Lessons from the Pros

Knowing Yourself and Revenge Trading

In my last article, I talked about traders with and without trading plans and some of the different types of trading days we as traders can expect to face on any given day. This week, I would like to go a little deeper into knowing one’s self and recognizing signs of revenge trading. By knowing our strengths and weaknesses, we can anticipate how we may act when a circumstance arises while we are trading. Even if we have a perfect trading plan that under most conditions we follow, we still need to know how we personally will react to different events in our lives and how that affects our trading mentally.

I will start with my own personal trading of late. Recently, I had some health issues that have changed my lifestyle temporarily. This change has put my mental state in less than great spirits. One of the many reasons I wanted to trade for a living was so I could take this career to my grave with no real physical limitations, other than a few trades that might have caused the heart some problems. What I am finding with my trading is my concentration and focus is not what it was when I was healthy. In class we talk about never trading when you are not feeling well or something is bothering you. These do not always have to be health issues. They can be problems in your home, work issues, relationships, or just about anything that consumes us with distracting thoughts.

Over the past couple of weeks I have cut my trading back to almost where it is not worth turning on the screens each day. The reason for this action or lack of is that I know with my situation I will try and make every trade a winner. Why? Because if I have a losing trade or two I will blame the markets for how another situation is making me feel at the moment. This will ultimately lead to revenge trading for not only the money, but trying to take my anger out on the market that had nothing to do with why I feel like I do. How many times have you had something go wrong during the day and all day you just kept getting more upset? Then when you got home that evening something goes wrong that normally you would shrug off, but you are still very upset with what happened earlier in the day and you take all that anger out on this unrelated event. I feel fortunate that I know this about myself and have the self control to cut back my trading until I am feeling 100% again. Being able to know how each of us will react to a situation can help to keep us from going down that road of revenge trading. We are only human; unfortunately, we will never take all our emotions out of trading.

Ever have one of these days?

"Fine, you want to go down now?" Then let’s do it! On this day the trader was long the Bonds and the market turned on him so he covered his long and reversed his position with a short. On top of this trade he had a losing E-mini S&P trade. The thought running through his head was that the day was running out of time before the close and he felt the extreme need to recover his losses and very fast. Like most of us, he just did not want to end the day in the red column.

His hopes were pinned on the Bond market to help make up for his losses in the E-mini S&P that he had. So when the Bonds did turn on him, he had a small loss on them, too. With the pressure on to perform with time running out, he increased his normal trading size by 10 contracts when he reversed the Bonds. For a moment the Bonds went his way and he was feeling like that emotional decision he made was the right one. Then as you would have guessed, the Bonds dropped on the close causing him to lose a considerable amount of money that he was not used to losing.

This happens in the market all the time to traders who trade with emotions and not their trading plan. Each of us would like to end every day with a green number in our account; in reality we know this will not happen. A lot of beginning traders fall into this trap simply because they have unrealistic goals and get caught up in revenge trading. Revenge trading is one of the fastest and easiest ways to lose all your equity in your trading account. Let’s look at some other examples of revenge trading.

• Holding onto a winning trade too long trying to make up for an earlier loss. Can you hear this trader talking to himself? "Let’s go, I am down $750 and need to make this up before the close." Trading like this is like linking your losing trades to your winning trades; they are not connected in any way. This will ultimately lead to allowing winners to turn into losers more than you can stand. All you should do is stay in the trade until your plan says to exit, not your profit or loss.
• Cutting your winners short because you have made up your losses for the day, only to watch the market go several more points in your direction after you exit. Let’s listen to this trader. "I finally got back to even for the day and don’t want to risk a red day." Again, follow your trading plan and not your emotions.
• Trading larger size to make up for earlier in the day losses. As we mentioned earlier, there is an hour left in the trading day and all of a sudden you trade a much larger size than you normally do, way over your head. When you get this focused on making back losses you will act out of desperation most of the time.
• The ultimate is overtrading. How many times have you been under water and found yourself admitting this is not the best trade setup but you will take it anyway? Normally, you trade 2-3 times per day and start finding yourself trading 13-15 times because you are forcing trades.
• Ever put a trade on and say "I sure hope this one makes up for all my losses?" At this point we are getting too attached emotionally to this trade; it has become our savior. Most of the time if the trade starts out with the word hope, it is anything but our savior. Remember, hopium is a bad drug to get addicted to.

I can almost hear some of the responses from the readers of this article saying, "These won’t happen to me" or "I am a better trader than that; no way I would let that happen." What’s funny is that if I had not experienced these, I would not believe they could happen to me either. Once you are down a few thousand dollars one day and realize the market is closing in an hour and a half, you have some bills due laying on your desk in front of you and of course, you get to hear that infamous response from someone when they get home, "How did you do today?", you will start to see just how easy it is to fall into one of these traps. I hope that by being aware of these that you may be able to recognize them before they become a problem.

So how do we get over this revenge trading once it has happened to us? In my opinion, it is by re-capturing. This does not have anything to do with a physical action, nor does it relate to obtaining revenge in any way. Your losses are in the past; you can only move forward now and this can be done even on weekends before the markets open. Re-capturing is a mindset!

The key is getting your mindset back to where it was before the losses that resulted in revenge trading. If you have a trading strategy that has been proven over time, you will probably have a positive expectation of making money with this strategy because of a good win/loss ratio and good money management. When you trade with these positive expectations you will win more than you lose. Trading is a probability business and when your strategy and money management are followed, you can afford a series of small losses and still make money. When you focus on the losses you have had or attempt revenge trading, you are putting yourself in the state of unknown expectancy. Once this happens, you will start making changes to your trading that are not part of your trading plan or money management. This will also cause you to jump around from one trading strategy to another before giving any of them a fair chance to work. This creates inconsistencies in your trading, also, which can lead you down a spiraling fall because you don’t know where to start correcting the problem.

Keep in mind that when we are not mentally or physically focused on our trading that we sometimes need to walk away, skip the remaining trading session, or just take some time off. Remember, the markets were here before us and they will be here long after us, providing us with plenty of opportunities to trade. Once you can re-capture your mindset back to where you were trading profitably you will be a much better trader than one who is suffering from our list of revenge trading situations.

I would like to leave you with this quote:

"Knowing is not enough, we must apply. Wishing is not enough, we must do."

- Don Dawson