Revenge Trading: Why You Double Down After a Loss

Revenge trading is the urge to win back a loss immediately: a bigger size, a trade you would not normally take, a position opened because the last one hurt. It is one of the most common trading-psychology problems, and it leaves records. Two of them are worth reading: the official account of how one trader’s losses compounded, and what thousands of ordinary brokerage accounts show.

A documented case: how the losses grew at Barings

In 1995 the Bank of England’s Board of Banking Supervision investigated the collapse of Barings. The report is public, and it reconstructs one account, number 88888, from its statements. The Board states that it could not interview Nick Leeson, who “is currently held in custody in Frankfurt, pending resolution of an application for his extradition”, so the numbers below come from the account records, not from his own account.¹

What the report records:

• The account was used to “park” losses and to take large proprietary positions, and “the balance on account ‘88888’ was allowed to grow and the cumulative losses were not recognised in the accounting records”.¹
• Figure 4.1 of the report gives the cumulative loss at £2 million (end of 1992), £23 million (end of 1993), £116 million (June 1994), £208 million (end of 1994) and £827 million on 27 February 1995. Of that, £619 million was lost in the last eight weeks.¹
• After the Kobe earthquake the account lost £102 million on one day, 23 January 1995. When the market moved his way he was “still running large positions and he held onto them rather than closing them out”. Then both markets moved against him and “rather than cut his losses he continued to build his long Nikkei and short JGB positions”.¹
• In two days, 14 and 15 February, he lost £109 million; on 16 and 17 February he added “a further 2,700 contracts to the short JGB position” and “a further 5,099 contracts to the long Nikkei position”.¹

This is not an ordinary trader’s story. It involves unauthorised trading and concealment, and no one stopped the positions from growing. What it shows is the arithmetic of escalation when nothing external caps the damage: each loss was answered with a larger position, and the final stretch of eight weeks produced most of the total.

What ordinary accounts show

Odean studied the trading records of 10,000 accounts at a large discount brokerage. He tested “the disposition effect, the tendency of investors to hold losing investments too long and sell winning investments too soon”, and found that “these investors demonstrate a strong preference for realizing winners rather than losers”. The behaviour “does not appear to be motivated by a desire to rebalance portfolios”, and it is not “justified by subsequent portfolio performance”.²

Holding a loser and revenge trading are two faces of one pull: not accepting the loss. In one case you refuse to close, in the other you open something new to erase it.

Why it feels logical in the moment

This part is our reading, not a finding from the sources: after a loss the number on the screen becomes a debt to repay, and the next trade is seen as the way to repay it. The market does not know your entry price or your mood. The next trade has the same odds as it had before, with one difference: you are now choosing size and setup in the worst state to do it.

How to stop revenge trading: five rules

These are practical rules, not results from the studies above:

1. A daily loss limit, in R. Pick a number such as two or three times your normal risk per trade. When it is reached, the session is over.
2. A cooling-off pause after every stop-out. Thirty to sixty minutes away from the chart before the next entry.
3. No larger size after a loss. Position size is set by the plan, not by the last result.
4. One question before each entry. “Is this setup on my list, with its stop?” If not, do not take it.
5. A short end-of-day note. Which trades were by the plan and which were not.

Why write them in advance? Gollwitzer and Sheeran’s meta-analysis of 94 independent tests found that a plan that spells out “if situation Y is encountered, then I will initiate goal-directed behavior X” had a medium-to-large effect (d = .65) on goal attainment, including “disengagement from failing courses of action”.³ The studies are general, not about trading, but the logic carries over: the decision is already made when the loss arrives. We cover how to write such rules in if-then trading rules.

Our free tools help with each step: the revenge trading page has a short quiz for the pattern, what to do after a big loss is a protocol for the first hour, and the session and plan page lets you set a daily loss limit, a pause after stops and a cap on trades, and blocks the entry form when you reach them. All data stays in your browser.

Questions traders ask

How do I stop revenge trading? Remove the decision from the moment after the loss: a daily loss limit, a pause and a fixed size, all set before the session.

Is revenge trading the same as FOMO? No. Revenge trading is triggered by a loss, FOMO by a move you missed. Both lead to trades outside the plan; see FOMO in crypto trading.

How large should the daily loss limit be? Many traders use two to three times the risk per trade. That is a convention, not a research result; choose a number you can follow every day.

If trading is causing you serious distress or you cannot stop, speak to a professional. This article is educational material, not investment advice or medical advice. More in the Trading psychology category.