There are certain things that happen to all forex traders regardless of their experience level. One of these things is losing money on a trade. There are a number of ways that traders deal with this, from assessing their trading plan to taking some time from the market, to revenge trading. Out of all the options available revenge trading is the worst thing a forex trader can do. It is important that you understand why this kind of trading is bad, and what it actually encompasses.
Revenge trading is the act of either not adhering to predefined risk management boundaries or entering trades beyond one's trading plan in the hope to win back losses or retrieve lost profit instead of stopping for the day. In practical terms it means that traders break their own rules and simply continue trading when they are not supposed to. Revenge trading can lead to huge losses and dramatic account drops as larger and larger losses accumulate. Traders must avoid the temptation to win back their losses beyond their initial risk borders.
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. 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.
It is very important that you avoid revenge trading at all costs. Of course, this is often easier said than done, but it is very important that you try. The best way to avoid this trading is to take some time away from the market if you are feeling too emotional after a loss. The amount of time you take will depend on the amount you have lost and the amount of time it takes to calm your emotions. You should consider that you have already lost money and you do not want to lose more. This is what will happen if you trade based on your emotions.