Losses are just as common in forex trading as successful deals. Unfortunately, many traders take losses personally and resort to revenge trading as a result of their losses.
The fear of being wrong is the driving force for revenge trading. It occurs when a trader, after a particularly vexing loss, chooses to make up by becoming more aggressive in his or her subsequent deals.
For two primary reasons, this is bad for your account.
For starters, it compels you to abandon your trading discipline. It changes your emphasis away from your trading technique and risk management and toward trying to generate enough money with less thought out deals to cover your losses. Fotolia 52035574 Subscription Monthly M
Trading is not dependent on emotions or chance.
- It’s a game of chance.
It can hemorrhage your account one trade at a time if you don’t have a risk management plan in place.
It’s a lose-lose situation as well. You worsen your downturn by losing a vengeance trade that you had barely prepared for. If you win, you’ll be persuaded that trading on instinct and emotion is profitable, and you’ll be motivated to try it again.
Revenge trades take various forms, but the most typical is when traders conduct rash (and generally larger) transactions in the aftermath of a particularly unpleasant loss in the hopes of recouping their losses.
Other instances include:
Ian has lost $97 of the $100 he put on the USD/JPY short. He notices that the pair has resurfaced, but he remains confident in his trading strategy. He moves his stop to the right and waits for the reversal. His corrected halt is hit two hours later. He ended up losing $250 instead of the $100 he had staked.
Mika just lost $50 on a transaction that went her way mere hours after she reached her stop loss. Frustrated, she decides to double up on her next deal and risk $100, which is double her typical risk. She clipped her winner as soon as she “recovered” her $50, not wanting to register another loss.
Ian and Mika are both guilty of revenge trading, despite their differing outcomes. Mika took on a more aggressive trade than she was used to and lost her potential gains by cutting a winner, while Ian lost more than twice his initial stake to ensure that his hypothesis is true. Both players ignored their regular methods in order to avoid losing.
Fortunately, there are methods to get back on your feet after a session of vengeance trading. Let’s have a look at a few examples:
After a frustrating loss, get out and clear your thoughts.
Do something unrelated to trading and return only when you’ve accepted that losing is a part of the game.
Keep track of the reasons why you lost your job.
Finding out what went wrong with your transaction and concentrating on improving your trading technique will help you feel less like the market is working against you.
In your trading diary, make a note of your triggers and tells.
Do you do it when you’re trading large positions or after you’ve been caught off guard by a surprise catalyst? Do you normally gnaw your nails, eat Cheetos, or yell at your cat before you do it? Knowing your triggers might assist you avoid doing additional revenge transactions.
Have faith in your system!
If you’ve thoroughly tested your strategy and adhere to your trading plan to the letter, you won’t mind the losses as much since you’ll know that the numbers will eventually add up in your favor.
Use risk management to your advantage.
You’ll have stronger trading discipline and be less inclined to make impulsive deals if you make risk management a habit. If you’re not used to it yet, start by sticking to stringent guidelines about position sizes and transaction length.
It’s important to remember that even the most regularly winning traders have losing streaks. After all, it’s all part of the game.
Losses should not be interpreted as a sign that the market is working against you. It is unconcerned with your sentiments or the soundness of your trade ideas. In reality, as traders, it is our responsibility to trade what we observe rather than what we imagine. Let rid of your ego and concentrate on making excellent trades after successful trades.
It’s not because of you; it’s because of FX trading.