The Revenge Trade

Discussion in 'Psychology' started by sniper, Oct 23, 2010.

  1. sniper


    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.


    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."
  2. jinxu


    Nice post. I think I read that somewhere, but I may be wrong. Rare posts like this is the only reason why I even bother to hang around elitetrader. Reading idiotic posts after posts was starting to drive me insane. I hope most newbies will ignore your advice. Thanks. :D

    And your threadid is 209027 (note the 27). That's just humorous.
  3. Handle123


    When I added up all my "revenge" trades long ago, I noticed I was wrong over 90% of the time, so I decided that wasn't going to change things. So when I miss a trade, hit the mouse more than once, lose connection, cat jumped on my head, I either walk away if I am not in a trade or get out if I lost concentration or just being irritated.
    beginner66 likes this.
  4. Wow -- seems like you could make a strategy that is right 90% of the time just by doing
    the opposite of what would be a revenge trade. I suppose that makes sense: buying
    when others are fearful and selling when others are eager, etc. A 90% correlation (either
    positive or negative) sounds like a gold mine to me.
  5. oraclewizard77

    oraclewizard77 Moderator

    The only thing I can think of to help is trade management, for example, look at a normal day, how many trades you take. Lets say its 4 trades. So limit yourself to 4 trades, that way even if you make a revenge trade, you will limit the damage.

    Also, realize that prices are sometimes random or you may be trading during a day that does not respect your system, and its not your fault if you have a losing trade.

    Also, finally this is confidence in your system, you need to get to the point you trust your system and wait for signals to occur, take those signals to conclusion for example don't move the stops or targets during the trade.

    Also, if you scale in and out of a trade, you may want to take a position on the 1st signal, and see if its behaving correctly before adding to that position. For example, lets say you go long, and the market starts going against you hard right away, maybe there was a news report causing this, and you may want to stand aside rater than add to a losing trade.
  6. Eight


    When my Pool game slumps I tend to take revenge shots, and they rarely are a good idea... when I miss a shot now I go through the list of very fundamental things involved in shooting a pool ball: plan, get the bridge settled, stance right, breathe in, breathe out and let the weight of the cue do the work... it makes me forget the revenge feeling and get down to the business of making a Pool shot and it works fine every time...
  7. NoDoji


    Assuming you placed a protective stop that makes sense, when stopped out for a loss it means the setup that got you in the trade in your particular time frame isn't valid any more. As yourself if it makes more sense to wait for a new entry in the same direction you were playing, or if it makes sense to switch sides. There's nothing to "get back" because as long as you continue to work the setups that have proved to be net winners over the long run, the losses will be erased over time.

    If you were stopped out because the initial trade wasn't properly signaled (this happened to me today when I jumped the gun by 1 tick and that 1 tick cost me the full stop loss), then remind yourself of your rules and don't worry about it at all, because again as you trade your proper setups will produce net profit over the long run and pay for your mistake.

    If you hesitated and missed a good move, decide whether it makes more sense to wait for a signal in the opposing direction or to patiently wait for the next signaled entry in the same direction. The first choice will get you in a trade sooner, but MAY be counter-trend, depending on the price patterns in your time frame; the second choice will require more patience, but MAY produce a much better R:R if it's with the trend and there's no reversal signal in play.
  8. Redneck


    Revenge trading is purely psychological in nature

    It stems from a trader not yet accepting the inherent loss (risk) associated with each trade

    Accept it – revenge trading is not possible

    Don’t accept it – who can say the damage one can exact on one’s account

    Imho of course…

  9. sniper



    I definitely like the sports analogy. You see it all the time, even watching professional athletes. The best athletes definitely have a mental edge. They can make a mistake, realize it, learn from it, and then continue performing without the fear of making another mistake. I do believe that this mental process is something that most people grow up without learning.

    As I continue to develop as a trader, I find that the more I focus on my own personal trading process from finding setups, to setting stops, to finding targets, etc... the better my trading performance becomes. Instead of trying to make money, I just try to trade well. This sounds easy in concept, but it is what I believe cripples most traders.
    #10     Oct 27, 2010