Revenge Trading: The Science Behind Changing Irrational Behavior

One of the common reasons that new traders blow out their accounts is because of revenge trading. Even professional traders can do this from time-to-time.

In this post, you'll learn why it's so dangerous, as well as scientifically proven strategies to change this behavior.

What is Revenge Trading?

Revenge trading is the act of taking one or more trades that do not follow a proven trading plan. This usually happens immediately after a losing trade, suffering a “bad beat,” or during a losing streak.

A “bad beat” is when you feel you should have had a profitable trade but you were cheated in some way. For example, getting stopped out by 1 pip, then having the trade hit the profit target, could be perceived as a “bad beat.”

This type of irrational trading is done out of frustration or anger, in order to get “revenge” on the market for the previous loss.

It's also known as going on tilt, FOMO (fear of missing out), overtrading, or chasing.

Why It's Dangerous

The primary reason that revenge trading is so dangerous is because it can lead you down a path of irrational behavior, which can lead to huge losses. 

Once you throw your rules out the window on one trade, it becomes much, much easier to violate your rules on all subsequent trades.

After you come to your senses, you may have erased of your previous profits for the month or you may have even lost your entire account.

It's a serious issue for some traders. 

Causes of Revenge Trading

Before we get into the solutions, let's take a look at some of the causes. Pay attention to if one or more of these causes resonate with you.

This awareness will make it much easier for you to figure out a solution.

Ego

One reason that traders trade irrationally is because their ego was hurt by the previous losing trade.

In other words, they take it personally. 

It's easy to spot if you are prone to this behavior. 

Are you easily insulted when people talk to you?

Do you always think that people are talking shit about you?

If you are having difficulty recognizing this, ask your friends or family if you do this.

When your ego is easily bruised, the common response is to lash out at whatever or whoever you feel wronged you.

Feeling Like You are “Behind Schedule”

Do you feel like you should have been successful 10 years ago?

This mentality will cause you to take unnecessary risks.

When you always feel that you are playing catch up, this is a poverty mindset. If you always feel like you have less than everyone else, then guess what?

You will act like you have less and are less.

Greed

You've been following all of the “lifestyle traders” on Instagram and you want to fly private and drive a Ferrari too.

So when you lose, you double up your risk, so you can make your money back.

That's basically martingale risk management and it always ends with an account balance of zero.

You can make more money than you will ever need during your lifetime by consistently compounding your account.

Anger

If you have a tendency to easily get angry at people or things, this is fertile ground for revenge trading.

Some people are predisposed to getting angry. This could be a result of innate personality or a challenging life situation.

Whatever the reason, understand that getting angry rarely makes a situation better.

Take a step back and acknowledge that you have a tendency to get angry easily.

Again, if you don't think that you get angry often, ask someone you trust.

But don't judge it, that only leads to regret and self-loathing.

Just take a few deep breaths and accept that it's part of who you currently are.

Now figure out what's causing it and how to change it. 

Market Personification

Do you give the market an identity?

Maybe you see the market as a small group of greedy traders.

…or maybe you feel that your broker is out to get you.

…or you see the market as an opponent in a boxing match.

Whatever the case may be, if you give the market a personality, it makes it much easier to focus your anger, disappointment or frustration on it and blame it for your losses.

Negative Market Metaphor

Do you have a negative metaphor for the market? For example, do you see trading as a battleground or a gladiator arena?

If this is your metaphor, then you will naturally cause yourself to feel tense or feel like every trade is a life or death situation.

Trading is a high-pressure profession.

There's no need to put more pressure on yourself.

Deeply Engrained Habits

Habits can be a bitch to break.

That's fantastic if it's a good habit.

Negative habits are another thing. Some habits are more deeply engrained than you may understand.

Some behaviors that feel unchangeable can just be well-worn habits.

Neuroscience has shown us that our brains have neuroplasticity.

In other words, we can change the way we think.

Our habits are not set in stone. 

Deeply Engrained Trauma

All suffering and disease basically comes from trauma. 

We keep stress, hurt and negative emotions trapped inside our bodies and that leads to negative behaviors and even physical diseases.

These traumas can come from any time during your life or it can even be inherited.

Here's a Harvard study linking childhood trauma to chronic disease as an adult.

If someone had a tough childhood, they may have coped with it by lashing out at people.

That may have served them well enough back then. But as an adult, these fits of anger can lead to an impulse to get revenge on the markets.

Proven Methods for Stopping Irrational Trading

Now that you understand some of the causes of going on tilt, let's take a look at how you can remedy this behavior. These are proven methods for preventing irrational behavior and changing other negative habits.

Trade Smaller Until You Figure Things Out

Set a hard risk limit of 0.5% or less, per trade.

Sure, you won't make as much money on winning trades. But if you go on tilt, you are also a lot less likely to do significant damage to your account.

You can take smaller trades by using nano lots.

