What is Revenge Trading?
How Your Emotions Can Ruin Your Capital With Revenge Trading Behaviour
Revenge trading is a common and dangerous behaviour among traders that occurs when emotions, rather than rational thinking, drive trading decisions. It occurs when a trader takes excessive risks or makes impulsive trades in an attempt to recoup losses incurred during previous trades. Let's understand revenge trading with an example:
For instance, let's say a trader named Buddhu has been trading stocks for a few months and has had consistent gains. One day, he buys a stock, and the price falls sharply, causing him to lose a significant amount of money. Feeling angry and desperate to make up for his losses, Buddhu decides to engage in revenge trading.
He starts taking larger positions than usual, using more leverage, and ignoring her risk management strategies. He trades emotionally, driven by a desire to recover his losses as quickly as possible. However, instead of making profits, his trades result in more losses, causing him to take even larger positions in the market. Buddhu's trading decisions are no longer based on market analysis or his trading plan, but on his emotions, leading him to make irrational decisions.
As a result, Buddhu's losses continue to pile up, and he eventually loses all the profits he had made in the previous months. He becomes frustrated and devastated, realising that his revenge trading has only made the situation worse.
This example illustrates how revenge trading can lead to significant losses and should be avoided. Instead, traders should follow a well-defined trading plan, use risk management strategies, and trade based on sound analysis rather than emotions. It is important to control emotions and avoid making impulsive decisions, especially during times of loss.
What Causes Anyone To Do Revenge Trading?
Many traders experience losses during their trading journey. However, how they react to these losses is what separates successful traders from unsuccessful ones. Revenge trading occurs when traders allow their emotions to control their decisions instead of following a rational trading plan. It often happens after a significant loss or a series of losses that can result in traders feeling frustrated, angry, or desperate.
Traders who engage in revenge trading often enter trades with larger position sizes than they would normally use, use more leverage than they are comfortable with, or take positions in assets they don't understand well. In some cases, traders may also ignore their risk management strategies or abandon their trading plan altogether, all in an effort to quickly recover their losses.
The danger of revenge trading is that it can lead to even greater losses. Traders who are emotionally compromised are more likely to make poor decisions, and taking on more risk often increases the likelihood of losing even more money. Additionally, traders who are focused on recouping their losses may not be paying attention to market conditions, news, or other important factors that could influence their trades. As a result, their decisions may not be well-informed, leading to additional losses.
How To Avoid Revenge Trading?
To avoid revenge trading, traders must learn to manage their emotions effectively. One way to do this is to develop a solid trading plan that includes specific rules for entering and exiting trades. Traders must be disciplined and follow their plan, even during periods of losses. Risk management strategies must be in place, such as setting stop-loss orders or using position sizing to limit the amount of capital risk per trade.
Traders can also benefit from taking breaks when necessary. It is important to step away from the market when emotions are running high and return when in a better emotional state. It can also be helpful to have a mentor or accountability partner who can provide objective feedback and support during difficult times.
In conclusion, revenge trading is a dangerous behaviour that can lead to significant losses. It is essential for traders to learn to manage their emotions and make rational trading decisions based on a solid trading plan. By doing so, traders can reduce their risks and increase their chances of success in the markets.