Most traders will experience a large trading loss at some point in their career. That generally happens in the beginning when they are first learning, but it can also happen later if they become overconfident.
The key to coming back after a large loss is to stop trading, review your process, then make the necessary adjustments. After you’ve made the proper adjustments, start trading small before you step back up to your full risk per trade.
Now I’ll break down the details into 7 simple steps that you can follow to do this.
Step 1: Take a Break From Trading
A big loss is very stressful and you don’t want to compound that stress with more losing trades.
So you need to stop trading and examine why you had such a big loss.
If you keep trading, it’s very likely that you’ll continue to be frustrated and lose even more money.
It also helps to get out of the environment where you had the losses. So go to a coffee shop or sit out in your back yard while you’re doing these steps.
Different surroundings will help get away from the mindset that got you into those losses.
Once you understand why it happened, it will be much easier for you to implement a solution and you can go back to your trading desk with confidence.
Step 2: Accept Full Responsibility
In order for you to improve your results, you’ll have to take complete responsibility for your actions.
That means you cannot blame your broker, your computer, or the tip you got on Facebook.
Your results start and end with you.
The great part is that since you created this problem, you can also create the solution to fix it.
Once you accept that, you’re ready to move on to the next step.
Step 3: Review Your Trading Journal
This is the step that most blog posts leave out.
Reviewing your trading journal is the key to figuring out why you lost so much money and how to prevent this from happening again in the future.
If you don’t have a trading journal, see what I currently recommend here.
You cannot figure out the problem if you don’t know the cause. And you cannot figure out the cause without looking at the stats on your trades.
Without a journal, you’re just guessing as to the source of the issue. For example, you might think that the cause is your trading system, but the cause is actually your lack of discipline.
What if you didn’t keep a trading journal at the time of the big loss?
Go back through your trade history and create screenshots of every trade.
Compile stats on all of your trades.
Create notes for each trade. You won’t be able to remember everything obviously, but do your best to write down why you entered, exited and modified trades.
Once you have that information, it’s time to examine the data closely and identify the problem.
Step 4: Identify the Specific Issue(s)
At this point, you should have a very good idea of why you had such a big loss.
Let’s take a look at a few of the most common reasons that traders lose big money.
This list might help you realize a reason that you’ve missed.
- Moving the stop loss
- Taking too much risk on one trade
- Not having a tested trading strategy
- Not following the rules of your strategy
- Taking trades that are not part of your strategy
- Adding more positions to a trade
- Not having a written trading plan
- Trading too many markets/trades at the same time
- You have to work on your psychology
Write down the biggest reason you had a huge loss. The more specific you can be, the better.
If there are multiple issues, write down the top 3.
Great, now you know the cause of your big loss.
That’s half the battle.
Step 5: Develop Specific Solutions
Alright, now I’ll give you some solutions to each of the causes listed in the previous step.
Many of these problems are easily solved once you know what they are.
Not Having a Tested Trading Strategy
This is the most common reason for big trading losses.
New traders will take trades without a tested trading strategy.
They will learn a new strategy on YouTube, then immediately jump into trading it in their live account.
I’m not judging because I’ve certainly been guilty of this when I first started trading.
But how do you know that the strategy is actually profitable?
Are you going to trust the video just because they showed you a couple of well-chosen examples and had some fancy graphics?
Of course not.
That would be like trusting a fancy TV commercial that says a car is super reliable when the car company has only been in existence for 6 months. There’s simply no data to back up that claim.
You have to test the strategy to see if it has worked over a long period of time.
Learn how to backtest in this tutorial. In many cases, you should also forward test the strategy.
Once you have historical data that shows that a strategy as an edge, you’ll have more confidence to take trades and you’ll know when the strategy has stopped working.
Moving the Stop Loss
This can be a big one for some traders.
They want to give the trade “a little more room,” so they keep moving the stop loss to give the trade a better chance of working out.
I’ve never ever met a successful trader who consistently moves his/her stop losses.
When you take a trade and set a stop loss, you lock in a fixed amount of risk.
If you move a stop loss, you add more risk to the trade.
Even if you tested your strategy, it won’t perform the same if you move your stop loss because you’re changing your risk parameters.
The bottom line is that moving your stop loss to create a bigger potential loss is never a good idea.
So you have to choose if you want to be a successful trader, or you want to move your stop loss and keep experiencing big losses.
Taking Too Much Risk on One Trade
I call this the “lottery syndrome.”
Traders are so sure that a trade will work out that they risk a large percentage of their account on 1 trade.
