When a trader experiences a significant loss, revenge trading is a normal and emotional reaction. After a significant loss, they immediately join another trade without stopping to consider their next move or review their approach.
The goal is to bounce back quickly from the setback. It is believed that by placing another trade—one that is anticipated to be profitable—the losses might be swiftly made up for.
When you practice revenge trading, you do one or more deals in an effort to make up for a big loss from a prior trade. There are moments when our desire is so intense that we behave unreasonably. While neglecting our tried-and-true trading strategies, we are placing larger trades.
However, markets are notoriously difficult to forecast. And it seem quite possible that the anticipated winning deal would really end up being the losing one, maybe a little bit greater than the one the trader was attempting to recover.
Therefore, it is important to keep yourself away from the trap of revenge trading.
How to avoid the practice of revenge trading?
Even while it might be challenging to maintain objectivity and emotional control after a loss (especially a significant one), the best plan of action is to take a break from trading, even for a short while.
Take a day or two off from trading, cease trading, or if you feel you must be in the markets, make a little trade. You could also think about changing your trading strategy. Instead of placing trades, change the way you'll trade going ahead following your little pause.
Additionally, it is important to evaluate the market conditions. If you take a good look, you will see that while important economic data and other central bank actions might offer trading opportunities, they can also cause market volatility. Additionally, volatility might occasionally be too high to justify entering a transaction.
Once you've completed all of the evaluations, you'll be able to make changes to either your trading strategy or your trading practices. Once you've determined where your trade has strengths and limitations, it may also be the right moment to make changes to your routine.
The market is a perpetual cause of unpredictability. A security's price may have fallen, but that doesn't mean it won't climb again in the next trading session. Despite your sadness about the previous setback, there is always a chance that things may improve.
This temptation causes uninformed traders to be tempted to go all in and vengeance trade. However, when trading, one should always strive for prudent and knowledgeable decisions.