Once you are confident that you won't revenge trade, you can go back to using normal sized lots.

Implement the 2-Strikes Rule

I have a simple rule called the 2-Strikes Rule that guarantees that I will never blow out my account due to revenge trading.

I don't allow myself to take more than 2 losing trades on the same trading idea.

This rule has kept me out of a lot of trouble and it can help you too.

When you set limits like this beforehand, you are much more likely to follow them, even when your emotions are running high.

In psychology, there is a fancy term called setting boundaries. You set boundaries in your everyday life and that determines what you will and won't tolerate.

Set a maximum number of losses on each trading idea and you will stop yourself from chasing trades that will make you go broke.

Identify Your Cue and Reward

In his book The Power of Habit, Charles Duhigg cites several examples of how powerful habits are and why they are so difficult to change.

I would highly recommend reading this book if you want to understand the inner workings of habits, how they are formed and how they impact our lives.

However, if you want to get the short version, then this infographic will help. Based on his research, this is the process that Duhigg recommends for changing a habit.

You can also think about it as: cue, craving, response, reward.

The bottom line is that our habits (even our bad ones) give us some sort of reward.

So if you can figure out what that reward is for your negative behavior, and substitute it with something positive, you can change the habit.

Create a Shutdown Rule

If it's too hard for you to change the habit, you can use a shortcut.

Once you identify the cue or the trigger, you simply stop trading for the day. 

For example, let's say that you notice that your revenge trading usually starts when you begin doubling your normal risk.

If that's the case, then you can simply create a rule that says you will stop trading for the day if you are tempted to double your risk per trade.

Leverage Behavior Conditioning

Studies have shown that kids respond better to positive reinforcement, but adults are generally more responsive to negative punishment.

Of course, the type of reinforcement that works the best will depend on the person and the situation.

So experiment with the 4 methods of conditioning:

• Positive reinforcement
• Positive punishment
• Negative reinforcement
• Negative punishment

Once you understand which one (or two) work best for you, then use them every chance you can, to keep yourself from revenge trading.

Use a Positive Market Metaphor

Get rid of metaphors that don't serve you.

Multiple studies have shown that metaphors can significantly color the way we see a situation.

So don't personify the market as a bunch of Gordon Gekkos or crooked brokers.

See the market as a network of regular people who have a tremendous opportunity to make a great living from anywhere in the world.

Seek out cool traders or brokers who care. Think of trading as the coolest club in the world or the Olympic Games of Finance (friendly competition).

The more you can see the market as a positive place, that will reduce the likelihood that you will lash out at the market when things aren't going your way.

Raise Your Heart Coherence

Heart coherence has been proven to help people regulate their emotional state and make better decisions.

Luckily, this is easy to measure. You can use a device like the emWave2 or the Flow HRV to measure your heart rate variability (HRV).

A high HRV means that you are in a state of high coherence.

Once your emotions are under control, you are much less likely to over trade and lose a lot of money.

Leverage the Law of Resonance

Everything in the universe is made up of energy. We tend to resonate with the type of energy that is in our immediate environment.

Here's an excellent illustration of this concept:

So be very aware of your environment and the people you hang out with.

• Do these people get angry easily?
• Do you watch shows/movies with a lot of violence?
• Is your home disorganized and distracting?

These influences could be triggering your revenge trading.

Do your best to hang out with positive people. Turn off the news and consider what you are watching on Netflix more carefully. Carry a $100 bill to help yourself feel more abundant. Keep your trading desk clean and organized.

Remember the Odds

Trying to grow your account by hitting a few ultra high risk trades is like playing the lottery. Any time you are tempted to do this, just remember that your chances of winning the Mega Millions jackpot lottery in the US is 1 in 302,575,350.

Your chance of winning a trade with a proven trading strategy can be as high 70%+.

Ask yourself: Which one will help you build wealth over your entire lifetime? 

Find the Source

Finally, the methods described above can help you kick the habit of trying to get back at the markets.

However, if you are having difficulty changing this habit after doing all of the above, then there may be something deeper in your psyche that's causing you to go off the rails.

The bottom line is that all suffering and disease is caused by trauma.

When you feel the need to get back at the market, you may be reacting to some sort of trauma in your body.

Read this post for my suggestions on ways to find the sources of your trauma.

Conclusion

If you find yourself giving back all of your profits, or you don't understand how you lost so much money last month, then be aware of your triggers. Keep a trading journal to figure out where you went off the reservation.

I consider revenge trading the most dangerous negative psychological state in trading because it can end in a zero account balance very quickly.

If you are prone to this behavior, first acknowledge that you have an issue.

Then take action to stop doing it. Keep things simple and only try to change one behavior at a time.

 

 

 

Disclaimer: Some links on this page are affiliate links. We do make a commission if you purchase through these links, but it does not cost you anything extra and we only promote products and services that we personally use and wholeheartedly believe in. A portion of the proceeds are donated to my charity partners.