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. 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.
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 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.
Thirdly, you’ll want to discover your trading macro purpose and when you have done so, place it prominently in your trading 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.
Dr Woody Johnson can be contacted on this link: Dr Woody Johnson