Bouncing Back After a Big Trading Loss

how to handle a trading losing streak
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Whether it was a technology meltdown, a lapse in discipline or just a sustained bleed out of trading capital, nearly every trader will face a big loss (or several) in their career. How to bounce back after a big loss isn't complex; only simple steps are required. What is difficult is repairing the mental damage done, especially the damage to confidence.

While overconfidence is blinding, successful traders have enough confidence that they're not trading in fear, because fear is also blinding.

That level of confidence—where you see the market for what it is, step in whenever there's an opportunity, cut your losses when it doesn't turn out and are able to sit on your hands when conditions aren't right—is the confidence that is lost after a losing streak.

After a losing streak or big loss, you start to question yourself. Questioning leads to all the typical problems many new traders have: getting out of trades too quickly or holding on to them too long, skipping trades with the fear of losing, or getting into more trades than you should in an attempt to get some winning trades ("on tilt"). If you experience these issues or have just suffered a big loss of capital, here are ways to get yourself back on track.

On "That" Day

If you happen to be in a big losing trade right now, and Googled "how to win my trading losses back" to find this article, stop trading right now before the damage gets worse.

Every trader has bad days. As a rule, I never let a bad day cost me more than I make on an average profitable day. If you average $700 on your winning days, don't lose much more than that on a bad day. Control the downside.

A big loss causes all sorts of inner conflict—need for revenge, fear, anger, frustration, self-hate, market-hate, and the list goes on.

After a big loss, there's no way to trade with a clear head. There are more than 250 trading days in a year, so there is no rush to get back in there. Today is not the day to make it back.

Accept Responsibility...Even If...

The dust has settled and you know the damage. Maybe it was just a bad few days, maybe it was your biggest single loss ever, or maybe it's a life altering loss (you owe your broker a huge sum of money).

In the latter case—facing financial ruin—there isn't much to do. Don't trade until the issue is resolved. Once it is, then you can proceed to the steps below, but not before. Don't trade with a massive debt over your head, with the intention of using trading to abolish that debt. That's a lot of pressure and could lead to a worse predicament.

If you have drawn down your account, had a losing streak or suffered a big sudden loss, that's different. You're still in the game, just a little beaten up. No problem. Everyone loves a comeback story, and every trader who has been around awhile has one (or several).

Read Reminiscences of a Stock Operator for a few comeback stories. The character in this book—based on legendary trader Jesse Livermore—always points the finger back at himself after a major set back.

This is accepting responsibility, and every trader must do this if they hope to recover.

It doesn't matter if a surprise news announcement caused the price to blow past your stop loss, or a technology meltdown caused you to lose your connection and the market moved against you.

There is always an excuse for a losing trade. Some are actually good excuses, but as traders, we ultimately must accept all the risks. Until that is accepted—that we are responsible for whatever happens with our orders (no one is forcing us to place our orders)—history will likely repeat and the same thing will happen again.

Accept responsibility and figure out what could have been done differently. This will help reduce the chance of it occurring again. It is also healthier than bottling up hostility and blaming others for your misfortunes.

Blaming others is admitting you don't control your own trading, and if that is the case, why are you trading? If you control your trading, then you can fix it. If others control your trading, you can't fix anything.

There are a thousand scenarios that could cause a big loss. What occurrence resulted in the big loss? How could it have been prevented or minimized? What needs to change for this not to occur again?

There is always something that can be done. It may involve changing markets, having backup data connections/feeds, having stop losses and targets automatically sent out when a trade is entered (even if it's a "worst case" stop loss in case you lose your connection), or maybe you set up your platform (or broker) to liquidate your trades if you hit a daily stop loss limit. The solution is there, you just need to find it. The best way to find it is to admit that the loss resulted from not handling something well, and then taking steps to fix it.

Fixing the particular issue that caused the loss is step one. There's still the issue of confidence, though. Even with the issue fixed, having taken a big hit your confidence may be low. Here's how to start rebuilding it.

Realign Focus to What Made You Successful to Begin With

When you started out, you were likely cocky, but then the market put you in your place. You developed healthy confidence over time by building your trading system, testing and practicing it, and then ultimately utilizing it for successful real-money trading.

Confidence is created by doing difficult tasks, and getting better at those tasks. In trading, our task is to implement our trading plan. Confidence grows as we see positive results coming from that trading plan.

After a big loss, get back to basics. Focus on the trading plan (with any adjustments now made to it) and your implementation of it.

Get back to really knowing your strategy. Knowing what market conditions it works best in, and what the profit and risk expectations are. Get back to what attracted you to trading in the first place: building or learning a strategy that made money consistently. Trading is hard, so get back to loving and embracing the challenge.

A string of good times can make us lazy, and often a big loss is the wake-up call. It's the market letting us know that we have drifted off course.

Back to Practice and Building Confidence

After a big loss, the confidence can be low. That means the mind may not be right for trading. Not having a clear mind can cause us to skip trades, panic out of trades (trading not to lose) or be overly aggressive in an attempt to get back to our old winning ways quickly. None of these are good.

Take a step back, and trade in a demo account for a few days. If you have been losing, likely you will save yourself money. There is also less pressure in a demo account (no real money) so it is easier to just focus on trading, and not worry about the financial aspect of it.

Back to Live Trading — Start Small

A few winning days in the demo account will raise your confidence levels. With confidence levels raised, we are in a better mental space to take on the markets again with real money. 

After a losing streak, start small. Don't jump right back to same position size you were trading before. On the first day back, trade a small position size. A winning day with a small position size will help build confidence, and you can increase your position size the next day. If you have a losing day, losing on small position sizes is easier to handle than another losing day on full position sizes.

Get back into live trading at a slow pace. If you're feeling really beaten up, spend at least two to five days in simulation (possibly after taking a couple days off altogether), and when you switch back to live trading, start small and increase position size when you have winning days. Even if you win a few days in a row, increase your position size incrementally, so it takes about a week to get back to your full position size.

I've seen people try to rush back into live trading after a big loss, and they weren't ready. They ended up losing more. Some traders repeat this cycle and never recover.

After you have traded big(ger) position sizes, it's annoying to start back with a small position size, but it's for the best. Bouncing back from a losing streak is about getting back to basics and implementing a strategy well. Bouncing back is not actually about making money. Money comes from implementing a strategy well. Demo trading and trading small position sizes gets you refocused on what's important, so you can start building your confidence again. Then the money will come, naturally, without being forced.

The Final Word on Bouncing Back After a Big Loss

If you've just taken a big hit, stop trading for a couple days. You aren't in the right head space to make proper decisions anyway. When you come back, look at your trading plan and your trading. Address issues as to what is causing the problem and make any necessary trading plan changes. Then trade in a demo account for a few sessions to help build confidence. Only switch to live trading once you have a few profitable days and are feeling more like your old, successful, self. When switching to live trading, keep position sizes smaller for the first few days. Making money isn't the goal. The goal is to build confidence and implement the plan well. If things go favorably, then slowly increase the position size back to your normal amount (for most traders that is 2 percent or less of their trading capital).