Probably every futures trader is guilty of entering a trade right after being stopped out and often traders even do it several times in one single trade, throwing good money after bad money. In this article, we explain what causes futures traders to reenter trades that have been lost and provide tips how to manage trade exits and reentries better.
(Disclaimer: The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders)
Why traders revenge-trade and commit to over trading
Before changing any behavior, you have to be aware of the triggers that cause your negative actions. When it comes to re-entering trades after a stop loss got it, the motives are very clear: The most common reason is that traders fear that price could suddenly reverse into the original direction without them and they are missing all the potential profits. It also feels good to get right back into the market because you avoid the negative feedback from a losing trade since you get the chance of making back the money right away, potentially. The third reason for reentering losing trades is the belief that markets just can’t go on forever and ‘price has to turn eventually.’
Looking at all these points from an outside and neutral perspective, it is evident why reentering trades should be avoided if the motives are not based on the sound market analysis. However, during trading sessions, making rational decisions is usually easier said than done and when emotions and money join the game, traders forget all good intentions and become victims of their emotional responses. Therefore, it is important to have a trading plan in mind before you sit down at your trading desk that guides you through your trading sessions and helps you deal with all scenarios.
Tips for better trade reentries
To overcome the problems of revenge trading and mismanaging trade reentries, a trader can choose from a variety of different techniques to find the one(s) that fit his trading style and personality best.
1 -Shut down the trading platform after a loss immediately
This is the most obvious way to avoid bad reentries; if you separate yourself from your trading platform, you simply can’t make mistakes. Walking away from your trading desk often provides a much clearer perspective and just closing down the trading platform for 30 to 60 minutes can often avoid revenge trading.
2 – Separate trading and charting
If you think that walking away from your trading platform is not necessary for you, at least add in a barrier that makes engaging in bad trading behavior not as easy. After you have entered your trade and set your stop loss and take profit orders, close your live trading account and switch to a demo feed to follow your trade. Although you can see when a trade gets stopped out, the demo feed acts as a buffer and the extra steps of opening your live feed before being able to reenter a trade can often keep you from making bad decisions.
Ask yourself if your trade needs to be monitored at all times in the first place? If your trade management rules allow, don’t watch every tick of your trade.
3 – Be clear about your reentry rules
Not all trade reentries are wrong by definition. After being stopped out, you can sometimes get back in for a better price and subsequently increase the potential reward-to-risk ratio. But, you have to be clear about when to reenter. If price blew right through a support level when you were long, it might be better to wait until the price reaches the next support area to enter another long trade. Or, waiting for clear signals that price is ready to turn back to the upside, instead of buying dips, could also increase the chances of catching a better reentry.
In the end, defining reentry rules is very personal, and it depends on your overall trading style and methodology. But, formulating clear and precise rules can often help significantly in managing trades better. If you need further support, print out your trading rules and put them next to your trading desk. If you can see what your rules are, you are less likely to forget them.
4 – Create a trading plan
This ties in with the previous point. If you have a plan and know what to do and when to do it, you can often avoid many of the impulsive and emotionally controlled trading decisions which cost traders so much money. A trading plan not only defines trade scenarios and trade entries, but it also includes scenarios when and where to reenter after a losing trade and under which conditions.
A trading plan and a set of clear trading rules can add another layer of protection and guidance to your trading and keep you out of trouble.
5 – Review your trades
Usually, traders are not aware of how much they are losing by making bad trading decisions. If you could see that by avoiding revenge trading you would be a profitable trader already, the chances are that you would stop it right away. But, traders usually don’t follow a trade review process, and after closing out a position, they just move on to the next trade and forget about what they have done (wrong) before. This not only makes progress impossible but without being aware of your mistakes and the impacts, a change in behavior will not take place.
Conclusion: Awareness and correction
Being aware of negative patterns in your trading is essential for making progress. Once you have identified your greatest weaknesses, you should take advantage of every opportunity to correct your behavior. By incorporating the five tips in this article into your trading routine, you have a much greater chance of fighting the account draining problem of revenge trading and taking bad reentries.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.
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