I'm on vacation for a few more days, but just posted the below on my blog. I feel like it would also be a good fit for this forum. http://independent-trader-ken.blogspot.com/ THE REVENGE TRADE The goal of a day trader is to take money out of the markets on a consistent basis. It would be great if that translated into turning a profit every day; however, it is inevitable that even the best day traders will suffer losing days. How a day trader deals with a losing money on a single trade, a whole trading day, or even multiple days in a row can have an enormous effect on the overall profitability of that trader over a longer period of time. One of my biggest "trading demons" that I still am working on completely overcoming is the revenge trade. For myself, the revenge trade usually occurs after I have made several losing trades in a row, but can even happen after just one losing trade. In the past, I have also made revenge trades after passing on or missing a great trade opportunity that occurred earlier in the day! Since I am discretionary trader, meaning that I don't trade a purely mechanical system, the revenge trade is purely entered into based on my emotions, instead of being a reliable pattern that I know is profitable over a large sample size. The mental process behind the revenge trade is that I want to immediately get back the money that I just lost or missed out on. This situation results from losing the long-term view of day trading, and focusing on immediate gratification. Now you might be saying to yourself, isn't the main reason for choosing to be a day trader immediate gratification? One could easily justify answering this question with a yes or no, but I believe the consistently profitable day trader will always answer with an emphatic NO! Consistent probability for a day trader is better measured over a longer period of time, a month, a year, or even multiple years. When the market is open, and money is exchanging hands in a rapid manner, it is easy to lose this long-term view of my own trading. When this happens, I greatly increase my susceptibility to make any number of trading errors, with the revenge trade being my number one offender. Here are some reasons that a revenge trade is bad news: * The trade is rarely based on a viable pattern or edge that I would normally trade. * I often put on a bigger size position on these trades in an attempt to quickly gain back money I lost on good trades that simply did not work out. This translates to risking more money than I would on a normal trade in a trade that most likely has a negative expectancy. * I usually become completely fixated on the revenge trade, blinding myself from other potential trade setups that are developing. * Sometimes a revenge trade that doesn't work out leads to a string of revenge trades, and I go from a minor negative day to a large negative day. * Sometimes the revenge trade works out, and I recover all my losses and might even turn the day into a profitable one. But isn't that a good thing!? NO! Being rewarded for doing something "wrong" only makes that habit harder to break. This goes back to taking the long-term view of your trading versus the desire to get lost money back immediately. So how do I break a bad trading habit (in this case the revenge trade)? For starters, keeping a sticky note, or something visible at my trading desk that lists bad trading habits is a good idea. This way, they are more likely to stick in my conscious mind, allowing me to catch myself before making the mistake. I would say the majority of the time I enter into a revenge trade I know I am doing it before I actually pull the trigger. The key here is to make the desire to achieve the highest rate of profitability over a long period of time greater than the desire to earn your intraday losses back immediately. With trading being totally electronic, this is easier said than done. One click of a mouse gets me in the trade, and it is easy to say to myself, I'll just make this my last revenge trade ever. So in the event that I can't stop myself from entering the revenge trade in the heat of the moment, once my emotions have calmed a bit and I figure out that i made a bad decision, getting out of the trade immediately is the next best action I can take. By doing this, I am removing the possibility of letting the revenge trade work (which it will do on occasion), thus reinforcing a bad habit. Trading independently is liberating but hard. I am only accountable to myself. If I don't keep a trading journal, revenge trades get lost in time and I might not even be aware that I am making them. By keeping a journal of my trades, I can review my trades in a rational fashion after the market is closed. This makes it easy to separate trades by category. After doing this over a few months, I calculate the profit/loss from just my revenge trades. Seeing a large negative number as a result of this process is all the motivation I need to start the process of eliminating a bad habit (and remember, the profit/loss on just the revenge trades doesn't include the trades I missed because I was so focused on the revenge trade I was currently in!). In closing, I am human, and will still occasionally make a revenge trade. Emotions and trading can be a deadly combination, and I believe controlling your emotions is the most difficult aspect of the trading process. I need to remember that losses are part of the game, and as Alexander Elder states repeatedly in his many trading books: "The goal of a good trader, paradoxically, is not to make money. His goal is to trade well. If he trades right, money follows almost as an afterthought."