When you lose your hard-earned possession, your natural instinct tells you to get it back. You strive to take it back even at the cost of giving a hard time to those who took it from you. And you are not going to cut some slack to the ‘market’ when it takes what is yours. When you lose money, you want it back. Period! If you act on this impulse and pound the market with an order after order, it is revenge trading.
But, here’s the thing:
It’s not you that is going to give the market a hard time. Instead, it is the market that’s going to give you a hard time.
The more you go back in a desperate state of the mind, the more the market is going to take from you. Because you are not backing your trades with strategy and discipline, rather with a mere hope. It is not a sell that market is going to buy.
And when your hope fails, it stings, hurts and drains your confidence level. It stays with you for days. When you come to your senses later, you would not only have the task of building confidence but also your wallet.
Remember what takes a minute to lose, takes days, months or even years to build.
So, let’s avoid the catastrophe. But how?
Identify the triggers of Revenge trading
The trigger point differs from person to person. It can be an analysis going wrong or losing a lump sum in a single trade.
Even a missed profit can be a trigger to many. For instance, your trade is in 100+ pips and you failed to book profits on the hope that it can go higher. But, it turns its head around and comes to your entry point. You miss out your unrealized gains. You tend to emphasize on the gain rather than the unrealized in the phrase. And yes it is a gain, nonetheless. So, it could be heart-wrenching and emotion spooking.
So, study your past behavior. Know yourself as a trader.
Had you maintained a journal, it could come handy here.
Define the losing streak that pushes you off the edge.
When your number of losing trades come close to the mark, call it quits for the day if you’re a day trader or scalper.
If you’re a positional or swing trader, take a break for a few days.
Use the break to clear your head and then re-enter the market.
Identify the root cause for your failure
What did you miss?
Did you get it wrong, or the market got the better of you?
Did you make a bet on a single outcome through multiple trades?
Has your strategy become obsolete?
Ask these questions, which can quantitatively measure your performance.
It helps to bringforth a qualitative change in you.
And make sure you conduct an objective audit of your methodologies to uproot revenge trading.
Test your strategy
Don’t discard your strategy just on the outset of a problem. Because successful strategies are a hard catch in the market.
Hence, test it with the strategy tester. And, if possible try to patch it up with tweaks.
Because you don’t want to go fishing for a new strategy when your account is already in disarray. A new strategy and its implementation always have its own risk. And if it doesn’t pan out to your expectation, then it can trigger emotions that could lead to revenge trading. Hence, avoid opting for a new one.
However, if your strategy is obsolete or you’re in a long break with ample time, you can try out fresh strategies.
Revisit your Risk management
Who is at fault when you end up losing a big chunk in one trade? Your risk management techniques or strategy?
The former is supposed to save you when the latter fails. Your strategy may be at fault but your risk management should have tapered the losses that oozed out of revenge trading. So, don’t confine your audit to your strategy.
Revisit and reinforce your risk managing techniques.
Stick to 1:1, 1:2 or 1:3 rule.
Yes, there are times where you need to go beyond these rules.
In such cases, the pragmatic approach would be to reduce the lot size and maintain your risk exposure in the same ratio but in dollar terms. If you’re unsure of this technique, check out the Expert Trading Panel which simplifies complicated lot size calculation and does it in a jiffy.
Personal life can trigger revenge trading too
When your personal life falls apart, your trading career follows suit.
A squabble with your folks or life partner can make you lose cool at times.
A cash crunch situation might force you to aim big in a single trade.
The former event leads to frustration while the latter opens up desperation.
Both these emotions fuels your stress level and let you lose grip of reality.
So, do not trade in the backdrop of these situations. Take a break and fix up the issues.
Because you need an unclouded and unfazed mind to be agile in your trading corridor.
Further, your personal life need not be a vulnerable part of trading. Take a leaf from your life and play to your strengths which can avoid revenge trading too.
You got to have a steady head and a cool mind to succeed in the market. Lunging towards the market, in the form of revenge trading, despite getting hit, makes you only a punching bag. When you get hit, stay put, prepare and then attack to get what is rightfully yours.