Are You Revenge Trading and You Don’t Even Know it?

BY TIO Staff

|December 7, 2022

Revenge trading? What is that? Who knew this was even a thing? How can you avoid revenge trading and how can you deal with revenge trading once you realize you’ve fallen victim to it?

If you ever feel like you’re out for revenge when you trade, you’re not alone. A lot of traders are guilty of revenge trading, even if they don’t realize it. In this blog post, we’ll discuss what revenge trading is, and how to avoid it. We’ll also provide some tips on how to stay disciplined while trading so you can ultimately be a better trader.

So read on to learn more!

What is Revenge Trading?

When trading you can be subject to a number of market risks, and revenge trading, otherwise known as revenge investing, is one of them. Revenge trading is essentially the practice of taking bigger and more frequent trades to try and make up for past losses instead of having a strategy in place and sticking with it. It falls under the scope of trading psychology traps.

A Revenge Trading Analogy

Imagine this scenario: You’re an entrepreneur, with a number of businesses, and you’ve recently switched to a fruitarian lifestyle. You’re excited about your new lifestyle and you’re inspired by the success of the raw food movement abroad. You decide to open a fruitarian restaurant in your hometown hoping to change people’s food preferences.

More hopeful than logical

Despite warnings from friends and family and research showing that similar restaurants have been closing down, you see this as a gap in the market. It’s an opportunity and you still believe that you could get people on board with your idea. Secretly, you also want to prove to your family and friends wrong and show them you’re a good entrepreneur with amazing market instincts. So you pour your life savings into this new venture. When it doesn’t take off immediately you feel aggravated as your family and friends start saying “I told you so!”.

When Pride Takes Over

You don’t want them to be right, and you don’t want to feel like a quitter who gave up too soon. Meanwhile, your other businesses start to suffer since you’ve used a big chunk of your capital and cash flow to start the new business. So you give it a second chance by taking out a loan, because you want to believe that society and culture are slowly shifting. Sadly, your hometown’s community has not converted to your ways fast enough for you to turn a profit, or to break even.

In a last effort to gain hopeful insights, you join a mastermind group and start talking to other entrepreneurs ‒ who secretly don’t want to admit to their failures and struggles and who only talk about their successes. So you start to feel hopeful that you are on the right path and should keep at it just like them.

One more try to make up for losses

Wanting to give your fruitarian venture a third chance, you take out a second loan. You hire a marketing firm and invest even more to grow your business. A month later, you toss out the last rotten cucumber from the industrial-sized refrigerator which you are now selling to pay off part of your debts, you lock up the restaurant and stick a “Business for Sale” sign on the door… and you go and buy yourself a BigMac.

Sound familiar? That scenario is the entrepreneurial venture equivalent of revenge trading.

What Causes Revenge Trading?

Reading the story above, one might think, “duh! It’s so obvious where this guy went wrong, how could he not see it?”

However, it’s not easy to see how big a storm is when you’re in the middle of it. One needs to look at situations like this from a bird’s-eye view. The emotions this entrepreneur experienced are very similar to emotions that traders experience which can cause them to fall victim to revenge trading.

Let’s take a deeper look. What emotions was this entrepreneur experiencing?

Revenge Trading Emotions

  • Hopeful for a different future
  • Inspired by others’ successes
  • Proud and wanting to prove people wrong
  • Greedy and wanting to belong to a group of ‘successful’ entrepreneurs
  • Fear of missing out by quitting too soon
  • Ashamed and wanting to recover from loss

Trading ‒ as in other business ventures ‒ can be as much of an emotional roller coaster as a monetary endeavor. Many traders fall victim to revenge trading, where an emotion such as fear or greed leads to unexpected losses.

Fear-based revenge trading often takes the form of desperate attempts to ‘win back’ capital after incurring losses. This may lead traders to chase markets, hold onto losing trades for too long, or take larger risks than is sensible.

On the other hand, individuals engaging in greed-stricken revenge trading could take their eye off the ball and make ill-advised gambles with their capital, ultimately resulting in unnecessary losses.

What Happens When You Revenge Trade?

  • You start to chase markets and try to win back capital after experiencing losses.
  • You listen to people’s success stories and act out of hope rather than strategy.
  • You make impulsive moves and trade outside your strategy.

When it comes to trading, particularly those who are new to the market must come armed with patience and confidence; allowing emotions like fear or greed to dictate your decisions can lead traders down a rocky road.

Consequences of Revenge Trading

Investing is an exciting venture, but revenge trading can cause more harm than good for any investor. Revenge trading can come in the form of over-leveraging or even taking too large of positions out of “revenge” for past losses. This could ultimately be devastating to the overall capital and trading portfolio of a trader.

Over-leveraging could cause your positions to be liquidated. You can quickly sink your trading capital with just one trade gone wrong ‒ not something any serious trader wants to experience.

When trading, you need to be focused on achievable and attainable goals and stay disciplined throughout every trade to avoid getting sucked into revenge trading and possibly irreversible losses.

How to Deal with Revenge Trading

Even though trading is a potentially rewarding activity, revenge trading can quickly turn your trading success into a losing streak. To avoid this situation we’ve put together a few tips and tools to help you be aware and dodge the revenge trading bullet.

Tips to Avoid Revenge Trading

  • Develop and stick to a strategy and take the emotion out of it.
  • Visualize and be aware of the risk that you are taking with each trade.
  • Establish safe guidelines to minimize potential losses.
  • Don’t let pride be your guide, cut your losses and move on.
  • Don’t try to make up losses with risky decisions.
  • Focus on stabilizing before making any additional investments.
  • Take a break from trading until your confidence is restored.

What Tools to Use to Avoid Revenge Trading

  • Keep a trading diary to journal all your investments, decisions, actions, and even emotions.
  • Stay knowledgeable with the best books and audiobooks on trading.
  • Study chart patterns through a free trading signals app.
  • Stay updated by signing up to trading blogs and vlogs.

Revenge Trading Conclusion

While trading can be a very lucrative endeavor, revenge trading can be detrimental to your investment portfolio. As a beginner if you fall into the revenge trading abyss it can put you off trading for good and you’ll never get to experience the joys and possible profits of a disciplined trading champion.

A great way to start your trading career is by practicing with a demo account. TIOmarkets offers a risk-free demo account so you can get comfortable with the platform and sharpen your skills before risking any of your own money.

Sign up for a demo account today and practice without risk!

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TIO Staff
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