They never stop to consider what will happen if the trade doesn’t work out.
Remember that if you lose 50% of your account, you’ll have to make 100% in profits to get back to breakeven.
That can be challenging, even for the best traders in the world.
So keep your risk low and either work on having a high win rate, or having winners that are much bigger than the losers.
Remind yourself that trading is about becoming wealthy over time, NOT getting rich quick.
Not Following the Rules of Your Strategy
Taking trades that are not part of your strategy comes down to a lack of discipline.
An effective way to change this is to remind yourself of how painful your big loss was.
Really feel it.
I’m not saying that you should dwell on it. But simply remind yourself of what could happen of you don’t follow your system.
Then imagine the opposite.
Picture yourself as a successful trader. See the house you would live in. Visualize the car you would drive.
Now which life do you want to live?
Do you want to live in pleasure or pain?
Your long-term outcome is the result of every single trade to you take.
Adding More Positions to a Trade
The practice of pyramiding, or adding to a winning trade, is something that many successful traders do.
But if you get this wrong, it only multiplies a losing trade.
So again, only pyramid if you’ve tested the strategy.
If you’re adding more lots to a trade randomly, then that’s a recipe for disaster.
Do not add to winning trades unless you have a profitable strategy without the additional trades.
Then only introduce pyramiding after you’ve tested the pyramiding strategy and shown that pyramiding makes the base strategy more profitable.
Trading Too Many Markets/Trades at the Same Time
Having too many trades open at the same time can lead to a loss of focus and a large loss.
This can be very discouraging and lead to a loss of confidence and a downward spiral of losses.
The solution here is simple.
Limit the number of trades you can have open at the same time.
Most traders limit the amount of risk that they take per trade.
You probably do that already.
Now limit the amount of open risk you have at any one time.
Let’s say that you want to limit your open risk to 10% and you risk 2% per trade. That means you can have only 5 open trades at any one time.
Using a very simple formula like this will help you keep your risk in check and prevent large losses, especially in correlated markets.
You could also limit the number of trades you can have open, regardless of risk. So maybe you set your limit at 5 open trades.
Doing this will allow to focus on managing those trades and you won’t lose a lot at once if they all end up losing money.
It will also help you keep your sanity.
Not Having a Written Trading Plan
Having a written trading strategy is essential to success.
When you’re trading multiple strategies, or you’ve tested many trading strategies, the lines between the strategies can become blurred.
It can be easy to forget the rules of the strategy you’re trading live.
Therefore, having a written trading plan is essential to maintaining consistent results.
If you forget your rules, you can always reference your plan.
You’ll also be able to see if you followed your trading plan or not, when you review your trading journal.
If you don’t have a written trading plan, you can download the free PDF worksheet here.
You Have to Work on Your Psychology
Now what if you know what to do, but you cannot seem to do it? You find yourself entering random trades, when you know you should follow your rules.
Then the issue is with your psychology.
This is a very deep subject and is beyond the scope of this tutorial. But if you want detailed information on how to change your psychology, read these posts.
I also wrote a comprehensive article on how to explore and upgrade your deepest psychology here.
Hint: Your BIGGEST trading gains will always come from working on your psychology.
Step 6: Start Trading Again, But Keep It Small
Once you have a plan in place, now it’s time to ease back into trading.
I would suggest starting small and working your way back up to your full size.
It’s like an athletic injury.
Let’s say that you hurt your knee playing basketball.
You aren’t going to start playing basketball at full speed right after recovering from your injury.
The smart thing to do is to ease back into playing.
Then once you’re confident that you’re fully healed, you can start playing all out again.
In trading, the equivalent is to trade a fraction of your normal trade size.
For example, let’s say that you usually risk 2% on every trade.
While you’re getting back on your feet, consider only risking 0.5% per trade.
Once you get your confidence back, then you can go back to risking 2% per trade again.
Step 7: Continue to Track Your Results
Once you’re trading profitably again, your job is not over.
Continue to journal your trades keep an eye on your performance.
Review your performance on a regular basis, whatever makes sense for the way you trade.
If you trade frequently, then review your journal once a week.
Don’t trade that often? Then a monthly review is probably enough.
When you stay on top of your results, you’ll be less likely to make the same mistake that led to your huge loss.
Recovering from a large trading loss is all about reviewing your process, making adjustments, then slowly getting back into trading your full size.
There can be a lot of shame and frustration that comes with losing a big chunk of your account.
But if you can detach yourself from those negative emotions and objectively review your results, you’re very likely to find the solution.