Whether it was caused by a fat finger, a tech failure, lapsed discipline or just a bleed of trading capital, every trader will face several major losses during their career. Bouncing back from a major loss isn’t complicated, you just need to follow a few easy steps.
The hardest part is repairing your damaged confidence. While overconfidence is bad, successful traders need to be confident so that they avoid trading in a state of fear, which is always harmful. The ideal is that perfectly level and clear confidence that allows you to seize opportunities and cut losses with the same degree of cool detachment.
Here are the simple steps you need to take to get yourself back on track after a major loss.
Your trade has turned, the losses are significant and its not coming back your way. Now is the time to undertake damage control to minimize the impact of your losing trade. Take a few moments to relax and ask yourself how you can achieve the best possible outcome from this bad situation.
Stop Trading for the Day
Seriously, just stop right now.
Once you suffer a major reversal in your day trading, your judgment will quickly become clouded by fear, anger, frustration, irrational hatred of the market, self-loathing, and more. All these powerful emotions will make it impossible to maintain the calm and clear vision of the markets that you need to trade successfully.
Accept Your Responsibility
Once things have calmed down and your emotions are back under control, take the time to review what you did wrong. This process is important both for getting past the incident so that you can move forward and learning from your mistake so that it doesn’t happen again. Yes, there are probably a dozen reasonable excuses for why it happened, but at the end of the day you made the decision, and the outcome is your responsibility. Own your mistake, learn from it and move on.
Realign Back to Success
Yes, our losses loom larger in our minds than our wins do. However, objectively they represent only a small part of a successful trader’s track record. Start focusing on the long string of wins that make you the valued professional that you are. Start thinking about how to set up your next successful trade, in particular because you are now even wiser and more experienced after suffering a major loss.
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Practice to Build Confidence
Now that you are getting back into the right mindset, it is time to reinforce that positive attitude with some first-hand experience. Fire up your paper trading accounts, and start to work on some trades to get back into the feel of things. As you start making successful trades on your paper accounts, your growing confidence will be reinforced by the evidence that you do, in fact, know what you are doing and that the recent loss was just that: a simple mistake.
Start Trading Again, But Start Small
The final step is to turn your live account back on and start making real trades. You will still be a little wary after being badly burned, so start with smaller amounts than you are used to to ease yourself back into the swing of things. After a few small successful trades, you will be ready for the big leagues again, with your recent loss acting as a valuable lesson that has made you a better trader than you were before.