Have you ever initiated a “revenge” trade? Most traders are well aware of this issue; but some of you may need an explanation.
What is Revenge Trading?
A revenge trade is a reaction to one or more losses. Let’s say that you had a good profit run of a couple of months. Your gains were in the 30% category and you were riding high and frequently breaking out into the trader “happy dance”. Then one morning you were feeling quite full of yourself with an illusion of infallibility. In other words, you felt that due to your string of wins you couldn’t lose. Your confidence had exceeded your competence. This irrational exuberance or trader’s euphoria clouded your vision and diffused your focus. Just then the price action inched toward your stop and you gave into an overwhelming urge to move the stop. This behavior is due to a common bias that virtually every human being on the planet succumbs to at one time or another… loss aversion.
Loss aversion is the tendency for individuals to prefer avoiding losses rather than accruing gains. The theory was first introduced in 1979 by Kahneman and Tversky under the assumption that losses have a larger impact on preferences than that of the advantages of gains.1 In fact, you may have moved the stop several times. Because you loathed the thought of losing so much all semblance of perspective left you and in that attempt to keep from losing money in the trade you inordinately and inappropriately increased your risk, in effect wiping out all of the last two month’s gains.
Make sure you are in the right state of mind when trading, revenge trading can cause significant losses.
In addition to the empty pit that replaced your stomach you felt depressed and self-loathing for violating your rule, while also huffing and puffing at the market for taking your money. Now, whether you were aware of it or not, you also felt anger. You wanted desperately to get your money back. So, you identified another entry, doubled or tripled your size and entered a revenge trade to get back what was rightfully yours and what, according to you, the market unceremoniously snatched from your portfolio. You don’t need me to spell out what the next outcome entailed…another loss, larger than the first one which more or less wiped out a large portion of your account. This very bleak picture is played out over and over again across the trading planet; and traders just like you are losing most if not all of their portfolio funds while caught in this psychological epidemic.
How to NOT Revenge Trading
First, you must aim to be fully present, fully available and in the NOW of the trade. Trading is a zero sum game and it is arguably the single most challenging business venture on the planet because you are trading your hard earned money and, more importantly, when you are in a trade, with every tick of the market you are gaining money or losing it. Due to this difficulty, at the drop of a hat you could find yourself in a position similar to the one above where one or two trades could wipe out scores of gains.
Secondly, you’ll want to ensure that you are not trading in mental states where you are frustrated, frazzled and fragmented; meaning that you are immersed in negative emotions like fear, anxiety, greed, doubt, worry or anger that can severely diminish your ability to maintain a fierce focus on what matters most. This is accomplished by taking your emotional temperature early and often. If you detect that you are distracted in any way, take a moment to reset and regroup your mental state.
Thirdly, you’ll want to discover your trading macro purpose and when you have done so, place it prominently in your trading business plan, preferably directly under your title. This purpose is where you take the “what matters most in your life” and connect it to the “what matters most in the trade”. It becomes your “compelling reason” for trading. The passion of your life is then put in the service of ensuring that you stay the course in your trading. It lays the foundation for supporting you in planning your trades, trading your plans, following all of your rules and keeping all of your commitments.
Revenge trading is just one of many mental/emotional pitfalls that can derange your trading results.Tweet: Revenge trading is one mental pitfalls that can derange your trading. It is imperative that you trade deliberately in a methodical step-by-step fashion and by design; that is, taking the time to be intentional about your mental/emotional state to ensure that your A-Game is working…all the time. You want to trade with your highest and best trader trading in your highest and best interests. It is much too expensive to do otherwise. It’s like walking a tightrope high above the ground…without a net. One false step could have you careening toward a very bad end.
This report is prepared solely for information and data purposes. Opinions, estimates and projections contained herein are those of FXTechstrategy.com own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the information nor the forecast shall be taken as a representation for which FXTechstrategy.com incurs any responsibility. FXTstrategy.com does not accept any liability whatsoever for any loss arising from any use of this report or its contents. This report is not construed as an offer to sell or solicitation of any offer to buy any of the currencies referred to in this report.
Editors’ Picks
EUR/USD steady below 1.0800 after US PCE meets expectations
EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair barely reacted to US PCE inflation data, with the Greenback shedding some pips. Fed Chair Jerome Powell set to speak ahead of the weekly close.
GBP/USD hovers around 1.2620 in dull trading
GBP/USD trades sideways above 1.2600 amid a widespread holiday restraining action across financial markets. Investors took a long weekend ahead of critical United States employment data next week. Fed Chair Powell coming up next.
Gold price sits at all-time highs above $2,230
Gold price holds near a fresh all-time high at $2,236 in thinned trading amid the Easter Holiday. Most major world markets remain closed, although the United States published core PCE inflation, the Federal Reserve’s favorite inflation gauge.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.
Key events in developed markets next week
Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.