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.
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.
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, you 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.
Luckily, there are ways to recover from a bout of revenge trading.
The easiest thing to do is to step back and clear your head. Maybe engage in non-trading-related activities until you acknowledge that losing is part of the game.
Documenting your losing trades will also help your next trades. How can you improve your analysis and execution? Did you have any triggers or tells before you made your revenge trade?
Last but not the least, you have to make risk management a habit. If you have better trading discipline, then you’re less likely to take impulsive trades.
Remember that even the most consistently profitable traders have bad trading days. Don’t let a couple of losing trades keep you from becoming a consistently profitable trader in the long run.