Revenge trading is common, especially among those involved in derivatives trading. Short-term derivatives traders benefit from many trading opportunities and have the potential to make a lot of profit in a short time. Having to make many short-term trading decisions also opens them up to short-term profits and losses. They can easily get so overwhelmed with losses that they start making emotional decisions, including revenge trading. Let’s take a quick look at revenge trading and how you can overcome it.
What is revenge trading?
When you lose money in a trade or business, it is normal to want it back immediately and you try to act immediately. The move to claw back can cause you to act without logic and could lead to more losses – trying to claw it back is what revenge trading is all about.
Crypto revenge trading, as described above, is a way to compensate for bad losses or lost trades by making irrational decisions that go against your trading plans. They often end badly and lead to greater losses, or even the complete loss of all funds in your wallet.
Revenge trading is a very bad trading practice. It is characterized by impulsive and emotional trading without any analysis to support the move. It often appears during losing streaks or after a big loss, and every trader goes through a time when it is triggered to realize it. Revenge trading is one of the biggest causes of failure among traders.
Features of Revenge Trading
Every trader, at some point, has had to face the urge for revenge or have fallen for it. The trader first suffers a loss, then is unable to deal with it and seeks to recover it as soon as possible.
In revenge trading, you trade based on your emotions, neglecting your proven strategy. With this act, you are doomed to lose your money and even all of the funds in your wallet. When revenge trading, you forget about your trading plans, like your entry and exit levels, even if they have produced consistent results in the past.
Another common thing in revenge trading is that risk management is usually not adhered to, as you look for ways to beat the system and make up for the huge loss in a short time.
Losses from revenge trading can cause you to lose confidence in your trading abilities. The resulting huge losses can cause you to lose confidence, and it may take you a long time to recover from such a state of mind.
What causes revenge trading?
We mentioned that revenge trading is usually triggered when traders have losing streaks or big losses. The loss triggers the trader’s emotion to exit his plan. Such an emotion could be a sudden fear of losing your account or the urge to get a lot of profit after a loss.
Anger and overconfidence can also cause revenge trading – anger at losing a trade or overconfidence in one’s strategy, causing you to execute trades with a much larger position than you would have taken.
The crypto market is uncertain and volatile. The fact that there is a drop in price does not imply that the price will not go up quickly. However, inexperienced traders get depressed by setbacks, forgetting that things can change on the next trading opportunity. They are always tempted to go all-in and risk more than they otherwise would have.
4 ways to avoid revenge trading
Here are the ways to avoid revenge trading.
1. Always stick to the plan
The chance of trying a revenge trade is minimal if you consistently stick to your trading plan. If you have a proven business strategy, trading against it should only produce the results you expect or at least some form of consistency to keep you in the game for a long time. So when you make a loss, it would only be an expected percentage of the your wallet balance. Your profits would also be within the expected range.
It is normal for humans to want to recoup a loss immediately, but trying to do so in the market is somewhat dangerous and results in losses. Trades should only be executed based on pre-determined conditions which you should have documented in your trading plan. Anything outside of that causes you to lose discipline since nothing guides your decision-making process.
Trust the system you have created and don’t worry about losses because with a good system the numbers will add up in your favor.
2. Learn to accept losses
There is no holy grail for trading. The holy grail is to have a proven trading strategy and to follow the strategy with good risk management. Accepting that no matter how good your trading strategy is, you will have times when you will incur losses will help you better approach the crypto trading market.
You don’t need to move your stop loss to account for the possibility of a losing trade reversing. The stop loss should be there to help you exit trades that are already going against your plan, as it ensures that you don’t lose more than the amount you pre-determined.
3. Document your transactions
Logging your trades will make you a more disciplined trader. If you log your transactions, you can see why you are running each transaction and whether you are trading according to your plan.
Documenting your transactions will also help you learn from your mistakes since they will also be documented. Helping you better manage losses and errors.
4. Take a break from trading
Taking a break from trading is one way to avoid revenge trading. You may need to take a break after making a series of losing trades. Pausing helps you understand what was wrong or if it was just the market that was the market.
Only return to active trading when you feel your mind is healed and you are in your best mental state. You should also always know that losses are an inevitable part of trading.
Losses are part of the game
Even the most skilled and profitable traders have bad days and bad weeks. Having losses does not necessarily mean that the market is against you or that your system is down. The crypto market is volatile and you don’t control it. You should focus on trading as you see it and as your trading plan and strategy allow.
To have confidence in your strategy, you need to have it back-tested over time. A well-tested strategy increases your confidence in it. So when you have losing streaks, you know the market is just the market and losses are always part of the game.