Six Reasons Why Revenge Trading is Lethal

Do you know what the all-time great American Stock Trader Jesse Livermore once said?

"The best way to make money in the market is not to be greedy. When you see a good profit, take it and run. You don't have to hold on until the last minute."

Sage advice, right?

But let's be honest, sometimes emotions get the best of us, especially after a loss. We all want to recoup that money fast, and that's where things can get dangerous.

By Wanting to take back the money lost, we are entering the world of

Revenge trading – the dark side of wanting to win back what you lost, Clouded by emotions and a distorted view of the market.

Here's the thing:

Revenge trading isn't just about making bad decisions in the heat of the moment. It creates a whole series of problems that can seriously hurt your chances of success.

This blog will discuss why revenge trading is lethal for your trading journey. We'll explore how emotions can lead to impulsive choices, confirmation bias, and ignoring crucial risk management strategies.

By understanding these dangers, you can learn to keep your head cool and avoid the pitfalls of revenge trading. So, buckle up and let's get started!

Reason #1: No Place for Emotions in Trading, Obviously!

We have emphasized it enough on these pages and will repeat it.

There is really no place for emotions in trading!

Imagine being punched in the face - the pain and anger might cause you to react impulsively without thinking clearly about your next move.

This is what exactly revenge trading makes you do,

You see, Losses can trigger a strong emotional response - anger, frustration, a desperate need to win back money. These emotions cloud your rational thinking and replace it with a primal urge to "get back at the market."

The Consequences?

You Start Chasing the Market.

The market doesn't care about your emotions. In the heat of the moment, you might chase after trades that look like easy wins but lack the technical analysis or fundamental justification that your strategy typically demands. This can lead to buying at highs or selling at lows, further amplifying your losses.

Overlooking Risk

Impulsive decisions often lead to neglecting risk management. Increase your position size beyond your usual limits, hoping to make a more significant profit to offset the previous loss. This significantly increases the potential financial damage if the trade goes against you.

And your Focus is reduced to Short-Term only.

Revenge trading makes you lose sight of your long-term trading goals. Your Focus narrows to recouping immediate losses, which can lead to taking on unnecessary risk for short-term gains, jeopardizing your overall trading strategy.

Reason# 2: Throws Risk Management Out of the Window

Here is a fun Fact first,

Why are we telling you this?

Because we want you to notice the difference of "1 in 292.2 million and 2-5%, i.e. 2-5 in 100"- Quite a big difference. Isnt it?

Professional poker players employ skill, strategy, and calculated risk management to increase their win rate compared to the purely random chance involved in the lottery.

The Key skills are duly adopted by Professional traders as well!

But when you start Trading under emotions, the biggest mistake you make is letting your this guard down!

With no defense upfront, you face the market punches, left, right and center,  and before you realize this, it's already too late.

And how do you become this defenseless?

Yes, by remembering your risk management practices.

Because,

The first Impact of Revenge trading is

Neglecting Stop-Loss!

A stop-loss order is a vital tool that automatically exits a trade when the price reaches a predetermined level, limiting potential losses.

What Revenge trading does is make you ignore or cancel stop-loss orders altogether instead of logically placing them. This exposes your entire capital to potentially significant losses if the market moves against you.

And once the stop loss is out of sight

Position Sizing begins to fade away as well!

A well-defined trading plan dictates a specific position size for each trade, ensuring you don't risk too much capital on any single position.

As you hope to make a larger profit to offset the previous losses under revenge trading, you abandon this strategy in favour of larger positions by significantly increasing your size.

This significantly amplifies the potential financial damage if the trade goes south.

As a result of this approach,

You start Ignoring your Risk Tolerance as well.

A key aspect of trading is understanding your risk tolerance.

- the amount of money you're comfortable losing on a single trade.

Revenge trading also throws this concept out the window. You might take on trades that exceed your risk tolerance by a large margin, putting your entire account at risk due to emotional impulses.

The End Result?

You Lose Discipline!

You see, trading is all about Discipline!

 Sticking to your plan, even after losing trades, is crucial. As Revenge trading replaces Discipline with emotional decision-making, You are potentially leading to a series of reckless trades with no regard for risk management.

Reason #3: Makes your Judgements Biased

Biasedness towards anything is terrible,

But what if it is towards your trading?

It's Lethal!

Due to the consequences it brings.

There is a very famous term when we are discussing the Bias in trading

The Confirmation Bias

Confirmation bias is a cognitive trap where you seek out and prioritize information confirming your beliefs while ignoring evidence that contradicts them.

confirmation bias is like being so focused on feeling better about that loss that you only see information that makes you feel like

you were "almost right."

You might scour the internet for articles that say the market is about to turn around, ignoring any warnings or signs that things might worsen.

