Experiencing losses is as much part of forex trading as winning trades. Unfortunately, a lot of traders take losses personally and they end up reacting to their losses by taking revenge trades. Many traders can’t handle losing, which ultimately drives many of them to revenge trading. Sometimes they can handle one or two consecutive losing trades, but when they lose too many times in a row, they become furious and try to win back all of these losses with one trade.
Revenge trading is mainly driven by the fear of being wrong. It’s usually when a trader, coming from a particularly frustrating loss, decides to make up for it by being more aggressive in his/her next trades. This is dangerous for your account for two main reasons. First, it forces you to throw your trading discipline out the window. It shifts your focus from your trading process and good risk management to trying to make enough money to recover your losses with less thought out trades.
Loss aversion is the tendency for individuals to prefer avoiding losses rather than accruing gains. The theory was first introduced in 1979 by Kahneman and Tversky under the assumption that losses have a larger impact on preferences than that of the advantages of gains. In fact, you may have moved the stop several times. Because you loathed the thought of losing so much all semblance of perspective left you and in that attempt to keep from losing money in the trade you inordinately and inappropriately increased your risk, in effect wiping out all of the last two month’s gains.
Traders experience a feeling of wanting revenge on the market when they suffer a losing trade that they were sure would work out. The key thing here is that there is no sure thing in trading. Also, if you have risked too much money on a trade, and you end up losing that money, there is a good chance you are going to want to try and jump back in the market to make that money back, which usually just leads to another loss (and sometimes an even larger one) since you are just trading emotionally again.
Many people find that their situation worsens as a result of the rogue, thoughtless trade. Hence – it is better to focus your energy on earning profits back in a reliable, thoughtful way, rather than simply on the flip of a coin. When you lose a large portion of your equity in one or two trades, it puts you into a situation where your emotions can easily overwhelm you. This is when you start making irrational decisions and lose a grip on yourself and your trading account. When traders become really emotional, revenge trading can happen almost automatically. Traders who risk tiny bits of their account on each trade are much less vulnerable to succumb to the revenge trading virus.
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