Well emotional trading is one of major enemies of the disciplined trading. However today we are gonna talk about the one of the factors of the emotional decision making which is revenge trading. Revenge trading refers to the trading which is based on the emotional decision making. Many traders deals with the frustration after a loss and due to the loss they engage in the another trade without analyzing the structure. At this stage every decision is influenced by the emotional decision making.
What Is Revenge Trading?
Revenge trading is occurs when a trader immediately enters in the next trade, just after the loss in the previous trade. The mindset behind this trade is to recover the last trade loss, this approach and mindset ic revenge trading. This consists no evaluation of market structure, all trading rules ignored and emotions take over the everything. In revenge trading traders trades in the frustration, fear of losing, anger and disappointment. They look for the instant loss recovery trade.
The Psychology Behind It
How To Avoid It
Why Accepting Losses Is Important
Accepting the loss is very important part of the trading, as it helps you to move on to the next trade. However the nature of the every market is unpredictable, accepting the loss will protect your trading psychology as well.
- Protect Capital: Cutting the losses at the decided place, will preserve your capital. While holding the losing position will leave a dent to your trading account.
- Maintain Emotional Control: Holding the losing trade may affect your emotions control. Meanwhile cutting the loss early, will prevent you from making the emotional decision making.
- Stop Losing Cycle: However cutting the loses will eventually break the losing trade cycle. Although not accepting the late will continue your losing cycle and keep on denting the trading capital.
The Connection Between Revenge Trading and Overtrading
Although revenge trading and overtrading are eventually co-related to each other, as the revenge trading often leads to the overtrading. Revenge trading and overtrading both the terms comes under the emotional decision making.
- No Analysis: Both the terms doesn’t involve any pre-trade or post trade analysis. Because both the words has the same meaning in the trading at some extent, of not accepting loss and instant recover mindset/
- No Rules Followed: While engaging to the revenge trading and overtrading, the traders often forget to follow the rules because disciplined trading won’t allow you to do revenge and overtrading. On the other hand, revenge and overtrading won’t let you follow any trading rules.
- Absence Of Strategic Decision: When the overtrading and revenge trading take over your trading system, you only think about quick profits. So instead of waiting for the proper confirmations and the real breakouts, they try to chase the every move of the market.
Why They Feed Each Other
Ego and Loss Aversion: Traders often attach a trade result to their self worth and ego. When a trade fails, to satisfy their self worth and ego they start engaging in the revenge and overtrading mode.
Chasing Dopamine: Sometimes trading may act as the dopamine trigger because when a trade fails of the beginner trader, they carves the excitement of the winning trade to soothe their ego and self worth. As a result revenge and overtrading offers excitement in the hope quick profits.
The Recovery Mindset: When a market triggers your stop loss, now you want to recover the only loss so that you can come at the breakeven stage again. But this loop never ends and it keeps on hurting your trading capital.
Meanwhile i have already elaborated in the above paragraphs how to avoid or prevent yourself revenge trading.
The Importance of Emotional Discipline
The emotional discipline plays a vital role in your trading career success. Emotional discipline creates awareness about the revenge trading, overtrading, when to walk away from the charts, how to accept the loses calmly.
Accept The Loss: When you are emotionally disciplined, you accept the loss as the part of your trading system. Loss is unavoidable in markets because it’s a nature of the market. Some days you lose, some day you win but one thing you need to keep in the mind that whenever you are winning you should have risk to to reward ratio at least 1:3 or more than that. So that whenever you lose, you won’t lose much.
Emotional Awareness: Whenever your emotions start triggering your thoughts, you know which emotions is triggering your thoughts and trading system. And This isn’t the part of your trading system.
Remains Patient: When the market isn’t favorable to your trading system, you just simply wait for the markets to get normal and favorable to your trading system. If you don’t wait then emotions will start driving your decisions which can hurt your trading psychology and trading discipline.
How To Build Emotional Discipline
Name The Emotion: Try to recognize what emotion you are feeling like greed, fomo and anything else and accept it. Because every trader gone through the same process.
Pause Before Reacting: Before reacting or taking an impulsive entry in the trade, ask yourself. Is this emotion controlling my action’s or it is a part of trading discipline and trading rules.
Reshift The Focus: When your emotions start controlling your decision, just ask yourself that will this keep me alive in the long run or it is just a short term dopamine.
Final Thoughts
Emotional decisions one of the major reasons of your damaged trading account and revenge trading one of major part of emotional decision making.
The market creates opportunity every second but as a beginner trader you don’t have to capture each and every move to be successful in the trading.
Success in trading requires emotional discipline, patience during the losing streak, strict risk management rules and no room for emotions in the trading.
Traders who are emotionally controlled, stay disciplined during the market noise are the one who survives in the long run of the trading.
If you want to know How Trading Separates Itself From Gambling then you can check my previous post