Mid-morning: your stop has just been hit on gold. The red line has barely appeared on your platform when your hand is already reaching for the button. The position is a little larger, “just to erase that loss.” Traders have a name for this reflex: revenge trading. And research had measured it among seasoned professionals long before it became a buzzword.

Chicago: the morning spills into the afternoon

Joshua Coval and Tyler Shumway examined the activity of proprietary traders at the Chicago Board of Trade, the “locals” who risked their own money in the trading pits. Their conclusion, published in the Journal of Finance in 2005, is clear. These professionals hate losing. And they regularly take above-average risks in the afternoon to erase their morning losses.

The working paper version of the study puts numbers on the difference. A trader who lost in the morning is more likely to take above-average risk in the afternoon than a colleague who made money.

Most importantly, in an attempt to recover, these traders buy at higher prices and sell at lower prices than the prevailing market prices. Within the following ten minutes, prices return clearly to their previous levels. The market can tell the difference: it distinguishes these rushed orders from informed orders, and the prices they move correct faster than the others.

A revenge trade is therefore not just emotional. It is also poorly executed. You enter at the wrong price, pay the spread, and the market collects what it is owed within minutes.

The market does not know that you lost this morning. It owes you nothing.

The break-even point, the invisible judge

Why do professionals fall into the trap? Richard Thaler and Eric Johnson identified the problem as early as 1990, in the journal Management Science. Their experiments conducted with real money revealed two effects. After a gain, people are more willing to gamble with “house money.” After a loss, any bet that offers a chance to get back to zero becomes especially appealing: this is the “break-even” effect.

Apply this to your trading session. Your reference point is your opening balance. As long as you are above it, you judge a trade on its merits. As soon as you fall below it, only one question matters: can this trade bring me back to zero? The setup, the context and the risk-reward ratio take a back seat.

In both cases, the previous result makes the decision for you. Yet the outcome at 10 a.m. says nothing about the quality of the signal at 11 a.m.

An empty trading desk during a break, with an open notebook and a glass of water beside the keyboard

The telltale signs

Revenge trading rarely looks like anger. It usually resembles a rational decision made a little too quickly. A few clues give it away.

  • The timing. You re-enter a position a few minutes after a stop-out, without reopening your plan.
  • The position size. It increases after the loss, even though nothing has changed in the market.
  • The setup. You take a signal you would have ignored at the open.
  • The asset. You switch markets to “find some movement.”
  • The stop. You widen it, or forget it altogether, because a second stop-out would be unbearable.
  • The target. You aim for exactly the amount lost, rather than a level identified on the chart.

This last sign bears the hallmark of the effect described by Thaler and Johnson. When you calculate your target in euros lost rather than in terms of market structure, you are no longer trading the chart. You are trading your account statement.

Experience is not enough

It is tempting to think that time will sort things out. AMF figures call for caution. The regulator studied active retail clients trading Forex and CFDs from 2009 to 2012. Its report found a very high proportion of losing clients, a substantial average loss and a median loss of €1,843.

This study does not measure revenge trading. It does, however, highlight something useful: stringing sessions together does not correct mistakes. To improve, you need to identify the pattern that keeps repeating. And you can only spot a pattern if you record it.

Rules set in a calm state

In the heat of the moment, you will lose the argument with yourself. So decide the rules the day before, with your account closed and your mind calm.

  1. A maximum loss per session, expressed in R (the amount risked on a standard trade). Once reached, you close the platform. No “one last trade.”
  2. A locked position size. It never increases after a loss during the same session.
  3. A break after every stop-out. Set its duration in advance and leave the screen. Walk, drink a glass of water, write down the trade.
  4. A written plan each morning. Only the setups listed in it are allowed.
  5. A sentence before clicking. Write “I am taking this trade because…” If the sentence contains “recover” or “win it back,” you do not have a trade.
  6. A pre-written “if… then…” rule. For example: “If I hit two stops before noon, then I switch to demo until the close.”

All these rules remove the decision at the moment when you are least equipped to make it.

The journal, a witness for the prosecution

Your memory goes easy on you. It remembers the revenge trade that erased everything and forgets the three that deepened the hole. The journal does not filter anything. But you have to record the right information.

For each trade, record the entry time and the exit time of the previous trade. Add the position size compared with your standard size, the session result at the time of entry, your emotional state rated from 1 to 5 and whether you followed the plan. If you are starting from scratch, the free trading journal template, in Excel and PDF already includes most of these columns.

After a month, filter the data. Isolate trades opened shortly after a stop-out and compare them with the others.

This filter changes everything. You no longer blame yourself for a lack of discipline, a vague and guilt-inducing concept. You see that a specific type of trade is costing you money, and you remove it. That is the value of an AI-powered trading journal such as Edgyx: every trade is timestamped automatically, and the Ora coach can flag entries made shortly after a loss or position sizes that increase during the session.

Review your emotional notes as well. If your worst trades coincide with a “4” or “5” on your frustration scale, you have found your personal warning threshold. The next time you write down that number, take a break.

The essentials

  • Among professional Chicago traders, a losing morning increases risk-taking in the afternoon, and prices pushed by these orders correct quickly.
  • After a loss, bets offering a chance to get back to zero become unusually appealing: this is the “break-even” effect described by Thaler and Johnson.
  • The warning signs are concrete: short timing, increased position size, an off-plan setup and a target based on the amount lost.
  • Set a maximum loss per session, a locked position size and a break after every stop-out while you are calm.
  • Record the time, size and emotion for every trade, then compare trades taken just after a loss with the others: the journal turns an impression into a number.