This is one of the most common reasons that people fail in trading. Unfortunately, it's also a natural human response.
I've been studying trading psychology for over 15 years, and I'm going to share with you what revenge trading is, what causes it, and the best ways that I've found to stop it.
Revenge trading is an emotional response to a losing trade or a series of losing trades. Traders that engage in revenge trading will try to make up their losses quickly. This leads to even larger losses, and can result in losing all of the money in their trading account.
Some people think that only big losses lead to revenge trading.
This is not true.
Even the smallest loss can trigger this behavior.
Table of Contents
The 8 Causes of Revenge Trading
It can be hard for some traders to keep themselves from taking more trades, when they know that they should stop.
This is because trading can evoke some of our deepest, darkest, most primal emotions.
Revenge trading is caused by a loss of emotional control. There are 8 underlying mindsets that will trigger an emotional reaction that can lead to revenge trading.
Some people have a tendency to get mad easily.
This is a strong innate personality trait for some, and for others, it's a product of their environment.
When people are stressed or tired, it's easy to get mad at the smallest things.
That causes them lash out at the market, in attempt to “get even.”
I think it's pretty safe to say that almost everyone gets into trading because they want to get rich quickly.
Successful traders eventually figure out that you can get rich over time.
But there's really no way to get rich quickly.
When traders try to make money too quickly, they want to get revenge for losing trades, instead of letting a positive edge work itself out over time.
3. Poverty Mindset
When you feel like you're poor, you'll have the need to “catch up” to all the time.
In order to do this, many traders take way more risk than is reasonable.
This leads to trying to make up for losses by stubbornly sticking to trading ideas that aren't working.
There are 2 types of fear that leads to revenge trading.
First, there is the fear of missing out.
To get revenge for a missed trade, some traders enter trades way too late and usually end up with a losing trade.
The other type is the fear of losing gains.
Traders have the tendency to close trades early to protect gains.
Sometimes that works out for the best. But many times the trade takes off, leaving the trader to regret the missed gains.
In order to get revenge for those missed losses, traders can take another trade on the same setup, or double down on the next setup.
Some traders have a lot of pride and don't want to experience the shame of telling their friends and family that they are losing money trading.
So in order to make up for their losses, they will take more risk on every successive trade, to try to make up for their losses.
Of course, that only leads to bigger losses and usually ends in a loss of the entire account.
6. Lack of Awareness
Have you ever started driving in your car, then wondered how you ended up at a destination?
I've certainly done that a few times.
Obviously, the reason why that happened was because I was thinking about something else and was not aware of where I was driving.
The same thing can happen in trading.
When traders don't track their losses and aren't aware of their emotional states, then they won't realize when they aren't following their trading rules and they are revenge trading.
On the surface, trading looks really easy.
Just click a few buttons and make some money.
You don't even have to get out of bed.
Of course it's not that simple.
But some new traders think that it is.
They have the false belief that all they need to do is follow a magic trading strategy on YouTube and they will start making money.
When someone thinks that something is easier than it actually is, they will have a skewed perception of the risk and will usually try to make everything back on the next trade.
8. Not Knowing the Probabilities of a Trading Strategy
Finally, many new traders do not know how their trading strategy should perform, or even if it has an edge or not.
So when they lose 2 trades in a row, they freak out and double down on their next trade to make it back.
Some very profitable trading strategies have a win rate that's less than 40%.
But if a trader doesn't know that, they have a significantly higher risk of blowing out their account if they try to make their losses back on a failed trade, instead of waiting for the next trade.
How to Stop Revenge Trading
Now that you know the causes of revenge trading, let's look at practical ways to stop yourself from doing it.
There are three categories of actions that you need to take to stop revenge trading. You have to understand why you do it, be aware of the events that lead up to it, and learn ways to stabilize your emotional state.
Some people think that it's as simple as telling yourself: “Just stop doing it.”
But nothing could be further from the truth.
Revenge trading is a very strong impulse for many people, so don't get discouraged if you cannot change your behavior right away.
Be patient with yourself and strive to get a little better during every trading session.
It's going to take as long as it takes for you, so don't compare yourself to others.
Keep at it and if you're honest with yourself, you'll start to see improvements.
