Most traders experience large losses at some point in their career. This usually happens early in learning, but can also come later if you become overconfident.
The key to recovering after a big loss is to stop trading, review your process, and then make the necessary adjustments. After making the appropriate adjustments, start small trades before returning to full risk per trade.
We’ll break it down into 7 easy steps for you.
Step 1: Stop trading
Big losses are very stressful and you don’t want to exacerbate that stress with more losing trades.
Therefore, you should stop trading and find out why You have suffered a great loss.
If you keep trading, you will continue to get frustrated and very likely lose even more money.
It also helps to get out of a loss-stricken environment. Go to a coffee shop or sit in your backyard while you follow these steps.
A different environment can help you escape the mindset that led you to those losses.
Once you understand why it happened, implementing a solution will be much easier and you can return to your trading desk with confidence.
Step 2: Accept Full Responsibility
To improve your results, you should: full responsibility for your actions.
In other words, you can’t blame your broker, your computer, or the information you get on Facebook.
Your results start with you and end with you.
The point is that since I created this problem, I can also create a solution to fix it.
Accept it and you’re ready to move on to the next step.
Step 3: Check your trading journal
This is the step most blog posts omit.
Reviewing your trading journal is key to understanding why you lost so much money and how to prevent this from happening again in the future.
If you don’t have a trading journal, here’s what we currently recommend.
You can’t solve a problem without knowing the cause. And you can’t figure out the cause without looking at your trading stats.
Without the journal, it’s just a guess as to what’s causing the problem. For example, you might think it’s because of the trading system, but it’s really because of lack of discipline.
What if you didn’t keep a trading journal when you had a big loss?
Go back through your trading history and create screenshots of every transaction.
Summarize statistics for all trades.
Make notes for each transaction. You obviously can’t remember everything, but do your best to write down why you started, ended, and changed deals.
Once you have that information, drill down into the data to identify the problem.
Step 4: Identify Specific Issues
At this point, you should have a good idea of why you have suffered such a large loss.
Let’s take a look at some of the most common reasons why traders lose big money.
This list may help you understand why you missed it.
- moving stop loss
- Taking too much risk on a single trade
- No tested trading strategy
- don’t follow the rules of strategy
- make trades that are not part of the strategy
- add a position to a trade
- No written trading plan
- Trading too many markets/trades at the same time
- you need to work on your psychology
Write down the biggest reasons for your big loss. The more specific the better.
If you have multiple issues, list your top three.
Now you know what caused the big loss.
That’s half the battle.
Step 5: Develop Specific Solutions
Here are some solutions for each of the causes listed in the previous step.
Many of these problems are easy to fix once you know what they are.
No tested trading strategy
This is the most common reason for large trading losses.
New traders trade without a tested trading strategy.
Learn new strategies on YouTube and start trading instantly with a live account.
I was certainly guilty of this when I first started trading, so I’m not judging.
But how do you know your strategy is actually profitable?
Are you going to trust the video just because it showed you some handpicked examples and had some flashy graphics?
of course not.
It’s like trusting a flashy TV commercial that says the car is very reliable, even though the car company is only six months old. There is absolutely no data to support that claim.
You should test whether your strategy is working over time.
Learn how to backtest with this tutorial. Often you also need to forward test your strategy.
Having historical data that shows your strategy is at the edge will allow you to trade with more confidence and know when your strategy has stopped working.
moving stop loss
This can be a big problem for some traders.
They want to give the trade “a little more room”, so they keep moving the stop loss to increase the chances of the trade going well.
I have never met a successful trader who consistently moves his stop loss.
When you place a trade and set a stop loss, you lock in a certain amount of risk.
Moving the stop loss adds more risk to the trade.
Even if you test the strategy, it will not work the same as moving the stop loss because you are changing the risk parameters.
The bottom line is that moving your stop loss to increase your potential loss is never a good idea.
So you have to choose if you want to be a successful trader or if you want to move your stop loss and continue to experience big losses.
Taking too much risk on a single trade
I call this “lottery syndrome”.
Traders risk most of their account on a single trade because they are confident that the trade will work.
