Bouncing Back After a Big Trading Loss

A frustrated day trader looking at stocks
Photo: Caroline Purser / Getty Images

Whether it is a technology meltdown, a lapse in discipline, or just a sustained bleed-out of trading capital, nearly every trader will face a big loss (or several) in their career. How to bounce back after a big loss isn't complex; it can be done with a few simple steps. What is difficult is repairing the mental damage done, especially the damage to confidence.

While overconfidence is blinding, successful traders don't trade in fear, because fear is also blinding. That level of confidence, where you see the market for what it is, step in whenever there's an opportunity, cut your losses when it doesn't turn out, and sit on your hands when conditions aren't right, is the confidence that can be lost after a losing streak.

After a losing streak or big loss, you may begin to question yourself, which leads to all of the typical problems that many new traders have, like getting out of trades too quickly, holding on to them too long, skipping trades with the fear of losing, or getting into more trades than you should, in an attempt to get some winning trades. If you have experienced these issues or suffered a significant loss of capital, there are ways to get yourself back on track.

Key Takeaways

  • The psychological strategies of dealing with a big trading loss are just as crucial as your investing strategies.
  • Develop your strategies to deal with losses at the same time you develop your investing strategy.
  • Identify and resolve the issue that caused your losing streak before you begin trading again, to prevent it from reoccurring.

The Day of Your Loss

Every trader has bad days. As a rule, never let a bad day cost you more than you make on an average profitable day. If you average $700 on your winning days, don't lose much more than that on a bad day. Control the downside.

A big loss causes all sorts of inner conflict—a need for revenge, fear, anger, frustration, self-hate, market-hate—the list goes on. After a big loss, there's no way to trade with a clear head. There are more than 250 trading days in a year, so there is no rush to get back in there; today is not the day to make it all back.

Accept Responsibility

Maybe it was just a bad few days, maybe it was your biggest single loss ever, or maybe it's a life-altering loss. In the case of facing financial ruin, there isn't much to do. Don't trade until the issue is resolved. Once it is, then you can proceed to the steps below, but not before. Don't trade with a massive debt over your head with intentions of using it to abolish that debt; that's a lot of pressure and could lead to a worse predicament.

If you have drawn down your account, had a losing streak, or suffered a big sudden loss, that's different. You're still in the game, just a little beaten up. Everyone loves a comeback story, and every trader who has been around a while has one (or several). It doesn't matter if a surprise news announcement caused the price to blow past your stop loss, or if a technology meltdown caused you to lose your connection, and the market moved against you.

There is always an excuse for a losing trade. Some are actually good excuses, but as traders, we ultimately must accept all the risks. Until we accept that we are responsible for whatever happens with our orders, history will likely repeat, and the same thing will happen again.

Accept responsibility, and figure out what could have been done differently. That will help reduce the chance of it occurring again. It is also healthier than bottling up hostility and blaming others for your misfortunes. Blaming others is admitting that you don't control your own trading, and if that is the case, why are you trading? If you control your trading, then you can fix it; if others control your trading, you can't fix anything.

There is always something that can be done. It may involve changing markets, having backup data connections, or having stop-losses and targets automatically sent out when a trade is entered, or maybe you set up your platform to liquidate your trades if you hit a daily stop-loss limit. The solution is there; you just need to find it. The best way to find it is to admit that the loss resulted from not handling something well, and then taking steps to fix it.

Fixing the particular issue that caused the loss is step one. There's still the issue of confidence, though. Even with the issue fixed, your confidence may be low after taking a big hit.

Realign Your Focus

When you started, you were likely overconfident, but then the market put you in your place. You developed healthy confidence over time by building your trading system, testing and practicing it, and then ultimately utilizing it for successful real-money trading. Confidence is created by doing difficult tasks and getting better at them, and in trading, our task is to implement our trading plan. Confidence grows as we see positive results coming from that trading plan.

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.

Practice and Rebuild Confidence

After a big loss, confidence can be low, which means the mind might not be right for trading. Not having a clear mind can cause you to skip trades, panic out of trades (trading not to lose), or be overly aggressive in an attempt to get back to your old winning ways quickly. None of these is good. Take a step back, and trade in a demo account for a few days. If you have been losing, you will likely save yourself money. Because it's not real money, there is also less pressure in a demo account, so it's easier to focus on trading and not worry about the financial aspect of it.

Start Small

A few winning days in the demo account will raise your confidence levels and put you in a better mental space to take on the markets again with real money. After a losing streak, start small; don't jump right back to the same position size you were trading before. On the first day back, trade a small position size. A winning day with a small position size will help build confidence, and you can increase your position size the next day. If you have a losing day, losing on small position sizes is easier to handle than another losing day on full position sizes.

Get back into live trading at a slow pace. If you're feeling really beaten up, spend at least two to five days in simulation, and when you switch back to live trading, start small and increase position size when you have winning days. Even if you win a few days in a row, increase your position size incrementally, so it takes about a week to get back to your full position size. Some people try to rush back into live trading after a big loss, when they aren't ready. They end up losing more. Some traders repeat that cycle and never recover.

After you have traded bigger position sizes, it's annoying to start back with a small position size, but it's for the best. Bouncing back from a losing streak is about getting back to basics and implementing a strategy well, not actually about making money. Money comes from implementing a strategy well. Demo trading and trading small position sizes gets you refocused on what's important, so you can start building your confidence again. The money will come, naturally, without being forced.

The Bottom Line

If you've just taken a big hit, stop trading for a couple of days. When you come back, look at your trading plan and your trading, and address issues as to what is causing the problem, and make any necessary trading plan changes. Then trade in a demo account for a few sessions to help build confidence. Only switch to live trading once you have had a few profitable days and are feeling more like your old, successful self.

Frequently Asked Questions (FAQs)

I lost a lot of money day trading. How do I write it off on my taxes?

Capital gains and losses (the type incurred by day trading) are reported on Form 1040 Schedule D. You will know your gain or loss when your brokerage sends you a 1099-B. Keep in mind, only $3,000 worth of capital losses can be deducted from ordinary income per year. Anything beyond that first $3,000 can be deducted from capital gains in the following tax year.

How do you know when to cut your losses day trading?

Knowing when to cut your losses on a trade depends on what your strategy is. If you're trying to top fish a stock with a short, then you would want to cut your losses if the stock were to break through its recent high—that's the point at which you know you didn't top fish at the right moment. Some traders may give more wiggle room with their stop-loss orders than others, but many trading strategies depend on either resistance or support holding. When it comes to cutting your losses as a day trader altogether, you may want to consider quitting if you are building debt or noticing negative impacts on your mental health.

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