Revenge Trading in the Stock Market: What It Is and How to Avoid It

Revenge trading is risky and reflects an irrational use of trading capital. Although many traders will not admit it, most of them fall into the trap of revenge trading at some point. This is one of the most common trading mistakes. 

This trading has been around for years in the stock market, and traders continue to struggle to avoid it. This happens because they often don’t realise they’re engaging in revenge trading until their losses accumulate. 

That’s why you must know what revenge trading is and how to avoid it or get out of it before it is too late.

When traders face a loss, their natural instinct is to recover from it. At times, this urge becomes so overwhelming that it can impair their rational thinking. Due to this, they start placing larger trades without following their tested strategies. 

This impulsive attempt to get back at the market is revenge trading. In short, it involves placing one or more trades to recover a significant loss from a previous position.

As is widely known, irrational trading rarely ends well. The larger the loss, the stronger the emotional reaction and the greater the temptation to retaliate against the market. This behaviour isn’t unique to trading. 

In essence, this trading is a response fueled by:

• A significant loss that can evoke feelings of anger or frustration, prompting traders to take impulsive actions in an attempt to recover

• Recover previous gains

• The loss can create a sense of urgency that leads to rash decisions

Personal stress from outside the market, such as financial troubles or workplace frustrations, can spill over into trading behaviour

The reaction is not the sole result of financial loss. There can be various psychological and external factors that influence a trader’s mindset. The following are the notable reasons for this trading: 

• Overconfidence After Losses

One of the primary psychological triggers of this trading is overconfidence. After experiencing a loss, a trader may think that they can use their knowledge or skills to make it all back in one or two trades. This overconfidence leads to extreme risk-taking.

• Escalation of Commitment

This concept refers to the tendency to continue committing to a losing position in an attempt to recover previous losses. It’s a common human behaviour not just in trading but in many aspects of life.

After a loss, a trader may feel emotionally tied to the trade and attempt to ‘fix’ the loss, often increasing their exposure to risk.

• Emotional Instability

This trading is frequently an emotional response. Losses, particularly significant ones, can trigger feelings of anger, frustration, or anxiety. These emotions cloud a trader’s judgment, leading them to make decisions based on how they feel rather than a logical evaluation of the market.

• Market Volatility

Unpredictable and volatile market conditions often provoke knee-jerk reactions from traders. In the heat of volatility, emotions run high, and traders may engage in revenge trading to recover losses, hoping for a quick recovery. Market volatility can also provoke such trading behaviour.

• External Stressors

Personal factors like financial stress, relationship issues, or work-related pressures can influence a trader's behaviour. These external stressors may cause an individual to act impulsively, making it harder to stick to a disciplined trading plan. Often, such stress spills into their trading decisions, leading to revenge trading.

Engaging in impulsive action can end up in several negative consequences, both financially and psychologically. Recognising these risks is essential to make sure you do not repeat the same mistake or stop yourself before it is too late. The risks associated with revenge trading are:

• Loss of Capital

The most obvious risk of this trading is the potential for further financial loss. A trader attempts to recover losses by taking high-risk trades without a solid strategy and increases the chances of loss 

• Increased Margin Calls

Revenge traders often use margin accounts. They borrow funds to increase their trading position. If these positions continue to go against them, they may face margin calls. Due to this, the trader has to deposit more funds to maintain the position and increase the debt in the process. 

• Risk of Debt

If this trading leads to repeated margin calls or significant losses, traders may find themselves in debt. This can be especially detrimental when traders force themselves to borrow money or use credit to recover from earlier losses.

• Increased Anxiety

This trading can heighten your anxiety. The more you engage in emotional trading, the more stress you experience. Eventually, it may give you a breakdown in mental health and anxiety.

• Loss of Discipline

Following the trading strategy is not always adhered to during revenge trading, even though they are crucial for maintaining consistent and rational decisions. 

• Burnout

Constantly chasing losses and engaging in this kind of trading can lead to burnout. Over time, traders may become emotionally exhausted.  This negative impact can influence their future decision-making in trading.

To prevent further losses, understanding this behaviour is crucial. Here is how to avoid revenge trading and maintain emotional control:

• Keeping a Cool Head

Emotions such as frustration, anger, and desperation are the primary causes of revenge trading. Managing these emotions is essential. You can benefit from techniques like deep breathing or taking a walk when feeling frustrated. 

• Recognising Emotional Triggers

Understanding your emotional triggers for impulsive behaviour can help you prepare for future losses. Recognising the emotional impact of a loss and taking a step back can help prevent impulsive decisions that lead to revenge trading.

• Importance of Strategy

One of the most effective ways to avoid revenge trading is to have a well-structured trading plan in place. A plan outlines the

• Types of trades to make
• The maximum acceptable loss
• The goals to achieve

By sticking to a plan, you can reduce emotional trading.

• Setting Risk Limits

As a trader, you should have a predefined limit on the amount of capital you are willing to risk in each trade. Setting stop-loss orders can also help prevent excessive losses. 

A solid risk management plan can ensure that no single trade, or even a series of losses, dramatically affects your financial position.

• Journaling

Keeping a trading journal is an effective method for reflecting on trades and the emotional reactions associated with them. Journaling can help you identify patterns in your behaviour and prevent the same mistakes from recurring.

• Setting Realistic Goals

You should focus on long-term growth rather than short-term recovery. By setting realistic, achievable goals, you can avoid the desire to recover losses quickly. 

There are some common signs that can tell that you are revenge trading without being aware of it. Understanding these signs can help you take corrective action before the behaviour leads to significant losses: 

• Trading on emotion

You are likely revenge trading if you act out of anger, frustration, or ego. Emotional trading often leads to

• Impulsive decision
• Larger trades
• Neglect of your plan or risk rules

• Trading without an edge

You place trades based on hunches rather than strategy, indicators, or market structure. This leads to random entries, overtrading, and poor alignment with trends or your trading style.

• Failing to review your trade

You avoid reviewing past trades or blaming external factors. Without honest reflection, you miss opportunities to learn and improve.

• Risking More Than Usual

If you find yourself increasing the size of your trades in an attempt to recover losses, this is another sign of revenge transacting. Traders often take on more risk than is prudent, believing that they can make up for previous losses by taking larger bets.

Revenge trading is a common drawback for many traders, especially those new to the stock market. Understanding the emotional and psychological triggers behind this behaviour is the first step in preventing it. 

By managing emotions, establishing a solid trading plan, and applying psychological techniques, traders can reduce the temptation to engage in this trading. It is important to remember that patience, discipline, and emotional control are the keys to long-term success.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

https://www.angelone.in/knowledge-center/share-market/what-is-revenge-trading

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