5 Steps to Recovering from a Big Trading Loss

Trading losses can end a career in a matter of a day, an hour, or in extreme circumstances even a few minutes. If you haven’t done so already check out my post on why you shouldn’t waste your time trading a small account. Here I outline some of the ways I have dealt with losses in the past and how I got over the hump.

1. Stop

Pull your hands off the mouse and ask yourself, did I follow my rules and trade my setup correctly according to my plan, if so then you’ve done nothing wrong. If you broke a rule or made any sort of impulse trade, get up immediately and walk away from the computer, come back in 5-mins when you’ve had a chance to collect yourself. There are over 250 trading days in the year, you’re not going to miss out on the home run trade that makes you a millionaire within the next 5-mins (as a matter of fact just forget those exist entirely)

2. Evaluate the market conditions

Is this market similar to one you’ve traded successfully in the past? Are your setups clear or are you making exceptions?

If you’ve decided that the market is acting funny or you’re not thinking clearly stop trading. If you’re confident in your system and feel that current market conditions are conducive to your strategy then resume trading.

Upon placing your next trade focus on trading to trade well, not to make money. Congratulate yourself for following your rules and trading according to plan. Remain patient.

Time to shut it down

Two stop outs in a row calls for a seize trading that setup for the day. At this point repeat steps 1 and 2 and determine whether or not you are truly following your rules. If you have followed your rules then congratulate yourself and sit on your hands the rest of the day. I recommend shutting down your trade ladder and just watching the market action the rest of the session as this is the point where a potential blow up can occur. Revenge trading and impulse trading are at their highest potential at this very moment.

3. Call your trading buddy

If you haven’t already done so find a trading buddy, someone who trades similar to you or at least the same market. Find out how their trading day is going and if they are noticing anything fishy about the markets. If they are trading well and you trade the same methodology then chances are the problem is within you, not the system or the market (this is often the case, but we cannot see it at times of heightened emotion – like right after a loss).

Side Note: If you’re finding that you become extremely emotional every time you take a loss then you are trading too large for your account size, or the money you are trading is “scared money,” money that you can’t afford to lose. You need to step back and reevaluate the bigger picture and where trading stands in reaching your life goals etc.

4. Go for a walk

That’s right, this step is absolutely crucial. Studies have shown that simple exercise such as walking helps the clear the brain and lift your mood. Go for a good 20-min walk in a place with trees or water and just try to relax. If you play a sport or enjoy biking or exercising this would also be recommended.

5. Listen to Mastering the Trade

This audio book has so many great nuggets in it that every time I listen to it I pick up something new. Not only is the story motivational, but the methodologies that John Carter talks about will become clearer and clearer the more times you listen to it. If you’re not a fan of Mastering the Trade, you can also read from any of these books as they are all fantastic.

By this point you should be feeling much better and have begun to figure out where you made a mistake or whether you’re just going through a lull that will be made up over the statistical set of your trading.

What if my loss is really BIG?

If you’ve suffered a big loss from breaking your rules, impulse trading, or revenge trading there are some things you can do in addition to the steps above.

First off it’s important to set daily loss limits with your broker to prevent total destruction of your account in the case of an emotional meltdown where you find yourself clicking frantically and scream at the market throwing your keyboard and pounding your fists leaving you questioning the meaning of life.

Hopefully you won’t ever experience this, but it may surprise you how many traders go through a similar routine on a daily basis. The worst thing you can do if you’re in a rut and suffering losses is continue to trade.

3 things NOT to do when suffering from a trading loss

  • Drastically change your strategy – chances are it’s not the strategies fault, go back and review your trades to see if you followed your setups exactly.
  • Blame the market – The market, while incredibly humbling, is never at fault for a loss. You must claim responsibility and be held accountable for your own trading actions.
  • Try to make it back – After suffering a big loss you must clear your head and reset back to zero. Each day is a fresh start and you should not dwell on the past, all you can do is not make the same mistakes again and move forward.

Trading is a hard way to make an easy living, but can be a roller coaster ride for not only your account balance but your psychological state of mind. If you have developed system that has proven worth of producing consistent results focus on execution and the profits will follow.

About Tim Racette

Tim is a full-time trader in the futures and stock markets and founder of EminiMind.com. He is also a Chicago-land native, competitive mountain biker, adventurer, and ASU Sun Devil.

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