In Australia, Revenge trading is widespread in the financial market and is one of the most egregious trading errors. It implies attempting to turn a profit after having suffered a significant loss. Emotions influence traders without a thorough evaluation (technical or price action) to back our argument.
Revenge Trading can be hazardous
Revenge traders often tend to enter long or short positions at market prices and suffer more losses than they would have if they had remained on the sideline. When their trades go against them, they get filled with anger and frustration and do not resist the urge to add to their losing position just for the sake of getting even. They would rather have a slight additional loss than suffer a significant loss.
Revenge Trading can lead to more losses
In some cases, revenge trading fuels even more losing trades and deepens the trader’s negative emotions. In other words, a losing trade is followed by a revenge trade which turns out to be another losing one. It gives rise to “martingale” style revenge trading. Traders add to their position after each consecutive loss, hoping that they will eventually get some of their lost money back—and perhaps a lot more if prices continue in that direction. However, this rarely happens, and it usually just compounds the problem and makes matters worse.
Revenge Trading paints yourself into a corner
Revenge traders often wait for the market to return to their entry price before they exit a losing trade. Usually, prices move against them more or less strongly, eliminating any hope of recovering the loss.
When it comes to revenge trading, you will get more of what you expect. If traders are willing to hold onto worthless positions in the hopes of recouping losses, only further losses can be expected. A better approach would be taking responsibility for our mistakes and learning from them instead of transferring all blame to other people or events outside our control.
Revenge Trading is based on emotions
This type of trading disregards logic and analysis. It has everything to do with our feelings rather than facts and figures that may have triggered the trading error. Revenge trading may help traders cope with loss-related anxiety, but the benefits are fleeting because they do not address the reason for revenge trading in the first place. Therefore, it is vital to understand why we are prone to engage in this type of trade rather than watch for them to happen and then try to fix things after it’s too late.
Revenge Trading makes you miss opportunities
The inevitability of losses should lead us to concentrate on preventing them from happening whenever possible. Concentrating on our mistakes locks our attention away from all the other possibilities that could exist if only we were willing to see them. By focusing on how much money other traders have stolen from us, we end up neglecting more profitable endeavours and losing even more money than we would have otherwise.
Revenge Trading can cause you to take more risk
Traders are often driven to revenge trading by their need for retribution. They feel as if they have been burned, and now it is time to make the other side pay, even if the cost of doing so outweighs any potential reward that may result from trying to recoup their losses. Traders who engage in revenge trading tend to be more aggressive with their money, which increases the amount of financial damage they could potentially inflict on themselves.
Revenge Trading eats away at your liquidity
As mentioned earlier, there are times when revenge trading appears to be highly effective because prices move strongly enough against the losing trade to create the illusion of success. But what happens afterwards? Markets don’t always stay in negative territory for very long (in fact, most often they don’t), and it is then that reality sets in. The trader takes their first loss and then tries to get even by making another losing trade—only to compound the problem. The vicious cycle of revenge trading can severely deplete a trader’s liquidity and cause severe damage to their account balance.
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