A massive trading loss is a devastating experience. The trading loss could be the result of stubbornness and indiscipline, where you didn’t obey your stop loss, you averaged down, and it kept going against you. Sometimes it can be from bad luck. Whatever the reason might be, it is always a huge blow to your confidence.
99% of traders have dealt with a huge loss at some point in their career, so it is crucial that you know how to prevent them from happening and how to recover from them. The recovery phase is not an overnight process, and you need to have specific procedures to put your trading career back on track. These 4 techniques will help you bounce back from a big trading loss.
1. Size Down A LOT
There is no reason to be trading size until you have proven you can be consistent and can prove you can cut your losses quickly. If your big trading loss was the result of you being undisciplined, you need to prove to yourself that you can cut your losses when you are supposed to.
You should cut your trading size in half, and then work your way back up to your former size. In the days following, you will feel the need to make the money you lost. Unfortunately, that is the best way to make your week even worse. You will start forcing trades on setups that are low quality in an effort to make the money back, and you will end up taking more losses because you are trading emotionally.
2. Use Hard Stop Losses
If your loss was the result of an inability to obey a stop loss, you need to use hard stop losses to manage your downside risk. This will help you get out when you are supposed to. Using hard stops will make you define exactly how much you’re risking on a trade. Once you have that risk defined, you won’t have to fear taking another massive loss. To learn more about using stop losses, check out this article.
3. Only Play Your Best Setups
Many traders think they need to make the money back they lost as soon as possible and they need to be trading even more than usual. This is the worst thing you could do. You need to be trading less and focusing more on high-quality setups. After a big trading loss, you need to rebuild your confidence slowly.
The best way to do this is to only take your best setups, your setups that you have the best win percentage with the best risk versus reward. This will allow you to regain your confidence, and get your PNL curve back on the uptrend. Once you start getting a few weeks, you can slowly start adding more setups to your arsenal.
4. Take Time Off
Sometimes the best solution is taking time off to recover. In order to avoid the revenge trading that might ensue following a big loss, getting away from trading altogether will be beneficial. You can use this time to study your trades, and refine your trading strategy even more. You should also use this time to figure out why you took such a big loss, and what you can do to prevent that from happening again in the future.
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