Over the years, this issue has lessened quite a bit, thankfully. However, when it does happen, it causes massive damage. It reminds me to tighten up and be ultra-aware of myself. In my early years, revenge trading would wipe out a whole week, or even a month’s worth of profitable trading. I knew I had to figure it out and address this.
I believe most people struggle with this revenge trading problem, especially new traders who are not aware of their tendencies. Falling into this trap can lead to huge losses in your account. It’s like someone else (a stranger) took over your trading account and is trading as an angry drunk with something to prove to the world. It’s like your ego on steroids and your rational side goes right into the trash. Leaving behind a belligerent and brainless monster, in complete control of your trades. A scary prospect, right?
The typical revenge trading cycle, at least from my experience, goes like this: I’m having a great week, trading has been going well and I’m green. Then, WHAM! A big unexpected gap down overnight has me losing my entire week’s worth of work in a flash. Frustration, anger, confusion, sadness…all come up.
What follows next is the slippery slope in action. After taking a shocking loss, the first thing I personally want to do is “get it back.” Just to get back to where I was, whether that’s break even or back to where my account was. At that exact moment, trading integrity slides, and we start making excuses and concessions that we wouldn’t normally make. Rules fall to the wayside, and common sense fails. At that moment, we’re not in control any longer.
At that point, I chase. I go for plays and setups that I would never otherwise consider. I go for “quick wins,” lusting for a fast buck. That longing for a quick win turns into many paper-cut quick losses. When day trading, I find that about 2-3 entries a day is about max, but on a bad revenge run, I could be in up to a dozen entries for the day (easily). By the time the dust settles, and I wake from this revenge trade haze, my account is usually beaten into a pulp. I leave feeling even lower and more frustrated than when I started trying to “win it all back.”
For me, that’s my revenge trading cycle in a nutshell. Over the years, it happens less frequently now. It used to happen almost weekly, then monthly, quarterly, and now it only occurs once or twice a year. But when it does happen, it’s a significant blemish on my P/L sheet, standing out like a sore thumb. Revenge trading brings out our worst tendencies.
How do we stop this revenge trading monster from taking over? One of the best ways to prevent it is by creating a simple rule customized to your trading style. For me, it’s a rule of two: 2 losses in a row, and I’m done for the day. 2 red days in a row, and I’m done until I figure out if it’s my mentality or a change within the overall markets. The point is to save yourself from yourself. I found that this magic number is enough to allow me to take a break and step back before things get out of control. I highly recommend implementing a similar rule for yourself as it was a lifesaver for me.
Working on the roots of my anger or frustration was another significant help for me. I cannot answer this for you. You need to chase this down for yourself, get to the root. Anger, obsessive longing, frustration, etc. are all just symptoms of a deeper disturbance within. It might seem silly, but I can guarantee that it’s something deep within causing you to react negatively and lose control of yourself and your trading.
Do whatever you need to do to bring it to the surface. Get a therapist, talk to a life coach, vent to a friend, find a trading mentor, journal, study the topic extensively, watch YouTube videos. Whatever you need to do to be at peace with that demon, whatever you need to do to release it and let it go.
The last word of advice that I have is to change up or fine-tune your trading style. Work around yourself and avoid your worst habits. For example, I had to realize that day trading or scalping mentality was a trap for me. I got to chasing too easily. I had to change my time frames and switch to more of a swing trader and investor style. I was trading the same as before, but much slower. Days and weeks charts, instead of the 5-minute and hourly. That helped me a lot, and I rarely fall into the revenge trading trap anymore.
In summary, the answer to avoiding, correcting or becoming aware of these mental pitfalls is different for everyone. The answer lies within us. Problems with revenge trading? Examine your mind, examine your emotions. Pursue a deeper understanding of yourself to put that revenge trade monster in its place for good.