Isn't it a tunnel vision? Seeing nothing left and right!

Indeed, it is leading us to

Selective Information Processing

You only hear the "good news" about the market, even if it's weak or unreliable.

You become so hyper-focused on any market signals that suggest a quick turnaround that You might downplay or completely miss crucial indicators that point towards a different outcome.

You Start Ignoring Red Flags

Your emotional state makes you blind to potential risks. You might overlook warning signs like unfavorable technical indicators or negative news about the underlying asset you're considering trading.

Experts call this

The Echo Chambers

A room that only echoes your desires!

Where you surround yourself with information sources reinforcing your desire for a quick win, this could involve online forums or social media groups focused on short-term, emotionally charged trading strategies.

For example, spending all your time with friends who only talk about get-rich-quick schemes – you become isolated from diverse perspectives and miss out on valuable information that could help you make informed decisions.

Here is the bottom line!

Revenge trading creates a distorted reality where your emotions filter out information that contradicts your desire for immediate gratification. This selective information processing can lead to poor trading decisions based on flawed assumptions and ignoring crucial risk factors.

Reason #4: Leads to Overtrading-The Treadmill Effect

Yes, it's like running on the treadmill,

You keep increasing the speed, thinking that you can cope by putting in extra effort, but there comes a time when you can no longer keep up the pace.

The result?

Your Downfall and potential injuries

The same thing happens with revenge Trading.

Revenge trading often leads to a dangerous phenomenon called "overtrading."

As the Losses fueled by emotions trigger a compulsive need to "do something" to regain control, this can manifest as a constant urge to place trades, hoping to recoup losses quickly.

And placing orders quickly,

reduces your analysis Time

Overtrading leaves less time for the thorough analysis crucial for successful trading. You rush into trades without proper planning or consideration of factors like entry and exit points, risk-reward ratios, and market trends. This haste increases the chances of making mistakes and incurring further losses.

Not only does it reduce the time for analysis, but it also results in

Missing Opportunities

Glued to your screen and constantly chasing trades can make you miss genuine trading opportunities requiring patience and a well-defined strategy. Overtrading hinders your ability to see the bigger picture and identify potentially profitable setups that require a more measured approach.

Reason #5: It leads to Compounding Losses

You might have noticed in your trading journeys that we humans are naturally more averse to losses than gains.

This phenomenon, known as “Loss Aversion”, is magnified during revenge trading.

Each loss fueled by emotions triggers a more robust negative response. You might start feeling desperate to recoup your money quickly, leading to even riskier decisions to "win back big." This desperation further clouds your judgment and increases the likelihood of further losses, creating a psychological spiral.

There is another Psychological to this as well,

The Fixation on Past Mistakes

Nobody likes incurring losses because they sting every now and then, But dwelling on past losses can be paralyzing.

Revenge trading keeps you fixated on these mistakes, making it difficult to focus on future opportunities and implement a clear trading plan. This fixation hinders your ability to learn from your mistakes and improve your trading strategy.

Reason #6: Account Erosion and Further Damage

Combining impulsive trades, ignoring risk management, and overtrading can lead to rapid account erosion.

As your capital shrinks, the pressure to make money back intensifies. This pressure fuels further emotional decisions, creating a dangerous feedback loop that can quickly deplete your trading capital.

This dwindling account size

limits your trading options.

You might be forced to take on more minor positions or risk a larger portion of your remaining capital on a single trade, further increasing your risk profile. This can put immense pressure on each trade, making it even harder to make rational decisions.

And Account Erosion doesn’t come alone.

It comes with further Psychological Challenges.

Leading to

Self-Doubt and Second-Guessing

A string of losses fueled by revenge trading can erode your confidence in your abilities. You might start questioning your trading strategy and second-guessing every decision. This self-doubt can lead to Analysis paralysis, making it difficult to pull the trigger on even well-calculated trades.

This self-doubt creates in you

The Fear of Making More Mistakes

& this can be crippling!

It can lead to a reluctance to take any trades, even potentially profitable ones. This fear prevents you from learning and growing as a trader, hindering your long-term trading goals.

The emotional toll of revenge trading can be significant. Financial losses, self-doubt, and fear can be incredibly draining. It can lead to a sense of hopelessness and a feeling that you'll never be a successful trader.

In Conclusion

Remember,

The market doesn't care about your emotions. It's a game of patience, Discipline, and following your trading plan.

By staying objective, managing your risk wisely, and learning from your mistakes, you can avoid the pitfalls of revenge trading. This blog gave you the five reasons why revenge trading is lethal, but there's a whole world of knowledge out there to help you become a successful trader.

Keep educating yourself, practicing good habits, and, most importantly, keeping your emotions in check. This will help you to,

Trade Smarter!