Do you ever get angry or upset after a losing trade? You start getting frustrated, and then you get an idea — "I will recoup all my losses on the next trade!" I am sure that many readers know this reaction, it is very common but dangerous in the trading world, called “revenge trading”. Research actually indicates that financial loss due to emotional trading can be worsened by as much as 60% in a single session. But that is exactly the temptation and danger of revenge trading, a trap which even the most experienced traders sometimes get caught in.
This article will take you through the basics of revenge trading, what psychological triggers cause it, and most importantly how to prevent yourself from falling into this self destructive behaviour.
What Is Revenge Trading in Forex?
Revenge trading is that inclination to take new, usually impulsive trades in order to cover the recent losses from previous ones. Following an unforeseen or emotionally traumatic loss, the urge to “get back” that cash is excessive. Instead of doing a sound analysis and planning for the next move, traders take new positions in haste to recover from their recent loss. This usually results in even more significant losses.
The Psychological Side of Revenge Trading
A familiar, but costly trap for many traders is the impetus to feel the need to “make-up” for a loss due to a bad trade. Revenge trading is essentially a reaction to all the emotional anguish that comes with losing money, rooted in both cognitive biases and reactions occurring inside our skulls. Below are the key psychological drivers of revenge trading.
Let’s break them down:
Loss Aversion
If you think about it, loss aversion is one of the strongest human motivations that drive revenge trading. Loss aversion is a concept that prof Allen Gannett explained in his piece on behavioural economics, saying that humans feel the pain of a losses roughly twice as strongly as we feel the joy of a gain of similar size. For instance, a trader losing $1,000 will feel the loss twice as strongly as he would feel happiness for gaining $2,000. Since losses are experienced with such greater force, there is also an intense urge to “erase” the unwanted result.
The intensity of this reaction causes a trader to want to open a new trade immediately, as if there is something that needs fixing from the erroneous performance. But the haste in recovery pushes towards unplanned steps which result in severe losses instead of being recovered.
Fear of Missing Out (FOMO)
Fear of missing out (FOMO) is another psychological factor that can cause revenge trading spiral to amplify. If you watch others making profitable trades and can’t enter in the same trade — or see an actual able to cover a portion of your losses, you might experience a deep fear that you are missing out on an opportunity to “get back into the game” and compete again with others. This might lead to risk exposures or trades that are entered without a plan.
Scalping trades based on FOMO can create damage as this lacks market basis. Rather, they are driven either by a fear of missing regret or to show the trader that he can still emerge victorious in the market. In this desperation to recover, people make hasty choices and the losses spiral out of control instead of being controlled.
Ego and Self-Worth
For many traders, a financial loss can feel like it hurts the trader's competence or self-worth. Creating an association that losing usually means personal failure. For traders who cognitively tie their performance in the market to their skill or intelligence, losses can be severe blows to their ego. This can be even more accurate and somewhat damaging for a trader who has had any level of success or established themselves as being good at trading.
They may take even larger risks or jump into new trades, hoping that they can score a quick win and redeem themselves in their own eyes. This is an understandable aspect of the psychology behind trading — there are bills to pay and immediate results are much easier to stomach, but this need for quick victories can lead to destructive behaviour, wrecking their account as well as confidence.
Fear of Further Losses
Surprisingly, even the fear of further losses may lead to revenge trading. Traders who experience a loss will be filled with anxiety, since they fear that they may incur further losses. Which can lead to some sort of panic or urgency, prompting them to act on emotion instead of logic.
For instance, after losing money a trader can quickly open a new position with the intention of getting back or minimizing losses. But the fear of losing more blurs the reasoning, and traders conduct quick trades without assessing their risk which compounds the issues.
The Chemical Effect of Adrenaline and Dopamine
Revenge trading can also have a physiological aspect tied to the brain’s chemical responses. Trading, especially in a fast-paced market like forex, often stimulates adrenaline, a hormone associated with the body’s “fight or flight” response. After a loss, the rush of adrenaline can create a sense of urgency, pushing traders to act quickly to regain control of the situation.
Dopamine, the hormone associated with pleasure and reward (in simple words: a neurotransmitter), is another reason behind price breakouts and sell-offs that make trading an addictive habit. With every trade, particularly one placed right after a loss, we get a little burst of dopamine; the emotional toll from losing can disappear for a minute. But this is temporary relief that comes with a desire for more. This creates a vicious cycle, as traders can get drawn into the revenge trading spiral, with each impulsive trade fuelling their appetite for another (quick) “hit”, that never seems to connect.
All of this together causes a reaction called revenge trading. Partially because of loss aversion losses stings so much worse than winning. You need to win more to achieve real happiness. Also, FOMO and ego twitch, while self-worth is at stake. All this, combined with the consequences of adrenaline and dopamine activity in your brain can lead traders the way to a vicious circle of bad decisions. But, these behaviors are an inevitable part of trading, and only by admitting to themselves which one they can easily fall prey to will traders be able to develop the self-discipline necessary for avoiding revenge trading and rationally making decisions based on strategy rather than emotion.
The Risks of Revenge Trading
One of the most toxic actions a trader can engage in is revenge trading – the complete nemesis action to what we want for our account balance and sanity. In this section, we will discuss just why revenge trading is so dangerous and how it can ruin not only a trader’s finances but also their mental health.
Increased Losses
It's hard to calculate the market objectively when you're trading on emotions. It is more likely that after a loss you will act on impulse instead of creating and executing an elaborative plan. Such an emotional reaction generally results in entering and exiting poor trades. So, losses can accumulate fast and it will result in more challenge to get back to where you started. However, revenge trading does not help you win back what you lost — on the contrary revenge trading can lead to further financial damage.