They never stop thinking about what could happen if the deal goes wrong.
Remember, if you lose 50% of your account, you have to make 100% profit to get back to break even.
This is difficult even for the best traders in the world.
So either keep the risk low and work towards a high win rate or make the winners much bigger than the losers.
Remember that trading is about getting rich over time, not getting rich quickly.
don’t follow the rules of strategy
Making trades that are not part of your strategy results in a lack of discipline.
An effective way to change this is to remember how painful the great loss was.
really feel it
I’m not saying you should stick with it. But remember what happens when you don’t follow the system.
Now imagine the opposite.
Imagine yourself as a successful trader. Look at the house you live in Visualize the car you drive.
Which life do you want to live now?
Would you rather live in pleasure or pain?
Your long-term results are the result of every trade you take.
add a position to a trade
Pyramiding, or adding to winning trades, is what many successful traders do.
However, if you get this wrong, you will only end up with more losing trades.
Again, only use pyramids if you have tested your strategy.
If you’re randomly adding lots to your trades, that’s a recipe for disaster.
Do not add to winning trades unless you have a profitable strategy without additional trades.
Pyramiding is then introduced only after testing the pyramiding strategy and showing that it increases the profitability of the base strategy.
Trade many markets/trades at the same time
Having too many trades open at the same time can lead to loss of focus and large losses.
This can be very discouraging and can lead to a loss of confidence and a vicious cycle of losses.
The solution here is simple.
Limit the number of trades that can be opened simultaneously.
Most traders limit the amount of risk they take on each trade.
you probably already do that.
Limit the amount of open risk you hold at one time.
Let’s say you limit your open risk to 10% and risk 2% per trade. This means that you can only have 5 open trades at a time.
By using such a very simple formula, you can limit your risk and prevent big losses. Especially in correlated markets.
You can also limit the number of trades that can be opened regardless of risk. Therefore, you can also set a limit of 5 open trades.
By doing this, you can focus on managing those trades and not lose much at once, even if every trade ends up costing you money.
It also helps you stay sane.
No written trading plan
Having a written trading strategy is essential to success.
If you are trading multiple strategies, or have tested many trading strategies, the lines between strategies may blur.
It’s easy to forget the rules of any strategy you’re trading live.
Therefore, having a written trading plan is essential to maintaining consistent results.
If you forget the rules, you can always refer to the plan.
You can also check whether you are following your trading plan by checking your trading journal.
If you don’t have a written trading plan, you can download a free PDF worksheet here.
you need to work on your psychology
So what if you know what to do but can’t seem to do it? I notice.
Then the problem is in your psychology.
This is a very deep subject and is beyond the scope of this tutorial. But if you want to learn more about how to change your mind, read these posts.
I also wrote a comprehensive article on how to explore and upgrade your deepest psychology here.
Tip: Your greatest trading profits will always come from working on your psychology.
Step 6: Resume trading, but keep it small
Once you have a plan, it’s time to get back to trading.
We recommend starting small and working your way back up.
It’s like a sports injury.
Suppose you hurt your knee while playing basketball.
I’m not going to start full speed basketball right after recovering from an injury.
The smart thing to do is relax and get back to playing.
Then, when you are confident that you are fully recovered, you can start playing full force again.
A trade is equivalent to trading a portion of the normal trade size.
For example, say you typically risk 2% on all trades.
While you’re recovering, consider risking 0.5% on a single trade.
Once you regain your confidence, you can again risk 2% per trade.
Step 7: Continue Tracking Results
Even if you can trade profitably again, your job is not done.
Keep track of your trades and keep an eye on your performance.
Check your performance regularly, depending on how you trade.
If you trade frequently, check your journal once a week.
Do you trade that often? Then a monthly review would suffice.
If you always know the consequences, you are less likely to make the same mistakes that cost you so much.
final thoughts
Recovering from a large trade loss is all about reviewing your process, making adjustments, and slowly returning to your original size trades.
Losing most of your account can come with a lot of shame and frustration.
But if you can step away from those negative feelings and see the results objectively, you’re much more likely to find a solution.
keep going!