to picture the market as a flowing river. You’re like a fisherman who has to wait for the perfect moment to cast his line. Being patient and not making hasty choices are both helped by this.
- Leveraging the law of resonance: Assemble a support system of upbeat, prosperous traders. You might catch their attitudes and ways of thinking.
Bottomline
It’s a journey that demands self-awareness, discipline, and a commitment to lifelong learning. The market isn’t an opponent to be vanquished, but a complex environment to be navigated with wisdom. So, let’s keep emotions in check, stick to our meticulously crafted trading strategies, and aim for not just immediate gains, but a sustainable future in trading. Happy trading!
FAQs
Revenge trading is generally considered detrimental to a trader’s success. It’s an emotional response to losses, leading to impulsive and high-risk trades in an attempt to recover. This often results in larger losses, as decisions are driven by emotion rather than rational analysis. Successful trading requires discipline, a well-planned strategy, and emotional control, all of which are compromised in revenge trading. Therefore, it’s best to avoid revenge trading.
An “angry trade” is not a formal term in trading, but it generally refers to a trade made in a state of anger, often as a reaction to a loss or perceived unfairness in the market. It’s similar to revenge trading, where decisions are driven by emotion rather than rational analysis. This can lead to impulsive, high-risk trades, potentially resulting in larger losses.
Dummy trading, also known as paper trading or demo trading, is a practice method where aspiring traders use virtual money instead of real capital. It allows individuals to simulate real trading scenarios, test strategies, and understand market dynamics without the risk of financial loss. Online brokerages often provide these simulated environments, making dummy trading a valuable tool for gaining experience and confidence before transitioning to live trading.
Trade sniping refers to the practice where traders or bots quickly execute a trade, often a purchase, immediately after a specific event or condition is met. In forex, sniping involves placing orders at the very last moment before the market executes the order, aiming to profit from small price movements that may occur in the seconds before the order is executed.
Yes, trading can be stressful due to the inherent risks, volatility, and uncertainty of the financial markets. Traders deal with uncertainty every day, which can lead to a high-stress environment. If left unchecked, this stress can build up and cause physical and psychological problems. However, with proper stress management strategies, traders can navigate these challenges and maintain their performance.