Revenge trading is simply one of the prop trading strategies, but it should be executed with caution as it can have very negative consequences. Prop traders are often under extreme pressure to make profits quickly. This, paired with the intense competition between prop traders, can make masquerade loss recovery an aggressive form of trading wherein a trader exhausts their funds to get back to their primary balance or target. Such an approach is very counterproductive and likely to lead to even greater losses. In controlled environments with strict rules managing funds, understanding the psychological impact of these losses is highly crucial for long term success.
Why Revenge Trading Stands Out
Blinded by rage, many traders tend to make impulsive deals over the edge of stock price fluctuations. Such an approach, when employed many times, becomes habit and transforms into a pain-response cycle: a trader makes aggressive moves to avoid a loss only to be left wiped out or targeted – losing everything while trying to simply recover to a comfort zone that is permanently moving away from default state. Such action is bewitched and can be very difficult to escape if there is no proper approach to restoring control.
Revenge trading in prop trading can be extremely detrimental. Prop firms function by giving a trader leverage and capital to trade with. Although the firm has some risk management systems in place, the trader still has to deal with emotions and is ultimately responsible for the incendiary decisions, hence the self-managed stress. In the hopes of “getting even,” losing traders often seek to perform and avoid losing further, creating a perfect storm for revenge trading.
The Emotional Triggers Behind Revenge Trading
Revenge trading is, in essence, an emotional response. It is the result of overwhelming emotions experienced by a trader. Losses inevitably bring about frustrations or anger or feelings of shame. These emotions tend to block the rational decision a trader would otherwise make, compelling the trader to make advanced moves from their game plan and take actions that are not typical for them.
Loss aversion is an important psychological concept which ties directly to revenge trading. It refers to an individual’s tendency to feel the pain of loss more deeply than the pleasure associated with a gain of the same magnitude. This phenomenon is likely to be severe for traders because each loss not only reduces the trader’s account balance but also undermines their self-worth. Therefore, traders are likely to take increasingly greater risks trying to recover the lost funds.
Also, the social comparison aspect has profound importance. In prop firms, traders are usually part of a team, and there could be some level of competition to outperform the other colleagues or attain certain targets. After a trader incurs a loss, he might feel as though he is lagging behind his co-workers, and this might trigger an impulsive action to help him to catch up.
The Effects of Revenge Trading
Revenge trading tends to result in poor decision making which can compound the initial loss, leading to even greater financial difficulties. Since revenge trading skips analysis as well as a well-thought out strategy, the trade is made without consideration of prevailing market conditions and rules of risk management. This causes the traders to be in positions that they would normally avoid.
For proprietary traders, the impacts can be severe. Most prop firms have in place robust risk management policies such as limits on drawdowns and maximum trade sizes. These policies are often infringed by vengeance trading. A trader can get into a revenge trading spree which can easily overshoot these limits resulting in margin calls or even liquidations of accounts. This comes with the downside of losing money, but more importantly missing out on recognition within the firm and their standing earnings.
Revenge trading in the context of swing trading can have unforgiving repercussions. Swing trading requires an intricate approach with a level of patience that entails holding a position for multiple days or weeks, potentially disrupting a long-term strategy left intact. Soos short-term revenge trades don’t provide an upper hand to a trader. Award goes to the unpredictable nature of revenge trading which increases the unlikelihood of successfully achieving within a set deadline.Consequences of Revenge Trading on Currencies Trades
Of all currency pairs (currencies swap), the Forex market is probably the most risky. It is prudent to understand both technical and fundamental reasons that drive swing trading in currency pairs. Different range of economic data, foreign policy concerns and central bank pronouncements influence and move currency pairs.
Moreover, revenge trading in Forex is now more of a standardized practice. Traders consumed by revenge sentiments are far more likely to act on impulse instead of assessing the currency pairs in question. Irrespective of the market conditions surrounding them, they tend to place fences bets hoping for snapback on losses. Such irrational levels of trading in Forex, which should ideally be confined to its huge liquidity pool and high leverage, only serve to amplify their emotional chaos.
Where, in most cases, only a handful of trades per day need to be made to qualify for level trade gaps, traders are easily drawn into unfamiliar currency pairs. These positions are often aided by trading during snap back losses. As a consequence, their trading becomes susceptible to heightened levels of risk and reduced probability of succeeding.
The Significance of Emotional Regulation Under Prop Trading
Emotional regulation is the key to preventing revenge trading. In particular, successful prop traders appreciate that trading does not equate to winning each and every trade, but rather making good decisions over an extended period of time. Prop firms, for instance, tend to look for traders who are able to demonstrate emotional fortitude and self-control as well as an ability to adhere to their trading plans.
During trading, emotions should be recognized as influences, but not allowed to dictate behaviors. Accepting signs of anger, frustration, or anxiety with awareness before it blossoms into revenge trading is the most essential first step. A trader who recognizes that he or she is laden with emotions can do something about those emotions.
Ways of Overcoming Revenge Trading
Meeting all the requirements of a trading plan is one of the worst possibilities for a trader seeking to overcome revenge trading. Those plans must encompass specific instructions on entry and exit points, risk, and other well defined goals for the trader. With a provided plan, traders become less prone to capricious behavior following loss as there is a system to follow.
Swing traders must also accept that losses are part of the trading journey. Mental models determine a trader’s decisions, so accepting that no strategy is perfect, and that losses are an inevitability within any form of trading, fulfills the acceptance gap, making losses mentally easier to digest, reducing impact of losing trades and drawdowns.
Taking pauses between trades is another effective technique. Traders must step away from the market for a few hours or even a day after a loss. This timeframe allows traders to deescalate emotionally, diagnose their approach, and distance themselves from decision making that is driven by negative sentiments.
A trader’s journal will also prove to be very helpful in postponing revenge trading. A journal enables traders to document their thoughts, emotions, and actions throughout each trade. With time traders can examine their actions and recognize repetitive behaviors that need to change, preventing them from falling into unhealthy behaviors such as revenge trading.
Conclusion
One of the most perilous mental traps a trader could fall into is revenge trading, particularly within the unforgiving setting of prop trading. Given that swing traders must contend with nitty-gritty details of currency pairs on top of both technical and fundamental analysis components, the involvement into revenge trading becomes far more dangerous. That said, traders have the ability to mitigate the negative consequences of revenge trading by recognizing the emotional patterns that lead to engaging in it, having set plans that disallow idle time, as well as practicing disciplined methods like taking breaks and having trade journals. Ultimately, the ability to control one’s emotions along with a focus on the future are the two main premises that will enable anyone to survive the harsh world of prop trading while consistently excelling at swing trading.