Here are 9 practical strategies that you can implement right now to prevent revenge trading.
1. Take a Break or Trade Smaller Until You Figure Things Out
If you think that you might start to revenge trade or you might already be revenge trading, the solution is to stop trading.
Close all of your positions, if necessary.
This pause will allow you to step back and see your trading more objectively.
If you don't want to stop trading altogether, then trade much smaller positions until you get back on track.
For example, let's say that you currently risk 2% per trade. You might want to temporarily scale that back to 0.5% risk per trade.
Trading a smaller size will allow you to stay in touch with the movements of market, while reducing the chance that you'll do significant damage to your account.
Using nano lots is a great way to scale down your Forex trading and take exactly the same amount of risk on every trade.
If you trade futures, you can scale down to mini contracts.
Trade fewer shares of stock.
Once you're confident that you won't revenge trade, you can go back to your normal position size.
2. Develop More Awareness While Trading
All change starts with awareness of the issue.
The first step to changing any behavior is to be aware of what you're doing. But this is often easier said than done.
This is because there is usually something that sets you off…a trigger.
Once that trigger fires, it sets off a chain reaction of actions and emotions that are currently beyond your control.
You might not even be conscious of what you're doing until it's too late.
That's what makes emotional trading so dangerous.
When you finally regain awareness, it's usually too late because you've already lost a ton of money.
In the case of revenge trading, the trigger could be a bad day at the office, losing a trade when you're tired, or a loss on a certain stock or currency pair.
So get in the habit of keeping a journal of your thoughts and emotions while you're trading.
It helps to journal throughout the day, so you can get an idea of what kind of things lead up to a revenge trading session.
Use a paper notebook or an app on your phone, whatever works for you.
If you don't like to write, record your voice.
The specific tool you use doesn't matter.
Record your thoughts in a way that's easiest for you and review them later.
3. Review Your Strategy, Execution and Market Conditions
Ask yourself 3 questions:
- Is your trading strategy performing within what is expected from your backtesting and/or demo trading data?
- Are you following your trading plan and trading in a peak mental state?
- Is there unusual market behavior and/or news?
An unusually high number of losses, due to one or more of these factors, could lead to revenge trading.
So review these 3 areas every week.
When you do, you won't be caught off guard by a high number of losses and be tempted to keep trading when you should really stop.
4. Implement the 2-Strikes Rule
I have a simple rule called the 2-Strikes Rule that guarantees that I will never blow out my account due to revenge trading.
I don't allow myself to take more than 2 losing trades on the same trading idea.
This rule has kept me out of a lot of trouble and it can help you too.
When you set limits like this beforehand, you are much more likely to follow them, even when your emotions are running high.
You can use whatever number makes sense to you.
But I've found that more than 2 to 3 shots at a trading idea does not increase my probability of success.
In psychology, there is a fancy term called setting boundaries.
You set boundaries in your everyday life and that determines what you will and won't tolerate.
Set a maximum number of losses on each trading idea and you will stop yourself from chasing trades and going broke.
5. Increase Your Heart Coherence
Heart coherence has been proven to help people regulate their emotional state and make better decisions.
A high HRV means that you are in a state of high coherence. In this state, you are more likely to follow your trading plan.
Luckily, this is easy to measure.
There are many devices that will help you do this.
I wouldn't recommend using one of these devices while you're trading because it can be distracting.
But consider using one of these devices before you start trading, to ensure that you're in a solid mental state before you begin.
I use the HeartMath InnerBalance device. It pairs with an app on my phone and gives me feedback on my heart coherence.
Five minutes is usually enough for me to get into a high state of coherence.
It's like a reset button that will help you clear any negative emotions that may have come up prior to your trading session.
6. Identify Your Cue and Reward
In his book The Power of Habit, Charles Duhigg cites several examples of how powerful habits are and why they are so difficult to change.
I would highly recommend reading this book if you want to understand the inner workings of habits, how they are formed and how they can be changed.
However, if you want to get the short version, then this infographic will help. It's a complete version of the image above.
Based on his research, this is the process that Duhigg recommends for changing a habit.
The bottom line is that our habits (even our bad ones) give us some sort of reward.
So if you can figure out what that reward is for your negative behavior (revenge trading), you can figure out how to get the same reward, but with positive behavior.
