Have you ever lost big? Did you think about placing a bigger, riskier trade to off-set the loss? You probably thought to yourself “if this works, I’ll make back more than I lost.”
With all of the sudden drops in the markets the last three weeks, you may be feeling like putting on a bigger trade to recoup some losses – this is kind of trading is sometimes called revenge trading. It’s called a revenge trade because when the market has sudden drops, like the ones recently experienced from the Coronavirus and the Oil Price war, it provides a “perceived” buying opportunity to get revenge on the market for prior losses. Revenge trading is considered to be risky, and it comes from an emotional place motivated when someone believes the market owes them.
Revenge traders must be very careful if establishing a long position after a sudden drop to avoid bull traps set by more savvy traders or larger volume traders. It is important to make your decisions on the market evidence not based on emotions.
If you find yourself revenge trading, or even tempted to revenge trade, you are probably too emotionally invested in the trades you’re placing. Losing trades are a reality of trading, and you need to get over them quickly and move on to the next trade.
A losing trade can trigger a fight or flight response you can’t afford to ignore or not mitigate. It isn’t logical, but emotional trading never is. You think, “I’m going to recover my losses from that last trade on this next trade.” Suddenly all rational thought is gone, you talk or force yourself into the next trade, you over trade size and abandon risk management. What could go wrong? Now you are two down.
The best way to deal with a losing trade is to turn it into a learning moment. What went wrong?
Evaluate. Analyze. Plan for the next time.
Sometimes nothing went wrong; the market is not always on your side, and it’s not always rational or logical or consistent. But, maybe you did do something wrong. Did you follow your plan? Maybe you jumped the gun or ignored a warning sign; you probably knew at the time you should not be placing that trade.
To earn your money back after a losing trade, figure out what you did wrong the first time and learn from it. Learn how to avoid your mistakes next time. Grow as a trader.
Disclaimer: The author is not a financial advisor and the following should not be taken as financial advice. This is by no means a complete discussion of the pros and cons of trading and/or investing. Please consult your own qualified advisors to determine what is appropriate and best suited to your specific investment objectives and risk tolerance.