Psychological Burnout
Revenge trading is not good at all, it tires your mind. In fact, you are under constant stress and anxiety to recover the previous loss, ultimately leading to emotional burnout. This pressure builds, and eventually makes trading feel like a monotonous race rather than a form to refine. The result? And then you wonder if you made the right decision to trade at all — exhaustion and frustration. Burnout doesn't just harm your performance, it can also ooze into other aspects of existence such as: relationships, health, purpose, motivation – you name it.
Impulsive Decision-Making
Any decision made under emotions leads to quick decisions. Revenge trading is missing the crucial element of analysis as well as a reason to enter. Rather than respecting where the market is or any indication of a strategic signal, your decisions reflect only an urge to “win back” losses as quickly as possible. This makes trading reactively, causing a high likelihood of expensive mistakes. In the long run, this hasty decision making tends to generate erratic results and lost potentials.
Eroded Discipline
Revenge trading can seriously erode trading discipline. After a loss, the urgency to “make things right” can push you to abandon established rules and take unnecessary risks. Discipline is key to success in trading; when it’s compromised, consistent profits become nearly impossible. Over time, each episode of revenge trading weakens your ability to stick to a strategy, turning disciplined trading into emotional decision-making.
Damaged Trading Strategy
Firstly and most importantly, revenge trading is damaging your overall trading plan. Every time you pursue a loss with a trade, it is a further deviation from the original plan. When the momentum swaps, you will toss your rules about entry points, stop-loss levels and risk management out of the window for a shot to get back what you have lost. Without a structured approach, trading becomes random and volatile with inconsistent results and large losses running up over time.
To sum it up, revenge trading clouds the mind from making rational decisions and it traps traders into a repeating cycle of losing more money; burning out; impulsive actions; then ultimately, ruined discipline. Knowing these pitfalls is essential to solid trading psychology and a long-term strategy.
Recognising the Signs of Revenge Trading
If you can identify the warning signs of revenge trading, you will be less likely to fall into this trap. Keep an eye out — these are the red flags to watch out for and avoid:
Need to Recoup Losses: If you feel like trading right after taking a loss, that is a red flag.
Higher Trade Sizes: Revenge traders tend to double down or increase trade sizes to recover their losses as soon as possible.
Not Following Your Trading Plan: If you find yourself straying from the plan, this is generally a precursor to an emotional trade as opposed to one based on analysis.
How to Avoid Revenge Trading
This is a great answer to revenge trading, but it requires self-discipline and concrete guidelines in addition to a sturdy psychological framework. To avoid emotional trading, here are some tips in practice.
Set a “Cool-Down” Period
Close the market after a bad blow. This is what some traders refer to as a "cooling-off period." This break resets your emotions and gives you time to analyze previous trade without the urge to make an immediate reaction. Keep in mind, patience is a strong conclusion to forex trading
Limit Your Daily Losses
Establishing a daily loss limit can keep you from trying to make back losses in the first place! In the case that you reached your daily loss cap, you will know to call it a day and reassess. This limit keeps you from entering a slippery slope of poor trades.
Reflect on Your Loss
Treat your losses as learning moments. Going back over a losing trade helps you identify where the loss came from–Was it due to market conditions, was your math wrong, or maybe an emotional trade? So learning the cause for loss will ensure that we do not make same error in future.
Develop a Pre-Trade Checklist
A pre-trade checklist helps ensure you’re entering trades for the right reasons. Include items like current market trends, your risk tolerance, and alignment with your trading plan. This step-by-step checklist can prevent you from making emotionally driven trades.
Use Mindfulness Techniques
Mindfulness exercises, such as deep breathing, visualisation or short meditations, will allow you to respond to those emotional triggers in the moment. According to a study in Journal of Behavioral Finance, by practicing mindfulness, traders may reduce their impulsivity and exhibit higher levels of trading rationality.
How to Build Immunity to Emotional Trading
Then comes the biggest challenge – getting past revenge trading is making a right mindset that goes through many trials. Let us take a closer look at ways to build the right mindset for trading:
Daily Mental Assessment: Every day before you start trading, force yourself to mentally check in with yourself and make sure that you are calm. Get in the right state of mind to make sound decisions.
Accepting Losses: Acceptance of loss is a part of this concept, every trader experience some losses. If you view losses as lessons rather than failures, it helps detach emotion from trading.
Follow a Written Trading Plan: A written trading plan provides structure and consistency. Give clear cut rules on where and when to enter, exit, and what your risk limit will be so you always have a plan to follow—even in the heat of battle.
Final Thoughts: Control Your Mind To Control The Market
Revenge trading is a trap for traders of all levels and based upon the same emotional drivers that affect us all. But you can stay out of this very expensive back and forth dance by implementing some strict boundaries, realizing when the emotion is driving your decision-making process, and taking a step back. Keep in mind that trading well is a marathon, not a sprint. That takes a level of discipline, grit and the willingness to learn from both wins and losses.
Keep a journal to track your emotional triggers and review your trading plan regularly, and enter every trade with a clear head, devoid of any anxiety to stay grounded. By using them, you will not only prevent the disaster of revenge trading from happening but also change to become a more consistent and confident trader.
If maintaining consistency in your trading discipline has been challenging, start using a trading journal or drafting up a detailed pre-trade checklist. Use these habits to stay the course and remain focused through difficult losses. Happy trading!