7. Implement Behavior Conditioning
Studies have shown that kids respond better to positive reinforcement, but adults are generally more responsive to negative punishment.
Of course, the type of reinforcement that works the best will depend on the person and the situation.
So experiment with the 4 methods of conditioning:
- Positive reinforcement
- Positive punishment
- Negative reinforcement
- Negative punishment
Once you understand which ones work best for you, then use them every chance you can, to keep yourself from revenge trading.
In my experience, I've found that the negative methods often work well in the short term, but positive methods tend to work best in the long run.
But again, experiment with both and see what you respond to.
8. Use a Positive Market Metaphor
Get rid of market metaphors that don't serve you.
Multiple studies have shown that metaphors can significantly color the way we see a situation.
So don't personify the market as a bunch of Gordon Gekkos or crooked brokers.
If you see the market as a battleground or place where you could “die,” then that's not a healthy metaphor either.
See the market as a network of regular people who provide a tremendous opportunity to make a great living from anywhere in the world.
Think of trading as the coolest club in the world, or the Olympic Games of Finance.
The more you can see the market as a positive place, that will reduce the likelihood that you will lash out at an “evil” market.
9. Leverage the Law of Resonance
Everything in the universe is made up of energy.
We tend to resonate with the type of energy that is in our immediate environment.
Here's an excellent illustration of this concept:
So be very aware of your environment and the people you hang out with.
- Do these people get angry easily?
- Do you watch shows/movies with a lot of violence?
- Is your home disorganized and distracting?
These influences could be triggering your revenge trading.
Do your best to hang out with positive people.
Turn off the news and consider what you're watching on Netflix very carefully.
I stopped watching the news in 2003 and it's one of the best things I've ever done for myself.
After some reflection, I also realized that Netflix is a waste of time and cancelled my subscription.
Carry a $100 bill to help yourself feel more abundant.
Keep your trading desk clean and organized.
These are all ways that you can start to raise the vibration of your surroundings and make you less likely to revenge trade.
If you prefer a video tutorial, here's a summary of the most important concepts mentioned above.
Frequently Asked Questions
Now let's wrap up this article with answers to a few frequently asked questions related to revenge trading.
1. How Do You Remove Emotions From Trading?
This is a common question that new traders ask when learning about revenge trading. But the answer isn't what they expect.
Traders cannot completely remove emotions from trading because they are humans, not robots. Therefore, the goal of every trader should be to minimize the negative impact that emotions have on their trading.
The best way to do this is to demo trade and/or backtest your trading strategy extensively.
When you've practiced your trading strategy over a significant number of trades, you will know your probability of winning.
Once you know this, you won't freak when you have a few losing trades in a row.
On the flip side, you also won't get too excited when you're winning either.
This will limit your emotional swings and make it much less likely that you'll revenge trade.
2. How Do You Avoid FOMO Trading?
The fear of missing out stems from the belief that there won't be any more trading opportunities in a market.
So a trader has to take THIS opportunity, before it gets away.
Of course, this is ridiculous because there are opportunities to make money every day.
The only thing that is preventing traders from taking advantage of these opportunities is a lack of skill in identifying them.
Therefore, the solution to FOMO trading is to learn different trading strategies across multiple markets.
When you do this, you'll get to a point where you'll have too many opportunities and you'll have to be selective.
3. How Do You Deal With Greed in Trading?
Greed is caused by the unrealistic expectation of a future result.
In trading, that means you think you're going to make way more than is realistic on a trade.
So again, the solution is backtesting and/or demo trading.
When you understand the parameters of your trading strategy, you'll know when to take your profits.
If you don't have that data, it can be very easy to hang on to a trade for way to long and see your profits disappear.
When that happens, it can be easy to try to make up for that loss by entering more trades.
Final Thoughts on Revenge Trading
If you find yourself giving back all of your profits, or you don't understand why you lost so much money last month, then be aware of your triggers.
Keep a trading journal to figure out where you lost emotional control.
I consider revenge trading the most dangerous psychological state in trading because it can end in a zero account balance very quickly.
If you are prone to this behavior, first acknowledge that you have an issue.
Then take action to fix it.
You got this.