Experiencing losses is as much part of forex trading as winning trades. Unfortunately, a lot of traders take losses personally and they end up reacting to their losses by taking revenge trades.
Revenge trading is mainly driven by the fear of being wrong. It’s usually when a trader, coming from a particularly frustrating loss, decides to make up for it by being more aggressive in his/her next trades.
This is dangerous for your account for two main reasons. First, it forces you to throw your trading discipline out the window. It shifts your focus from your trading process and good risk management to trying to make enough money to recover your losses with less thought out trades.
Trading based on emotions and luck is not trading. It’s gambling. Without any risk management plan, it can bleed your account one trade at a time.
It’s also a lose-lose situation. If you lose a revenge trade, you deepen your drawdown with a trade that you had barely planned for. If you win, then you’re led to believe that trading on guts and emotion works and you’re enticed to do it again.
Revenge trades come in many forms but the most common one is when traders take impulsive (and usually bigger) trades after a particularly frustrating loss in the hopes of making back the money they’ve lost. Here are other examples:
Ian is losing $97 out of the $100 short that he placed on USD/JPY. He sees that the pair is still popping up but he still believes in his trade idea. He adjusts his stop and waits for the reversal. Two hours later his adjusted stop gets hit. He ended up losing $250 instead of his initial $100 risk.
Mika just lost $50 on a trade that went her way only hours after her stop loss got hit. Frustrated, she decides to double up and put $100, double her usual risk, on her next trade. Not wanting to log in another loss, she cut her winner as soon as she “recovered” her $50.
Though they incurred different results, both Ian and Mika are guilty of revenge trading. Ian lost more than double his initial risk to assure himself that his idea is correct while Mika took on a more aggressive trade than she was used to and lost her potential profits by cutting a winner. Both disregarded their usual strategies in favor of avoiding losses.
Luckily, there are ways to recover from a bout of revenge trading. Let’s take a look at some of them:
1. Step out and clear your head after a frustrating loss. Do non-trading related activities and come back only once you’ve acknowledged that losing is part of the game.
2. Document the reasons why you lost your trade. Identifying what went wrong with your trade and focusing on improving your trading process helps lessen the feeling that the market is against you.
3. Take note of your triggers and tells on your trading journal. Do you do it when you’re trading big positions or when you got taken out by unexpected catalysts? Do you do usually bite your fingernails, snack on Cheetos, or scream at your cat before doing it? Knowing your triggers helps you prevent yourself from taking on more revenge trades.
4. Trust in your system! If you’ve tested your system and follow your trading plan 100%, then you won’t mind the losses much because you know that the end numbers will add up in your favor in the end.
5. Practice risk management. If you make risk management a habit, then you’ll have better trading discipline and are less likely to take impulsive trades. If you’re not used to it yet though, then you can start with following strict rules on position sizes and trade duration.
Remember that even the most consistently profitable traders have bad trading days. It’s all part of the game after all.
Don’t take losses to mean that the market is against you. It doesn’t care about your feelings or how sound your trade ideas are. In fact, it’s our job as traders to trade what we see and not what we think. Let go of your ego and focus on getting one good trade after another. It’s not you, it’s just forex trading.