A common saying in trading and investing is that the only certain thing in the market is uncertainty. Even with all the technological and statistical tools available, no one is really able to predict how the market will move in the next hour, day, or month. It’s simply not possible.
As a result, every person losses money at one point or another.
When We was starting out, We lost more than $35,000 within a week. Warren Buffet has lost money in the past. James Simmons (maybe on of the best trader in the world) has had down years in the past. As we speak, Carl Icahn is in the red. Bill Ackman has lost more than $4 billion in the past one year.
So, how then do you move on after making a big loss to start trading again?
Start immediately or take a break?
A required assessment before moving forward. You would be inclined to think that a day trader is familiar with taking losses throughout the day, so he should be able to cope with even substantial ones.
The truth is that it’s not the same thing because the size of the loss makes a big difference from a psychological point of view. Think of a trivial “losing a dollar vs. losing 100 on the street”-would this have the same effect on you? We bet they wouldn’t.
Here, losing large sums during your workday can bring other negative effects with it, including revenge trading (something that can be catastrophic for your account). That is why, in the first tips, you will find exactly to take a break.
#1 – Don’t Panic
The first thing you should do to start trading again after making a big loss is to avoid panicking. Panicking can make you make tremendous mistakes which can cost you big money. When many people make a loss, they immediately open a trade in the opposite side.
For instance, if the loss had come from a buy on gold, the trader will immediately open a sell trade. The idea is to reverse the loss by opening the trade in the opposite direction hoping the chart will reverse. This is usually one of the worst mistakes you can ever make!
We have tried it in the past and failed.
Thing is, when you enter the trade without doing any analysis and in panic, chances are that you will not recover the lost funds.
#2 – Take Time off
We have found this to be a really important decision. When We lose money, We like taking some time off. During this time, We might go to watch a movie or swimming. At times doing all this might be tough especially when the loss is very big. However, it really helps.
Spending time away from the market will help you condition your brain in the best way possible. It will help you avoid making silly mistakes.
#3 – Find the Mistakes
The next thing you need to do is to find the mistakes that led to the loss. At times, the mistake could not be your fault (but at least 90% of time is your responsibility).
You might have done the right analysis and invested in the best way. However, as We stated before, no analysis method is 100% accurate.
If on the other hand you made a mistake opening the trade, We recommend that you identify the mistakes.
You can do this by having a look at the chart and comparing the market environment with your trading journal. In the past, We have been a strong proponent for having a good trading journal to help you make proper decisions.
#4 – Be Confident
After a loss-making trade, chances are high that you will have fear opening a trade. Fear can lead to serious mistakes in your trading.
As you start trading, you should forget the loss that you made and focus on your present trades. Fear can make you enter or exit a trade at the wrong time. Fear can also make you change your trading strategy.
Being confident will make you recover from your losses within a short period of time. The following can help you improve confidence at such a time.
- Remember all the successful traders who have lost and recovered from the market
- Think that the loss could be a platform to your future success
- Remember that all traders in the market lose money on a daily basis.
#5 – Remain Protected
Risk management is something you need to do after a big loss. This is a process where you work to reduce the risk while ensuring that you maximize your returns.
There are several risk management strategies that will help you prevent some of these risks. You can achieve this by doing some things.
One, all your trades must always have a stop loss. The stop loss should represent the maximum amount of money you are ready to let go.
Second, you should always hedge your trade. You can achieve this by opening two trades (with different volumes) of the same asset. The idea behind this is that the chart will always go up or down.
In this case, your profit will be the difference between the profit and loss of the trade.
Third, reduce your leverage and your trade size. Leverage makes it possible for you to make more money. However, it can also lead to bigger losses. Therefore, you should start rebuilding your account with a small leverage.
While big trades will make it possible for you to make more profits, you should start rebuilding your account with small trades.
And remember, as a day trader you should not leave your trades open overnight.
#6 – Using a Demo account
Another strategy that can help you overcome a big loss in the market is to use a demo account, which is provided by most brokers.
At DTTW, we provide all our traders with a practice account known as the Training Mode Superb (TMS). While it is used mostly by beginner traders, it is also used by experienced traders to test their trading strategies.
After you go through a big loss, we recommend that you try to test the strategy that made you make the loss in a demo account. This will help you improve on the strategy.
#7 – Don’t make a big loss – period
While the six strategies mentioned above are awesome, a better option is not to make a big loss in the first place. What does this mean?
Ideally, in your day trading, you should always work to prevent a situation where you make substantial losses. You can achieve this by working out with a well-defined risk management strategy.
A good risk management strategy is where you have a risk-reward ratio for all trades that you initiate. For beginners, a good risk-reward ratio is about 2%. This means that you should set a stop loss at a place where you won’t expose your account to a 2% loss.
For example, if you have a $10,000 account, you should ensure that the maximum loss you can make per trade is about $200. Doing this will help you avoid making a big loss.
#8 – Be consistent and diligent
Finally, you should ensure that you are diligent and consistent. You can do this in a number of ways. The best way to do this is to always have a trading journal and do in-depth research before you start trading.
A journal is a document where you write all details about your trades, including the opening price, the reason for opening the trades, and the key support and resistance levels.
Also, watching Trader.tv and other online live trading shows will help you develop your consistency.
The financial market is always volatile, which means that the threat of making a loss is always there. Making a big loss can have a big impact on your trading. We know of excellent traders who exited the industry after they made substantial losses.
Therefore, using the strategies we mentioned, you can easily move on and build a successful trading operation after you make a big loss.
Start Trading Again – Useful Links
- A Bearish George Soros starts trading again – WSJ