How to Recover from a Significant Trading Loss
What happens after you face a loss can be imperative in determining your trading outlook and trading plan. Your reaction to trading loss is crucial. Letting emotions run at the forefront of your trading strategy could cause an even more detrimental effect on finances and emotions.
After facing a loss, some traders will carry on opening positions without having a clear and concise plan in front of them. Other traders will be more determined to try and win back losses by trading with more money, or even opening more positions on different asset classes, without actually collecting information in order to make an informed decision.
One of the characteristics that define a successful trader is how well they handle losses. Encountering a major loss may be difficult. At the same time it can also present itself as an opportunity to develop and improve your trading skills.
We’ve listed 6 steps below to help you recover from large losses.
Accept the Loss
Being in denial will not help you to overcome major trading losses. Make sure you aren’t placing blame on other factors which you think has caused the loss. Once you have accepted the trading loss then there is a higher chance of you having to gain control of your trading. From there you can start to plan your next steps with a clear head.
Take a Break from Placing Orders
It’s a good idea to go back over the past trades which led to a big loss and try and determine what went wrong. You could ask if the trade had been planned prior to opening a position, did you just open the trade based on ‘Gut Feeling’ or emotions? Did you look into the market you traded on? Did you form a clear trading plan? These are questions you should ask yourself when reflecting back on your past trades.
Create a Trading Plan or Go Back and Revise Your Trading Plan
Read our guide on how to create a trading plan here. By noting where your trade could have gone wrong, you can go back to your trading plan and readjust accordingly. Waiting for the next trading opportunity is good but you will also want to try and reverse your trade if you can. This is so you have the chance to make up for the original trading loss as well as trying to make a profit.
Practise First Before Trading
After you’ve faced a trading loss, your confidence might have suffered. As a result, you could be nervous to start trading the financial markets again. If this is the case, it might be a good idea to go back to basics with a demo account. Demo accounts are a great way to familiarise yourself with the trading platform as live price charts are integrated into the demo. So you can trade risk-free and practise opening positions on various asset classes. You won’t face any pressure beforehand as you aren’t putting any capital into a demo account. It is instead based on virtual funds. To apply for an Eightcap Demo Account click here.
Keep your emotions in check
Your trading decisions should be informed, and not based on trading bias or the determination to win your loss back. To learn more about the emotions behind trading the financial markets read our guide on trading psychology.
After Losing Start Small
You might feel confident to open positions once again after creating or amending your trading strategy. It is important to start small with position sizes, especially if you were trading with large position sizes when you faced the loss. You can gradually increase your position size when you have a number of consistent small wins. That will build your confidence. Furthermore, if you face a loss then it wouldn’t be as bad compared to losing on large position sizes.
You should create a stronger trading plan, ready for when the market opportunity presents itself.