How to bounce back from losses in trading?

Have you started trading recently? You may have seen some profits and then you start making losses. To recover the losses, you fight with the market and in the process, you encounter more loss, and lose your confidence. Many traders initially go through a drawdown phase and that's normal.

In this post we will explain practical steps to quickly bounce back from a trading drawdown.

1: Cut your trading size

The first and foremost thing to do after a drawdown is to immediately cut your trading size. Otherwise, you can make more losses. Cutting the size ensures no further damage and protects your account, buying you time to reflect.

2: Take some time off

Immediately after a big drawdown, a trader should take some time off from markets and focus on his hobbies and going out. This instantly stops the account bleeding and gives you a sense of relief.

3: Avoid revenge trading

Strictly avoid the urge to recover all the losses quickly. In fact, the urge to revenge trade will further increase your losses. You may start taking unnecessary risks and trading impulsively. To cope with the fear, you may start to fantasize about how you can make back losses: “If I make 10 big trades in the next week, I can make up for all my losses.” But that never happens.

4: Realign Your Focus

After a big loss, get back to basics. Focus on the trading plan (with any adjustments made to it) and your implementation of it. Get back to what attracted you to trading in the first place: building or learning a strategy that made money consistently. Trading is hard, so get back to loving and embracing the challenge. A string of good times can make us lazy, and often a big loss is the wake-up call. It's the market letting us know that we have drifted off course.

5: Learn from your mistakes

This is the most important thing. You went into a big drawdown because you have done something wrong. Identify, what went wrong and start to optimize your strategies.

6: 1% rule

Make sure of keeping strict risk limits. Never ever risk more than 1% of your capital on any given day. This ensures you stay in the game even when you go wrong.

7: Focus on small wins

Your goal when you restart your trading should never be to make big money. You should be focusing on small, but frequent wins. It gets you into the habit of winning which ultimately improves your mindset.

8: Create a trading journal

Start to maintain a trading journal and religiously note down all your trades, why did you take the, mistakes you made, etc. along with the profit and loss. This will ensure you have hard data of your own trading performance and helps you to learn.

9: Manage risk

There’s only one way to recover from a drawdown safely. You must carefully manage risk. You must stay calm, determined, and rational. You must work at a steady pace until you make enough profits to break even.

10: Drawdowns happen to the best of us. But when every time you recover from a drawdown, your confidence will skyrocket. Drawdowns teach more lessons than winning streaks.

Love,

DPZ.

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