What is Revenge Trading? How to Conquer the Fear?

Revenge trading is considered one of the major causes of trader’s failure. While most traders will not admit it, the truth is that most traders succumb to revenge trading at some point in their trading career. In this article, we will see what revenge trading is and how to avoid revenge trading as one of the common mistakes in trading.

What is revenge trading?

Revenge trading represents an emotional response when a trader suffers a big loss. Before considering their next move or reconsidering their strategy, they enter another trade after the significant loss.

The goal here is to recover from the big loss immediately. The idea is that the loss can be recovered quickly by putting on another trade.

But markets are not simple to predict.

And the fact is that the expected winning trade could turn into a losing trade. Revenge trading is the situation where you try to force a trade to recover from a previous big loss. Most of the time, traders who succumb to revenge trades are in a good run until a big loss sets them back.

Revenge trading is caused by anger which leads to undisciplined and harmful ways of thinking.

What’s behind revenge trading?

A lot of emotions – fear, shame, anger, greed, acting on impulse – are behind the revenge trading, which must have an impact on any trader at one time or another. Beware that this irrational activity is not limited to newbie traders.

Even some seasoned traders with years of experience are prone to this practice. And that’s what makes it more irrational.

Trading coaches who have experience working with different profiles of traders confirm the harmful impact of revenge trading.

In most cases, a trader who resorts to revenge trading tends to double or triple trading positions, hoping the next trade will be a winner.

Greed and anger

With greed and anger at the markets as the prevalent emotion driving decisions after a significant loss, a trader may automatically enter a trade without thinking.

But most of the time, the trade goes against them, and the traders realize a bigger loss.

Shame and fear

For some traders, the fear of a loss is so real that they are inclined to put on a revenge trade right away.

The urge to recover from a considerable loss can also be caused by the fear of facing colleagues, friends or relatives who will know of the loss. For most traders, saving face is a strong driver if they have a reputation as a good trader who wins most of the time.

Effective ways to avoid revenge trading

Given the impact of revenge trading, it’s in every trader’s interest to stop it. According to many trading psychologists and coaches who have worked with traders, here are some effective ways to stop revenge trading.

1. Step back temporarily

Although it is tricky to keep control of your emotions after a big loss, the best thing to do is to step back, even for a short period.

Take a few days off from trading, or if you really must, place a modest position size open if you feel the need to be in the markets. It would help if you also considered revising your strategy and trading plan.

2. Make a self-assessment

Once you have finished a temporary break from trading, it’s time to have an emotion-free self-assessment to grasp what led to the losses and the revenge trade.

It’s essential for a successful trader to be self-aware when facing revenge trading and other challenging situations.

“To be aware of what is happening, traders need to be self-aware. They need to be aware first, step back from their computer screen and assess the whole situation. A trader needs to be objective to be in a position to rectify the consequences of the revenge trade.

3. Assess market conditions

Assessing what’s happening in the markets is also important. The trader needs to figure out if the market is too volatile, are there solid trends and opportunities and what’s driving the market at the particular moment that makes it difficult to trade.

If you pay keen attention, while economic data and central bank reports present great opportunities, these can create significant volatility that can negatively impact your trade.

4. Assess your trading strategy

It’s necessary to assess your trading strategy to verify if it is appropriate for the current market conditions. This allows traders to make adjustments to the trading method.

It’s also important to review entry and exit strategy and answer the following questions:

Do you have a solid exit strategy?
Have you stuck to your exit strategy?
Have you seen a solid entry set-up, or did you force your trade?

5. Make the needed adjustments

Once you’ve made these assessments, you will be able to adjust your trading strategy and procedures. It may also be a good moment to make changes to a trading routine when you identify where the strengths and weaknesses points are in your trading sessions.

Revenge trading Forex market

Losses are part of Forex trading, just like winning money. Wanting to make money is completely normal, just like not wanting to lose it.

That’s why you shouldn’t absolutely create a trading strategy that is 100% winning trades but try to optimize your winning trades (the risk-reward ratio).

Unfortunately, many novice traders sit on their bad trades, take them personally, and as soon as they return to the market, they are out for revenge.

This feeling of revenge is bad for the trader. It is generated because of a particular frustration and pushes him to be even more aggressive in the next trades. This is dangerous because it wakes up the unruly trader in you who sometimes pushes you to put your money management aside.

Practicing Forex trading based on your emotions and luck is not trading. It’s gambling! Forex trading is not a game, and Forex traders are not gamblers.

This Forex trading activity requires a plan and risk management if you do not want to bleed your trading account. Seeking revenge for what the market has done to us is like taking impulsive and often larger lot size trades in the hope of making up for what was lost in a single trade.

However, there are other ways to overcome losses in Forex trading:

Get out of your office and clear your head after a frustrating loss, take the opportunity to take a coffee break and return serene to your trading station.

Document yourself to find the reason why the trade was lost.

Seek the opinion of other traders on Forex trading forums regarding the losing trade.

Take notes on this trade in the Forex trading journal (specify if there were any unexpected or exceptional factors before or during this trade).

Continue to have confidence in your trading strategy and in your risk-reward ratio, then forget about this loss which will be quickly recovered and barely visible on the results curve.

Remember that even professional traders and the best Forex traders in the world also have their bad days in the financial markets.

Losses are part of the game, after all, and not accepting them would mean you don’t accept the market, care about your feelings and lack confidence in your strategy.

Accept losing trades, put your ego aside and focus on trade after trade in order to make the best possible trading decisions that will bring you the most money possible in the event of success and which will cost you little in the event of a bad prognosis.

The importance of trading discipline for stopping revenge trading

Discipline is one of the qualities required to avoid revenge trading. Most novice investors are incapable of being disciplined when speculating in the financial markets.

Here are some tips for becoming a disciplined trader and changing bad habits.

Why Discipline is Key to Fight Revenge trading

Most traders, whether beginners or professionals, know that trading contracts for difference require a high degree of discipline.

However, knowledge is different from action; traders know that they need to be disciplined, but they always find excuses to bend some rule “I will be disciplined and manage my risks when my account has made X money”. Making excuses for not following a trading plan is the worst mistake almost every trader makes in their career.

This is simply a greed error. Greedy traders don’t make money over the long term. If there’s one thing that can destroy a trading account quickly, it’s greed.

A greedy trader trades too much and takes too much risk. Taking positions with high leverage is the main reason traders lose money on the stock market.

Trading with a margin account naturally induces greedy behaviour, the temptation to earn money quickly and easily is constant. To combat this temptation of easy money, every trader must have a plan to combat this greed.

Bottom line – Become a disciplined trader

Investors who survive long enough in the financial markets to become fully profitable themselves are those who manage to maintain positive trading habits. Like anything else in life, habits affect the reality of a situation. Good or bad habits become stronger over time and become a daily routine.

Unfortunately, for most novice traders, developing the habits of a successful investor is a difficult task from the start. The first step to becoming a disciplined trader is simply to accept the reality of what is possible given the size of the account and plan to implement a risk management system.

After fully accepting the reality of trading, it’s time to develop a concrete plan to adopt positive trading habits. The trading strategy is not enough. The overall approach must also be planned in a trading plan. This plan will serve as a guide for how to interact with the market, assuming it is followed, of course.

When the trading plan is built around an effective Forex strategy, it is important to keep track of all transactions in a trading journal. The trading diary is a formidable weapon that allows the trader to analyze his behaviour and correct the weaknesses of his strategy or his psychology if he does not follow the plan.

The trader should always be aware of the importance of daily discipline when trading the stock market or Forex until it becomes a habit.

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