What is Revenge Trading?

Revenge trading meaning when trading is done irrationally while ignoring tried and tested trading tactics to make back previously lost money. In revenge trading, people act impulsively, usually in anger, to take revenge on the market. 

This article discusses the risks and triggers of revenge trading and how to maintain trading discipline to avoid revenge trading.

What is Revenge Trading?

Revenge trading is impulsive trading behaviour with the aim of recovering money lost in an earlier trade. When trading is done based on emotional reasons, the consequences can be severe. These include:

1. Loss of capital: Since in revenge trading, your trades are not based on tried and tested tactics, you face a high chance of losing all your working capital.

2. Loss of faith in trading abilities: When you take part in revenge trading and lose, you can begin to cast doubt on your trading abilities, which can severely affect your confidence. 

Triggers of Revenge Trading

It is essential to understand the triggers of revenge trading so that you can take preventive actions against them. Some common revenge trading triggers include:

1. Losses

The immediate trigger for revenge trading is a loss in an earlier trade. It can give rise to the urge to recoup lost money as soon as possible, leading to impulsive decisions.

2. Anger or frustration

Upon losing a trade, you can get angry and frustrated at your poor trading decision, leading to revenge trading.

3. Shame and fear

Many traders struggle to accept a trading loss, especially if it is substantial. This leads to the urge to recoup the lost money immediately. Shame and fear of being exposed to others are strong psychological drivers of this behaviour. 

How to Prevent Revenge Trading

The following steps can help you avoid trading revenge:

1. Create a trading plan

Having a predefined trading plan and sticking to it can help you avoid impulsive trading decisions.

2. Set stop-loss orders

To limit potential losses, consider setting up stop-loss orders, which sell your stock or security when it falls below a predefined threshold.

3. Take breaks

Instead of trading continuously, consider taking periodic breaks to clear your mind and avoid falling prey to your emotions.

4. Recognise unavoidable losses

Instead of giving in to shame and fear, recognise the fact that your investments are subject to risks and sometimes losses are unavoidable. 

Revenge trading is an impulsive behaviour with serious personal and financial consequences. By following the steps given here, you can avoid giving in to the urge of revenge trading. 

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