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5 Ways To Defend Yourself Against Revenge Trading

Revenge trading is one of the easiest forex trading mistakes to fall into, even for experienced traders. It is particularly toxic because traders often don’t recognise the warning signs until it is too late and some serious damage has been done. In fact, those who think they are immune to such pitfalls can be most at risk.


Here’s a closer look at what revenge trading is and how you can be on your guard against it.


What is meant by revenge trading?

Revenge trading occurs when a trader takes on more trades to try and compensate for a substantial loss. It’s a knee jerk reaction to cover up failure and regain the lost funds. All sorts of powerful and dangerous emotions come into play at this point, which as you can probably guess is not conducive to logical and measured decision making. 


In fact in most scenarios, revenge trading only serves to compound the initial loss and can lead to a downward spiral that is impossible to recover from. This is because the desire to take revenge on the markets clouds rational judgement, and carefully worked out trading strategies are abandoned in the heat of the moment. 


What is the emotional state of a revenge trader?

The revenge trader is driven by a toxic brew of emotions that inevitably colour their actions. These are likely to include stress and anxiety at lost funds, which can be compounded by hurt pride and loss of face—after all, no one likes to be a loser. Some people may feel shame or embarrassment at having to admit the loss to colleagues or friends. 


The trader may feel disappointment and frustration at their own performance or at the perceived ‘unfairness’ of their loss. Sometimes in forex trading, losses occur even if all the rules have been followed, but new traders can find this a difficult lesson to learn. This can lead to anger or fear that they will never recover their losses.


A loss can also trigger greed to regain what the trader sees as rightfully theirs. They can feel as though the money has been stolen and the natural human instinct is to take it back as quickly as possible. These are all deep and primal instincts that have developed from the earliest days of humanity, when gains and losses were really a matter of survival. 


No matter how much more evolved we think we are than our ancestors, we are all to a certain extent hardwired to respond in this way to adversity. It takes self-awareness and mental discipline to overcome such powerful primal instincts, and this is why all forex traders need to be aware of the psychology of trading.


The most dangerous and vulnerable traders are often those who think they are too strong to fall prey to their emotions, because nobody is. Real strength comes from learning to put aside the ego and make decisions that are rational and only ever based on market research and in line with a predetermined trading plan. 


How to recognise the triggers of revenge trading

One of the most important steps to avoid revenge trading is to learn what triggers it in the first place. One of the most common scenarios is when a trader has been on a successful run of trades and has become overconfident in their own abilities. 


They may have come to assume that they can do no wrong, and when the winning streak ends the loss is particularly painful. The trader may feel hubristically cheated out of what they feel entitled to, and they redouble their efforts in an attempt to take it back. 


However, even the most experienced traders make losses, and simply making more trades means putting yourself at the risk of more losses. Another scenario is when a trader exits a trade early in response to a market downturn, and then tries to compensate for the loss by quickly placing a new trade.


Impatience, fear and anxiety then come into play as the market continues to plummet, and the trader then falls into the same panicked reaction and exits the trade, only for the markets to recover soon afterwards. This pushes the trader into placing yet another ill-thought through trade and the downward spiral becomes hard to break out of. 


There are just a few examples of how a trader can be pushed to abandon a trading strategy and risk management plan when events do not always turn out the way they expected. Sometimes, external factors can influence the revenge trade, such as feeling stressed or worried about a job or relationship.


How can you avoid revenge trading?

Once you have learnt to recognise the red flags that signal a revenge trade, the next step is to learn how to maintain your self-discipline in the face of challenging situations. Here are some tips.


Do nothing

The hardest thing to do is often just to learn to do nothing. We instinctively want to take immediate action to fix a problem or mistake, but this will just lead to further mistakes and losses. When things do not go to plan, step back from trading for a day or two and work out why.


All successful traders continue to make losses, and learning how to deal with them calmly is all part of learning how to trade. That is not to say the trader should just ignore the poor outcome and plough on robotically with the same course of action. However, any changes must be aligned with the risk management plan and trading strategy. 


Check in with any emotions you are experiencing, such as frustration, panic, or fear, and allow yourself to vent if you need to. However, pick a displacement activity such as going for a run or chatting with a non-trader friend—anything but placing another trade. Close that laptop and step away.


Some people find that meditation or breathing exercises helps them to clear their mind and reach a state of calm objectivity, where they can park their emotions and focus on the cold logic of the markets. 


Look at your trading strategy

When you have dealt with any negative emotions and accepted the loss, take a look at your trading strategy to see if you can identify the reasons for the poor outcome. Losses happen to the best traders and it may be that you decide to take it in your stride and carry on with your tried and tested strategy.


You may well find that you did not follow your entry or exit strategy closely enough, or that you were impatient in placing a trade when there was not enough evidence that the conditions were favourable. 


Look at the wider market conditions

We are living through some turbulent geopolitical times and this can cause unusual volatility in the forex markets. If you do not regularly read the financial press and follow the international news, then you could be missing out on warning signals of upcoming turbulence in the markets. 


If the markets are particularly volatile due to wider economic or geopolitical events, this could explain your losses. Step back from trading until the opportunities are more settled and favourable. New traders often overtrade out of the mistaken notion that more trades means greater profits, but in fact it is just as important to learn when not to trade. 


Learn from your mistakes

Be humble enough to accept your mistakes and learn from them, as this is the path to becoming a truly self-confident trader. Be honest with yourself about your own strengths and weaknesses and how these bear on your trading style. 


For example, if you know that you have a tendency to impulsiveness or a quickness to anger, learn how to control these instincts when you are trading. Always bring yourself back to your predetermined trading plan before acting, and never do anything to compromise your risk management strategy. 


On the other hand, if you are naturally cautious you are probably less prone to the pitfalls of revenge trading, but not being proactive enough can also hold you back. Learn how to identify a genuine opportunity for a good trade and act on it decisively. 


If you have fallen into a run of bad trades, then it’s time to sit down and review your strategy and records to try and identify a pattern. Is there a common factor that links all the trades? Can you improve your technical analysis skills or pay more attention to the economic news? 


If you do want to try new trading methods, start small to mitigate against any potential damaging losses.


Have a good work life balance

Finally, it is important to keep your mental and physical wellbeing in good shape by ensuring that you have a life outside of trading. Forex trading requires mental agility and stamina as well as good emotional discipline, and it is impossible for anyone to sustain this frame of mind by working round the clock.

If you would like some information about funded forex trading accounts, please get in touch today.

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All our funded accounts come with a fixed equity stop out level. Once the account equity level gets below this fixed stop out bar, we will close all running trades and disable trading and access. The stop out level is a fixed value for each funding level, this means that any profit which has been made by the trader increases the loss allowance.

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