Tuesday, March 20, 2012

Revenge Trading – avoid it


Aha, the pains of revenge trading. If you have not been a victim of revenge trading, just count yourself lucky. 

Revenge trading is where you place a trade. You have done all the analysis. You have followed your method to the dot. You have calculated your stop loss and take profit and you feel confident that you have a great trade. You place the pending order. And as expected, you get triggered into the trade. The trade goes as expected – you are in profit and you are headed towards your target. You are maybe just 20 pips from your target. You relax and walk away from your computer. You don’t want to be tempted to take out the trade before you hit your target. After about 45 minutes, you return to your computer only to find you are headed for your stop loss!!! 

There is nothing you can do about it. The trade is rushing towards your stop loss. You think of adjusting the stop loss but again you know that is another recipe for disaster. You start praying and wondering how such a great trade could have gone sour. You wish you would have taken out the trade when it was still in profit. 

And as you watch, what you expected becomes reality. The trade hits your stop loss!!! What next??? You do what most traders do. You put in another trade, most likely in the opposite direction and hope to make the money that you have just lost.

That is where revenge trading starts. By putting a trade immediately after losing a trade, you are not emotionally sober. You are being driven by the desire to make the money that you have lost. Your analysis is blurred and not accurate. You are basically revenge trading.

I have been a victim too. Recently, I lost 3 great trades in a row. I was devastated. I had not lost 3 trades in row since the year begun. The setup for the first trade looked great. I was sure I was going to rip off big. The first trade had even made profits but I was waiting for it to reach my take profit. It never did. It instead hit my stop loss.  Oooooouuuuuuuuccccccccccccccccchhhhhhhhhh!!!!

As mentioned, I was devastated. I figured I could at least make some profits by going in the opposite direction. I entered two trades in the opposite direction. There was no proper analysis done. There was no method followed.  However, like all my trades, I put stop losses. I moved away from my computer. I wanted to go and recollect. I wanted to refresh my mind and think of something away from forex. Having been evening, I decided to take a walk – I love being alone so a walk would do me great. 

On my return, I checked my trading journal to see where I had gone wrong on the firs trade. It looked fine. I took a look at the chart and the setup was fine too. 

Then I looked at my current trades. And behold, these were the problem. The first trade was a good setup that did not work out. The second trades that I had placed where pathetic. I had not really done proper analysis. I was blinded by the desire to make the pips that I had lost on the previous trade. I realized what a mess I had gotten into. 

And that my friends is what happens or most likely to happen when you revenge trade – most times you end up with pathetic  trends.

3 comments:

Whyse said...

one tool i have found particularly very helpful is the trailing stop. as soon as your trade gets in some acceptable level of profit, it is good to trigger the trailing stop. i dont know what others think

Innocent Kazooba Ka'Nyamuhanga said...

I do agree with you. I am full time trader so I monitor my trades most of the time. And I always have a stop loss - I never trade without one.

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