​4 solutions to revenge trading

Dear Traders,

Revenge trading is the act of either not adhering to predefined risk management boundaries or entering trades beyond one's trading plan in the hope to 'win' back losses or 'retrieve' lost profit (instead of stopping for the day). In practical terms it means that traders break their own rules and simply continue trading when they are not supposed to.

Revenge trading can lead to huge losses and dramatic account drops as larger and larger losses accumulate. Traders must avoid the temptation to win back their losses beyond their initial risk borders. Here is our advice how to mentally handle this and avoid revenge trading.

1. Appoint a boss

Traders have the difficult duty of combining multiple jobs when trading. They are system creators, analysts, traders, own bosses, risk managers, testers, and evaluators all in one. With such diversity in focus, it might not come as a surprise that traders are unavoidably weaker in one or more of these areas. Doing everything yourself is very tough and holding yourself accountable is even rougher.

One solution is to appoint a second person who will act as your supervisor and monitor your areas of weakness on a regular basis. Another solution is to join or form a strong peer group of traders that hold each other accountable and provide support.

2. Contact your 'panic' person

Emotions are often riding high after an exhaustive day in the markets. The need to win back the losses can overwhelm the rational of risk management. At these times, traders can be tempted to break their own rules.

But what if traders had a telephone number of a friend who they could call in times of stress? Talking to an external person about these events can provide the well needed relief to calm down and regain emotional control, before revenge trading starts.

It is important to pre-discuss your needs with your contact person because they need to be aware of their role when the time comes. Their task is to investigate the situation, assess the risk and help you regain your composure. It is better to have a couple of people on your list, just in case the first person is not available.

3. Monitor and set up boundaries for your emotions

Actively keeping a finger on the pulse of your emotions during trading, can help you with recognizing early symptoms of revenge trading. The best solution is to monitor your emotional state after each closed and open trade, by answering a short check list. Once you feel imbalanced, it is imperative to implement your prepared back-up plan.

Your checklist could include various questions, such as asking yourself if you are breathing quickly or heavily. If you answer yes then this could indicate a raised level of nervousness. Other questions to ask yourself that that could measure and detect nervousness include:

1. am I sitting leaned forward with my eyes close to the screen?
2. am I making repetitive nervous gestures?
3. am I glued to watching one screen?
4. are my thoughts repeating the same fear?

If you answer yes to any of these questions then you need to get ahead of the revenge trading curve. You can do this by:

1. quietly reflecting on your completed trades
2. standing up and taking a step back to create distance between you and your computer
3. taking a short break
4. stretching
5. meditating
6. grabbing a snack away from your desk.

4. Evaluate your trades and strategy

Traders should eventually feel comfortable with their trading strategy because a mismatch with your trading psychology, can motivate revenge trading. It's therefore critical to:

1. evaluate your setups and learn from them - so you know if you are implementing your strategy correctly and can ensure appropriate risk management
2. grade your trading performance and rate yourself for focus, distractions and implementation of your trading plan - to measure any correlation between poor implementation and poor trading results.

Revenge trading in Forex is a dangerous response that can negatively impact your account. The tips I've given in this post, work for me and I hope they'll be useful for you too.

Which solution do you think could help you out the most? I look forward to reading any feedback in the comment section below, or in my next Admiral Markets webinar.

Cheers and good trading,

Chris