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Why you should avoid revenge trading
Written by: PaxForex analytics dept - Friday, 27 June 2014 0 comments
You may have heard the term revenge trading before as you did some research about forex trading or while you were browsing forum threads at your favorite forex forum. Revenge trading is one of the worst forms of trading a forex trader can do and it usually always has a terrible outcome as the trader will be faced with even bigger losses.
What is revenge trading?
Revenge trading refers to a trader who has just lost a position and therefore trading capital to open another position in the same currency pair and in the same direction out of anger and without conducting an analysis hoping to recover the lost funds.
Here is an example:
You have place a long position in the EURUSD at 1.3200 and the price continued to fall which started to increase your floating trading losses. You have place your stop loss order at 1.3000 and the price breached through that level which left you with a loss of 200 pips.
At this point you get angry and adapt the attitude that the market is wrong. You are furious and seek to recover your losses with the same currency pair and in the same direction. Your emotions take over and you are not able to make a rational decision, you don’t bother to analyze the trade and you place another long position in the EURUSD at 1.2950 based on hope that it will allow you to recover your losses and with the mindset that what comes
The EURUSD moves down another 200 pips and your next stop loss level is triggered which left you with a loss of an additional 200 pips for a total of 400 pips. Now you leave the trade and give up after facing unnecessary losses. As you stop trading, the price recovers and moves past the 1.3000 level.
The above is a great example how not to trade, but most new traders do engage into this type of trading and often find them buying at the top and selling at the bottom which leads to heavy losses and ultimately causes them to blow their trading accounts and leave the markets for good.
Ways to avoid revenge trading
Stop trading – When you are faced with a loss and feel emotions take over, leave your trading terminal and do not continue to trade. You need to calm down and not make an emotional decision as it will only lead to further losses.
Analyze your loss – When you have calmed down, analyze your loss and understand why you lost this trade and why your initial analysis was wrong. Learn from your loss and try to avoid the same mistakes you have made.
Don’t trade the same currency – After you analyzed your loss, do not trade the same currency where you just faced a loss as you are biased and your analysis will be influenced by it which could lead to further trading losses.
Analyze your next trade – Now you can analyze the charts again and see where you find good entry points free of emotions.
You don’t need to recover your loss with the same currency; understand that losing is part of trading and that not every trade will be profitable. Continue to execute your trading strategy and do not let a loss throw you off course. Stay away from revenge trading and take a break from trading if you have to in order to avoid trading losses due to emotional decisions.