Forex Trading Library

The Destructive Power of Revenge Trading

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Revenge trading is quite possibly the most counter-intuitive, self-destructive behavioral pattern a Forex trader could ever slip into. And yet, so many investors can often find themselves shackled by this seemingly unstoppable compulsion to keep placing trades, even in the depths of a never-ending losing streak.

So what is it within us that just can’t seem to stop this vicious cycle? Are there warning signs to watch out for to catch it before it starts? And what can we do to get out of that harmful headspace once we’re in it?

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Why We Do It

The answer is simple: it’s pride, mixed with a hefty helping of stress. No matter how analytical forex traders claim their minds to be, at the end of the day, we must remember that we are all human.

A passionate trader who has opened a position has invested more than just their money. They’ve invested their time, research, and faith, both in themselves and in the markets. So a loss can have a significant impact on us, both psychologically and yes, even physiologically!

What Our Body Goes Through

Cortisol is our body’s stress hormone. And losses, especially sequential ones, can significantly stimulate our cortisol production. This almost instantly compromises our ability to make logical decisions.

Cortisol fuels our anxiety, catapulting us into a state of panic and clouding our judgment. Our brain goes into “fight or flight” mode, and the immediate priority becomes to undo the damage and regain our losses.

This prompts us to place impulsive trades that we have neither thought through nor considered in our larger risk management plan.

How It Keeps Us In

This is where pride comes in.

We can all relate to feeling like we’re failures because we’re “losing” as investors. After all, our business is to invest successfully. So, if we’re technically “failing” at it, it can be difficult not to take personally.

But that type of negativity nurtured by high levels of stress can very quickly snowball out of control, hijacking our entire mental process.

So what ends up happening?

  • We drown ourselves in shame and anger, refusing to accept our losses
  • We focus on the amount lost, making it our life’s mission to return (or avenge!) what’s gone
  • We convince ourselves that it MUST turn around at some point
  • We continue to desperately place more poorly thought out trades

Suddenly, we’ve found ourselves deeply inside a vicious cycle of revenge trading and we just can’t seem to stop.

But fear not, traders! There is a way out before you considerably damage your equity!

How to Get Out Once You’re In

The most important thing to do when you’re in a cycle of revenge trading is to recognize that it is happening!

If you’ve experienced one too many losses in the Forex market recently, stop and write down the thoughts running through your head and the emotions you are feeling.

  • Are you feeling stressed, anxious or angry?
  • Do you feel panicked and itching for a quick win?
  • Are you questioning your abilities as an investor or jumping from one opportunity to the next?
  • What was the real strategic reason behind the placing of your last trade?

If you answer yes to any of the questions above, or have no logical answer for the last one, then you MUST step away.

Find activities that will pull you away from the computer IMMEDIATELY and reset your brain. Some investors get some exercise or go for a meal, others meditate or go for a drive.

Once you’ve calmed yourself, it’s time to think of a game plan. You can do any and all of the following:

  • Halt all trades until you reassess your trading strategy! This means doing more research, tweaking the strategy accordingly and perhaps testing it out on an MT4 demo account before re-investing your money.
  • Employ the use of wealth managers who will manage your money until you’ve sufficiently worked on achieving a healthy trading psychology.
  • Peruse around for a trader you vibe with to copy on a social trading platform or seek a good trading signal provider.

Remember that having an emotional response is not wrong. We aren’t robots! Embrace it, familiarize yourself with it and most importantly, swiftly recognize when it becomes a destructive emotional habit and respond to it correctly.

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