Revenge trading or wash trading happens when a trader uses a higher than usual volume of trades to attract attention from other traders to increase the value of assets he has borrowed. It’s a form of market manipulation that facilitates price control by using large amounts of capital instead of buying directly from other investors.
Although wash trading isn’t illegal, it is considered unethical for traders, primarily if performed on a large scale without disclosing the practice to customers who would be engaging with their own money. In addition, unlike market manipulation, where prices are controlled downwards, revenge trading increases prices, encouraging other traders who view the activity as prices going up to buy in; this makes wash trading quite dangerous for investors.
Use limit orders instead of market orders
Using a limit order on your options contract is the safest way to maintain liquidity and ensure you get your entire investment back. Limit orders prevent traders from buying or selling at unreasonable prices to reduce the risk of revenge trading. By using this method, banking institutions will not panic since prices are expected to go down and stay within a specific range.
Use OTC banking services instead of direct market access
OTC banking services allow traders to buy and sell assets without using automated systems, ensuring that they won’t carry out transactions in large quantities. It essentially reduces the chances of triggering any alarms by revenge traders who scan for excessive trades made by individual investors. There are also extra fees involved with using automated systems to trade, so trading costs are higher.
Don’t trade during after-market hours
Trading after market hours increases the risk of falling victim to revenge traders. There isn’t a lot of liquidity, so you’ll experience higher than usual bid and ask prices, or even worse, prices might not move at all, which means you won’t get your original investment back. Add to that the fact fewer people are monitoring the exchanges, and you get an ideal scenario for revenge traders who like taking advantage of unsuspecting investors.
Trade on a reputable exchange
The more reputable the exchange, the less likely you will become a victim of revenge trading. Exchanges with a high rate of transparency and robust security measures in place are unlikely to be targeted by these revenge traders since they’re too busy buying and selling assets at other exchanges.
Use algorithmic trading instead of manual trades
Manual trades can trigger alarm bells with revenge traders who target individual investors due to their higher risk profiles. Using automated or algorithmic trading tools reduces your risk markedly because your trades will not stand out from the crowd. In addition, there is less chance of making mistakes which means price manipulation won’t be possible either. In this way, you get to reap the benefits of trading without actually having to deal with brokers.
Watch out for pump and dump schemes
Pump and dump schemes are hazardous because they attract attention from revenge traders who aim to exploit individual investors who get lured into buying assets that seem like they’re about to increase in price. Victims usually end up losing money when prices go back down after the initial rise, which means you should be extra vigilant when trying to spot these schemes.
Find signs of market manipulation before you trade
You can find some warning signs of possible market manipulation on news websites or social media platforms where traders discuss their experiences, good or bad. If someone is using an unusual amount of capital, it might signify revenge trading, so be sure to seek out these warning signs and adjust your trading strategy accordingly.
Be aware of the trading tools available to you
There are many different trading tools available to suit your specific needs. Some of these can be used as weapons against revenge traders, so you must be familiar with them and their effects on the market before deciding which ones you should use. Tools like limit entry orders, stop-loss limits, or algorithmic buying can help you avoid falling into this trap.
