Revenge trading is a common pitfall in the trading world, where a trader makes impulsive trades to recover losses from previous trades.
Instead of ing a well-thought-out strategy, the trader acts on emotion—often fear or frustration—hoping to “win back” lost money quickly.
This apach usually leads to bigger losses, as decisions are driven by anger or anxiety rather than analysis.
Understanding revenge trading and learning to control emotional impulses is crucial for long-term success in any market, whether stocks, forex, or crypto.Table of ContentsHow Does Revenge Trading Work?Causes of Revenge TradingConsequences of Revenge TradingSee All 11 ItemsHow Does Revenge Trading Work?The behavior known as revenge trading rears its head when you suffer a loss while trading and, out of frustration or anger, you take a larger position or enter multiple trades to recoup your loss.
Too often, this leads to a bigger loss, potentially wiping out all your capital.Revenge trading is a common behavior among traders.
However, it can be devastating to your account and trading performance. Revenge trading is an emotional response – typically to a bad trade – of fear, anger, perhaps even greed, and shame.
Your emotions can drive your decisions after suffering a big loss or a series of losses.
Executing a trade poorly, hitting your stop, or missing a chance for a fit might be scenarios that trigger revenge trading.
Your emotional state may lead you to increase the size of your position, ignore stop-loss orders, and abandon your trading plans.
You might be frustrated that your trade idea didn’t work out or angry with the market.
Reacting negatively to a loss, believing you can fix what is broken, or struggling to accept you were wrong are natural responses to a setback.
Instead of stopping to think what to do next or reviewing your strategy, you might enter another trade, believing you can quickly recover the loss.
However, letting emotion take the wheel instead of ing an analysis strategy can drive your trading into a ditch.Causes of Revenge TradingFear, anger, desperation, greed, and guilt are the emotions that can trigger a desire to seek revenge against the market.
Losing money is not easy.
You may get angry at yourself, or you might even feel ashamed if your family and friends know you lost a bundle.Your ego or disposition might play into revenge trading behaviors.
The direction the market moves is the sum of all investors’ knowledge and opinions. The market moving against you means that you were wrong.
If you’re overconfident or hypercompetitive, an outsize emotional response could lead to even larger losses.Consequences of Revenge TradingRevenge trading can lead to amplified financial losses, but it can also impact your trading performance.
Your emotional response can open the door to rash decisions, leaving your risk management and trading plans outside on the stoop.
The ensuing cycle of poor choices can compound your losses.Acting impulsively goes against the three fundamentals of sustainable trading success: plans, preparation, and discipline.
Without this foundation, you are more ly to trade on emotion rather than headed strategy.
In your attempt to recover your losses, you may enter positions at a bad price, hold a loss too long, or double down on a losing position.
This can zap your capital, making it even harder to recover.Pursuing losses in an emotional state can contribute to stress, leading to burnout and impaired judgment.
This downward spiral can have lasting effects, as you abandon strategy and develop bad habits.
Ultimately, the loss of discipline and lapses in risk management plans can lead to unrecoverable losses.How to Stop Revenge TradingFortunately, there are ways to combat revenge trading.
Consider these five practices:1. Establish and Stick to a Solid Trading PlanA well-defined trading plan can help you stave off the desire for revenge.
Relying on your plan takes the emotion out of trading. Its rules are your road map, leading your decision-making and keeping you disciplined when losses come or when you feel emotions starting to rise.
2. Cultivate Emotional DisciplineWins and losses are inherent in trading. Learn to accept that you will lose sometimes.
By emotional discipline, you can distance yourself from the outcome of individual trades. Instead of devoting all your attention to results, focus on the overall trading game.
This can help you accept any losses you incur.3. Implement Risk ManagementRisk management is critical to sustainable, successful trading.
Set your stop-loss orders before you begin trading, and know the percentage of capital you plan to risk on each trade.Consider setting boundaries on the amount of losses you are willing to take before exiting a trade.
Deciding on a specific number – and sticking to your decision – can prevent you from chasing the trade and possibly losing all your capital.4.
Keep a Trading JournalIn a trading journal, you document your trades so that you can reflect on and learn from them.
Regularly reviewing your journal allows you to recognize patterns, analyze mistakes, and gain insight into your trading habits.
This insight can help you develop strategies to control your emotions while trading.5.
Take a BreakStepping away after a loss, especially a big one, can give you time to recover emotionally, even if the break is brief.
After a day or two, you might feel refreshed and ready to review and adjust your trading plan.Additionally, you don’t have to trade every day.
Consider assessing market conditions before deciding whether to trade that day.
While economic events, central bank nouncements, and other news can create opportunities, they also can create volatility.
There’s nothing wrong with sitting out sometimes.Understanding Revenge Trading Can Help You Avoid ItRevenge trading can devastate you financially and hold you back from success.
Understanding the psychological impact of trading losses and knowing the signs to watch for after a loss can help you avoid this self-destructive behavior.
Awareness, patience, and strong risk management are key to the cycle of revenge trading and achieving long-term success in the .Frequently Asked Questions QHow to get rid of revenge trading?
AIf you catch yourself revenge trading, stop trading and walk away, allowing your emotions to settle.
To prevent revenge trading in the future, consider these steps: (1) Build discipline, accepting that losses are part of being a trader, (2) implement good risk management strategies, (3) review your trades and learn from your mistakes, (4) stick to your trading plan and (5) talk to more experienced traders for support.
QIs it true that 90% of traders lose money? A Yes, it’s widely reported that around 80–90% of traders lose money, especially beginners.
High failure rates are due to poor risk management, lack of discipline, and emotional trading. QWhat is the 1% rule in trading?
A The 1% rule in trading states that a trader should never risk more than 1% of their total trading capital on a single trade.
This helps limit losses, tect the account from large drawdowns, and mote disciplined risk management.
Sarah EdwardsSarah Edwards is a finance writer passionate helping people learn more what’s needed to achieve their financial goals.
She has nearly a decade of writing experience focused on budgeting, investment strategies, retirement and industry trends. Her work has been published on NerdWallet and FinImpact.