Revenge trading is the easiest way to turn a nice green day into a red one. It is one of the biggest issues we see for new traders. In order to become a profitable trader, you have to learn to combat revenge trading and eliminate it from your trading. In this article we will talk about what it is, why it happens, and what you can do to combat these destructive tendencies.
What is Revenge Trading?
Revenge trading occurs after you have had one or several losing trades, and you start to get emotional. You want to make back the money you just lost, so you start forcing trades on sub-par trading setups. What happens after is that you end up losing even more money, you become even more emotional, and you start to spiral out of control.
You jump on the next stock that moves and hope that it will rescue your day and restore the gains in your trading account you just lost. The setup is completely outside of your niche, and it ends up turning into another loss. You usually only trade the mornings, but you stick around in the afternoon to try to make your money back. Next thing you know, a small red day turned into you losing a whole week’s worth of profits in just half a day.
Why Does It Happen?
It is human nature to want to get back what we just lost. Especially when it is something we are emotionally attached to like money. Traders are their most vulnerable after a loss, and the natural reaction is to try to make the money back. It is this mentality that makes casinos so profitable.
Every day there are thousands of stocks moving. There is a ton of temptation to trade one of these random stocks after a loss. Often your emotions will override the rational part of your brain, and you will end up viewing some of these random stocks as a legitimate trading opportunity. The reality is, these stocks are just moving randomly, and there is no edge trading them for you. But you cannot recognize that because you want to make back the money you just lost so badly.
Solutions To This Issue
Revenge trading happens even to the most experienced of traders. The first step to preventing it from affecting your trading is developing high self-awareness. Turn your attention inward after you have had one or several losing trades. Recognize when you’re starting to get emotional.
When trading opportunities present themselves in this state, maintain the ability to recognize which setups are a high probability, and which setups are low quality. Ask yourself: Is this a trade I would recommend to my mom with her life savings?
If you are having difficulty controlling your revenge trading, taking a break and leaving your computer is the best thing for you to do. Getting away from charts will allow you to settle down and recollect yourself.
A daily max loss on your trading account is another great way to prevent revenge trading. A daily max loss will cause your trading account to become locked once you are down a certain amount of money on the day. This will prevent you from spiraling out of control, and prevent you from revenge trading your trading account.
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