How To Recover From A Big Trading Loss

Without Making It Bigger

I received the following email a couple of days ago:

“Hi. I’m a relatively new trader and I own META. I bought some a couple of months ago which has been down pretty much since I pressed buy. Unfortunately, I “backed up the truck” last week when the stock gapped down because I thought the stock would wash out all of the weak holders then really take off to the upside, so why not average down. So now I’m really in a big hole and I don’t know what to do. I’ve been following you sporadically for a couple of years and you seem to be right more than you’re wrong. I also saw that you posted about META [and Jim Cramer] a couple of days ago. I’m writing to ask if there’s anything I you know of that I can do to save my position. I really can’t afford to take this big a loss. I know you don’t give investment advice, so I’ll rephrase the question; “what would you do if you were in my shoes?”

Thanks,

Longing For The Real Facebook

My answer to this person is short… I would sell. I would hope that I would never have gotten myself into such a position [again], but if I did, “I would take the pain” and sell. I’m sharing this post from some time ago to share what i would do then.

I wrote “How To Recover From A Big Trading Loss” some time ago. It’s a brief step-by-step guide to recovering from a tough [often large] trading loss.

To be clear, you will lose in trading. More accurately, you will have losing trades. But remember also… A losing trade does not a loser make you…

Unless…

You fail to respond correctly to the loss or losses.

Your simple trading strategy should, by definition, account for relatively small losses. That is, losses that are small when considered next to your winning trades. If your strategy isn’t profitable notwithstanding the losses, it’s not a strategy that you should be trading.

In the rest of this post, I want to address the other trades. You know… the “not so relatively small” trades.

Here are 5 steps you should take after suffering what feels like a debilitating loss. They’re not necessarily in order of importance… that’s more of a personal thing. But they are all time tested by yours truly.

They work.

1. Accept The Responsibility: You created the loss… and made it bigger than it should have been. Whether by not entering a hard stop loss, moving the stop loss you DID enter or executing a bigger lot size than your position sizing algo allows, both the nature and the size of the loss are yours. Own it. Don’t brush it aside, hide from it, or blame your broker, the “smart money,” or the trading gods for your large loss. When you take ownership, it’s the first step in controlling the most important tool in your trading… you.

2. Keep Trading: This is contra to what most trading coaches and gurus suggest. In their program you’re suppose to “take a break to figure out what went wrong… assess what happened by reviewing events carefully.” That is the EXACT WRONG approach. Assuming your trading strategy is well tested and you believe in it, the worst possible thing you can do is send your subconscious the message that this incredible asset [your trading strategy] is broken. That is the exact message that you send if you stop trading to “figure it out.” The better approach is to continue trading… “next trade.” Granted, a big loss causes all sorts of inner conflict-the need for revenge, fear of the market, anger, frustration, self-hate, market-hate — it’s not a short list. After a big loss, there’s no way to trade with a clear head, so the best thing to do is execute your proven strategy perfectly.. Reevaluating and/or tinkering with your trading strategy is the LAST thing you should do. Your belief in the strategy may never recover. It’s true, you should isolate and eliminate the root cause of your outsize loss… but it must be done while “the show continues.” There’s little worse in trading than missing the next great signal your strategy produces because you’re lamenting a previous loss. And, by the way, that will only exacerbate your inner torment.

3. Have a Verified Simple Trading Strategy [VSTS]: Speaking of the simple trading strategy in which you want to maintain your belief… make sure you have one. How do you get that? Beg, borrow or steal… well, actually, don’t steal, but you get my point… a simple trading strategy. You need to obtain and verify a simple trading strategy with positive expectancy before anything else. Once again, trading gurus will tell you that you must have a detailed, simple trading plan before wading into the markets. It’s true, you do need a simple trading plan, but you can wrap any old trading plan around a verified, simple trading strategy and come out a winner. This is because the strategy is the core of the trading plan… it’s the reason for its being. It completes the trading plan. The same can’t be said in the opposite direction. The trading plan is a should… The VSTS is a must.

4. Review/Update Your Trading Notes: When you suffer an outsize trading loss, it’s usually for 1 of several reasons.

These causes all have 1 thing in common… they’re the result of a breakdown in your discipline… a slip of the old emotional capital. One of the best ways I’ve discovered to prevent/resolve these kinds of errors is to tighten up your trading journal. Recommit to journaling every trade…it’s more than just a hack. Make sure each entry has all of the detail required to lay it out…go back and fill in the missing details from previous trades. This exercise reminds you of exactly how your simple trading strategy works… with the added benefit of refreshing your focus. Try it… it works.

5. Maintain/Regain Perspective: You [and your trading] are more than any single trade. One trading loss — even a large one, does not and should not define your worth. Getting perspective on your life when the chips are down helps restore balance so you can take steps to continue trading. Use this loss as motivation for learning and developing your skills for better trading. The best professional athletes become excited when they discover they have a weakness in their game. They use the weakness as a catalyst to improve. You should too.

Hope it helps.

Related posts:

The alternative finance industry is fundamentally challenged by a lack of alternative credit data, especially when cash is still king among…

We believe that travel opens your heart, broadens your mind, and fills your life with stories to tell. Aigent Club is the traveler-community driven NFT project with the exclusive e-voucher utility…