According to Steenbarger: "Revenge trading is caused by wrath as you are angry that you lost and have the lust to make it all back quickly."

Revenge trading is a natural and emotional response when a trader suffers a significant loss. When a trader has a large loss, they may resort to revenge trading as a natural and emotional reaction. After their large loss, they make another deal without pausing to consider their next course of action or plan. Recovering from the loss as soon as possible is the goal. The idea is that the losses may be swiftly recovered by placing on another trade, which is anticipated to be profitable. 

Revenge trading particularly occurs when a trader, after experiencing a significant loss, engages in impulsive and often risky trading in an attempt to recover those losses quickly. The emotional response triggered by a substantial loss can lead traders to abandon their usual risk management strategies and make trades based on emotions such as frustration, anger, or the desire for retribution against the market. Revenge trading is characterised by irrational decision-making and an increased willingness to take on excessive risk in pursuit of recovering previous losses.Only bigger than the one the trader is trying to recoup.Revenge trading is when you try to force a trade in order to recover from a previous loss. Most of the time, traders who do revenge trade have been on a good run until a big loss sets them back.

Pitfalls of Revenge Trading: 

Revenge trading can have several detrimental consequences for traders, leading to a variety of pitfalls. Here are some of the key pitfalls associated with revenge trading:

Increased Risk Taking:

Traders engaging in revenge trading often abandon their usual risk management practices. They may take larger positions or trade more frequently in an attempt to recoup losses quickly. This increased risk can lead to further financial losses.

Impulsive Decision-Making:

Revenge trading is characterised by impulsive and emotional decision-making. Traders may make decisions based on frustration, anger, or a desire for retribution rather than on rational analysis. This impulsiveness can lead to poor trading choices.

Loss of Objectivity:

Emotional reactions can cloud a trader's judgement and prevent them from making objective assessments of market conditions. Revenge traders may ignore signals and indicators that contradict their desire to recover losses quickly.

Cyclical Losses:

Revenge trading often results in a cycle of losses. Traders who try to recover losses through impulsive actions may end up compounding their problems by incurring additional losses. This cycle can be difficult to break, leading to a downward spiral.

Stress and Burnout:

Engaging in revenge trading can be mentally and emotionally exhausting. The stress of trying to recover losses and the consequences of poor decision-making can lead to burnout, affecting a trader's overall well-being.

Strained Relationships:

Financial losses and the emotional toll of revenge trading can strain relationships, both personal and professional. Traders may find it challenging to explain their actions to family members, friends, or colleagues.

Undermined Confidence:

Sustained revenge trading can undermine a trader's confidence in their abilities. Constant losses and impulsive decisions can erode the self-assurance necessary for successful trading.

Deviation from Trading Plan:

Revenge trading often involves a deviation from a trader's established trading plan. This departure from a well-thought-out strategy can lead to inconsistent and unpredictable behaviour in the markets.

To avoid these pitfalls, it's crucial for traders to recognize the emotional impact of losses, maintain discipline, and adhere to a well-defined trading plan. Seeking guidance from mentors or professionals and taking breaks to regain composure can also be beneficial in preventing revenge trading. Developing emotional resilience and a disciplined approach to trading are essential for long-term success in the financial markets.

Dealing with the tendencies of Revenge Trading: 

Overcoming revenge trading requires a combination of self-awareness, discipline, and strategic measures. Here are some steps we can take to overcome revenge trading:

Stick to a Trading Plan:

Develop a comprehensive trading plan that includes risk management strategies. Ensure that your plan is based on a sound analysis of the markets and your risk tolerance. Commit to following your plan even when emotions run high.

Set Realistic Goals:

Set achievable and realistic trading goals. Understand that losses are part of trading, and it's not always possible to recover them immediately. Setting realistic expectations can help reduce the emotional pressure to engage in revenge trading.

Review and Learn from Mistakes:

Analyse the trades that led to losses without emotional attachment. Focus on learning from your mistakes rather than placing blame. Understanding the reasons behind the losses can help you make better-informed decisions in the future.

Use Risk Management Strategies:

Implement effective risk management techniques, such as setting stop-loss orders and position sizing. These measures can help limit losses and prevent impulsive, emotionally driven decisions.

Take a Break:

If you find yourself succumbing to revenge trading impulses, take a step back. Give yourself time away from the markets to cool off and regain emotional balance. This break can help you avoid making impulsive decisions.

Keep a Trading Journal:

Maintain a trading journal to record your trades, emotions, and the reasoning behind each decision. Reviewing your journal regularly can help you identify patterns of behaviour and make adjustments to improve your trading discipline.

Remember that overcoming revenge trading is an ongoing process that requires commitment and self-reflection. Developing a disciplined and systematic approach to trading, combined with emotional resilience, can significantly improve your chances of long-term success in the financial markets.

Conclusion:

We saw how revenge trading is detrimental to a trader's financial well-being because it often involves poor decision-making, chasing losses, and disregarding fundamental and technical analysis. It can also lead to a cycle of further losses, creating a downward spiral that is difficult to break. Successful trading requires discipline, a sound strategy, and the ability to manage emotions effectively. Traders who succumb to revenge trading are at risk of making impulsive decisions that can result in additional financial setbacks.

To avoid revenge trading, it's important for traders to stick to their trading plans, use risk management strategies, and be aware of their emotional responses to losses. Taking a break, reevaluating trading strategies, and learning from mistakes are crucial steps to prevent falling into the trap of revenge trading.