The Curse of Revenge Trading and How to Avoid it in the Future (2024)

Are You a Revenge Trader?

While it may sound like the newest superhero saga to appear in the Marvel Universe, Revenge Trading is anything but a hero’s work.

On the contrary, revenge traders are to be feared and avoided. They are traders who fail to admit when their trades are going towards a loss or who refuse to accept that they’re losing and missing their daily goals.

These anti-heroes have a negative sense of failure and generally want to overcompensate. Look yourself in the mirror and ask yourself – “Am I a revenge trader?”

In an effort to compensate, the revenge trader will almost always chart a course that is propelled by emotions. In an industry where trading plans and preparation are the keys to sustained success, emotional impulses are always a misguided way.

When revenge trader settles into the losing mentality, every time they lose, they try to fix it immediately, leaning heavily on emotionally driven responses and reactions and less on analytical or methodical thought processes. In this heightened emotional state, the revenge trader loses their sense of professionalism and resorts to trying to compensate for their losses through the use of poorly thought-out force.

What revenge trading looks like

Revenge trading starts or is triggered by an initial relatively large loss. After that loss, the trader starts to overcome the big loss with larger trades or multiple poor trades, which only makes things worse. What could have been an isolated loss ends up becoming a catastrophic drawdown or margin call.

Know the Warning Signs

The most important thing for traders to know regarding this syndrome (revenge trading) is that it’s very common. As mentioned above, it’s an emotional state that just about any trader might fall into without the proper warning and avoidance systems in place. Once aware of these pitfalls, the next thing a trader has to do is know how to avoid them.

If, for some reason, a trader knew about revenge trading but couldn’t avoid falling into its grasp, they need to cut their feelings and recognize their unhealthy footing in their portfolio immediately.

Let’s say, for example, you’re suffering a sequence of losses, you’re going away from making your daily goal, and you’re really stressed. Take a step back and ask yourself, “am I getting into an emotional state where it’s of the utmost importance that I make up all of my losses as quickly as possible?” if the answer is yes, you might be infected with the revenge trader syndrome. Our professional advice is to stop everything and make it quick.

If you’re in it, you’re probably the type of trader who would fail to admit that you’re capable of taking losses. You might fail to understand that the market doesn’t care about what you’re doing. Trying to succeed in the market might have become a stronger impulse than following the market prudently and making reasonable decisions based on what you study.

Most importantly, your concept of losing trades is equivalent to failure. Know that taking losses according to your plan is not a failure. Persuade yourself that this is the right way and you can’t force yourself. In case you missed it, here is a great guide for how to embrace such a mental state.

Watch our Correct Mindset for Traders

Type of Trading that Occurs While Under the Influence of Revenge Trading

Not all revenge traders are created equally, though, as there are several types of trading that can happen while in the revenge state.

1. Trader overtrades and forces trades and analysis – This breed of revenge trading is very impulsive, and without proper analysis, the trader would change direction, enter the same position at different prices, and suffer more losses.
2. The “no loss cutting” revenge trader –In this archetype, instead of cutting losses and trying to regroup according to a sound investment plan, the revenge trader might hedge the trade. Since it’s on this list, you can probably tell it’s a bad idea, but we’ll say it anyway – this is a bad idea. When traders do this, they postpone the real decision making of when to resolve their trade. This leads many traders to get confused and ultimately stuck without the ability to recover. At one point you’ll have to get rid of one of the hedge sides and the loss at the time of the initial hedge will remain no matter where the market ultimately ends. Avoid hedging, it’s almost never a viable solution for recovering a loss.
3. The most reckless of all revenge traders is perhaps those who instead of exiting a loss, hold the loss and buys a position at a preferred price. They will average a better entry price but this is a misleading strategy because since the market goes in zig-zags, it will actually get you on a break-even. By doing so and succeeding to get out of this situation, you’re being deceived and threatening detrimental effects to your career. Many times it will be in your favor and you break even, however it only takes one time that it doesn’t and you’re so heavy on the other side, you’ll fall incredibly quick and hit your end of the road margin call and break the account. It’s a tremendous amount of work for a ridiculously quick account crash.

How to Manage If You’re Infected with The Revenge Trader Syndrome

If you recognize that you’re a revenge trader, as we’ve mentioned, first know it’s undeniably bad for your portfolio. From there, you can try to deal with your mental state.

• Coach yourself into not allowing yourself to ever get into a position in which you might mutate from a sound mind into a wild revenge trader. It’s a dangerous emotional state that only grows the more you try to impulsively react against it. Trading in an emotional state will always open you up to abuses from the market and only a focused and well-reasoned trader can avoid getting knocked out by the market.
• Try to get yourself back to a focused, analysis based trading style. If you can’t, take your losses and just stop. Losses are not a failure, remember! Go back to the drawing board and rewrite your trading plan.
• Keep the focus on making reasoned decisions. If you can’t, take the day off and come back fresh at a later date. Being a revenger trader will devastate your trading and can never hold over a long term trading manner. Help spread awareness and let’s beat this syndrome/curse once and for all!
• Take a break and learn from the mistake. A trade may fail, but that does not make you a failure. Take a step back and learn what went wrong in your trading, write the lesson down so you do not make it again.
• Identify the triggers. Revenge trading might be triggered by different factors in every trader. Acknowledge them so you prevent yourself from letting them taking control of your trading.

How to avoid revenge trading in the future

As we mentioned, it is imperative to know what would trigger your revenge trading behavior. Once you have that in place, you need to document the reasons why you have lost a certain trade. Remember losing trades are unavoidable and is part of the trading business, so make sure you are taking correct trades and remember some of those will end up losing money.

A small loss is very unlikely to trigger a revenge trading attitude, so make sure you trade small position sizes, so you do not get emotionally attached to a certain trade.
Lastly, if you feel like increasing your lot size to overcome a loss, just don’t! Stop yourself and walk away from the computer.

Revenge Trading Summary

Revenge trading is one of the most common and devastating behaviors traders can experience. It will more likely present itself after a big loss or a losing streak, leading traders to increase position size and the number of trades taken. All traders will most likely experience it at least once, so make sure you identify it once it gets to you. In that way, you will be able to prevent it from damaging your account, and avoid it in your trading performance.

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