Revenge trading

A recognisable sequence rather than a mood. A position closes at a loss; a further position is opened shortly afterwards; the size is larger than the position sizing rule permits for the stop distance being used; the instrument is frequently the same one, and the direction is frequently the opposite of the one that just failed. Each element is a fact about conduct, which is why the sequence can be identified in a record rather than argued about.

The account conventionally offered comes from prospect theory, the study of decision making under risk: a position framed as a loss to be recovered rather than as a fresh decision makes risk seeking behaviour more likely, and the reference point doing the framing is the loss just taken. The recovery target is set by the size of that loss rather than by anything the market is offering, which is why the size is decided before the opportunity is examined.

Two consequences follow mechanically. The larger size means a further adverse move costs more than the first one did, so a sequence of two can exceed a limit that neither would have breached alone, and on a leveraged position the loss is not limited to the amount deposited. And the loss limit that stops the sequence has to be fixed in advance, because every argument for suspending it becomes available at exactly the moment it binds.