As a newbie trader- whether forex or stock/derivative trading- you are probably going to make a lot of costly mistakes as you transition to a live account.
However, as with any new skill you will learn in your life, some of the mistakes you will make are quite basic and avoidable- such as revenge trading.
What Is Revenge Trading? – A Newbie Friendly Definition
Revenge trading is simply making a trade immediately after losing money on the market. It usually takes the form of retaliatory trading and, for newbies, can be disastrous because you are bound to make trades based on emotion. Revenge trading also tends to involve erratic spending- committing a large sum of money in hopes of recovering what is already lost.
There are a couple of reasons why revenge trading is widely discouraged especially on your brand-new online trading account. Here are some of them:
Market Instability
Think about it; you probably lost your money because the market didn’t move the way you thought it would move, or it was too volatile. Jumping in immediately after a loss means you are going into the same unstable or skewed market with the same strategy hoping to make a profit; this rarely works.
You Are at Your Most Vulnerable After A Loss
Most traders, newbies and old hags included, tend to be a bit angry, panicked, or disappointed after a significant loss in the markets. As is always the case, emotional trading always breeds panic and more significant losses in the markets. This is because you are more likely to make irrational decisions when you are trying to get back at the market after a loss.
Aggressive Trading Is Not for Newbies
Some people tend to prefer the term “aggressive trading” as opposed to revenge trading. However, as a newbie, you are more likely to make silly mistakes and lose a lot of money by trading aggressively. This is because experienced traders probably know a thing or two about erratic markets and how to make decisions on the whim. You, on the other hand, have to rely on research, trading instruments, and a great deal of caution to make a profit in the market.
How to Avoid Revenge Trading as Newbie Trader
Use A Stop Loss Strategy
Good trading platforms have a feature that enables traders to exit automatically when they make losses beyond a certain point. This is what is referred to as a stop loss in trading circles. As a newbie trader, you are better off with cautiously set stop losses as opposed to active, aggressive, or revenge trading. This way, you won’t have as much temptation to jump back in with another trader after an uncontrolled and significant loss.
Taking A Break from The Market
This is perhaps the oldest and most practical piece of advice you can receive as a newbie trader. The best way to avoid the adverse effects of revenge trading is to take a break and watch the market. You will have a good chance, during the break, to analyze the market trends, catch up on the news, and read the indicators before making further trades.
Taking a break from the market may also help you see flaws in your current trading strategy before you make further losses. Sometimes, it’s better to take a punch on the chin but learn how to duck or be prepared for it in the future.
Refine Your Risk Management Strategy
Newbie traders often struggle with managing risk. The best time to devise or refine your risk management strategy is after a devastating loss. This is because you will appreciate the importance of managing risk more at this time and probably understand how to avoid future losses even by a tiny bit.
The bottom line is that revenge trading is a bad idea, especially for newbie traders. Markets can be unforgiving for traders who think they can exchange punches with them every round. Be wise and understand that losses are part of trading!
