I absolutely love discussing matters that are close to my heart. This, however, is not one of those matters! In fact, I hate losing trades, as I’m sure you do, too, but because so many traders out there are still reeling from the shocking move in the Swiss franc (CHF), it seems appropriate that we discuss how to recover from losing trades today. Oh, and just so we’re clear, an acceptable solution is not to “just double down on the next one!”
Now, losing trades like what many unsuspecting CHF traders suffered recently can literally be devastating, as some lost everything and will never so much as place another trade. As we continue on in the markets, though, let’s first take a moment to be thankful for the journey itself, and for our ability to keep learning and trading. Now, to continue that education, and with eyes on the future, let’s evaluate what to do—and what not to do—in order to effectively recover from losing trades.
While it’s really easy to get mad first and ask questions later, no amount of yelling and screaming has ever helped traders recover from losing trades. So while smashing the monitor, or the keyboard, or the mouse, all seem like great first steps at the time, the right thing to do is actually get to the bottom of why the losing trade(s) happened in the first place.
And, perhaps fortunately, we can say with almost 100% certainty that any and every losing trade will have happened because of (at least) one of the following reasons:
- Strategic variance(s): Did you “break a rule,” trade a non-qualifying set-up, or suffer from delayed execution or mismanagement of the trade?
- Mental errors: Did fear, greed, and/or other emotions play a part in causing the losing trade?
- Factors beyond your control: Did you plan and execute precisely according to your plan, and then simply fall victim to the random nature of the markets?
Get Recommitted, but to the Right Things
In trading, just like in life, you’re bound to have some hard lessons along the way, and that’s why a big part of how to recover from losing trades is to turn the experience into a positive and learn from it. So after you’ve identified why a losing trade(s) happened, the next item on your to-do list is to devise an action plan to get back on track and prevent repeat occurrences of the issue(s) at hand.
If you read an improper entry signal, for example, make note of it, and then reinforce what the valid signal is going forward. And, if you held on too long, were careless with risk, or worst of all, didn’t use a protective stop, well, you know better than that!
All this information, of course, is to be documented in your trade journal for easy reference down the road. And, definitely don’t forget the most overlooked component of every trading plan, which is having (and enforcing) a reward and punishment system.
In total, these functions are intended to facilitate the learning process, give the incentive you need to “follow the rules,” and help you recover from losing trades by addressing the real root of the problem. You can’t just “put it behind you,” or “try harder the next time” or else you’re bound to repeat the same mistakes and allow flawed methods stick around for that much longer.
Oh, And Here’s How Not to Recover from Losing Trades
I suppose that in the context of how to recover from losing trades, it would also be helpful to clearly state how not to recover from them. So, whatever you do, absolutely, positively, do not take your next trade with money in mind and with the intention that you have to—or are going to—recoup your recent losses in one fell swoop! That’s how losing streaks happen, and it will, more often than not, make things go from bad to worse almost immediately.
Don’t bet bigger, trade set-ups that are outside your realm or comfort zone, or use wider risk controls when trying to recover from losing trades, either. If anything, and especially if you’ve lost a few trades in a row, consider tightening up on risk, trading smaller size, and qualifying set-ups that much more.
Book even a small winner to get some feel and confidence back, and then build on what you were able to do right in that case. That’s how you’ll help reverse your fortunes and recover from losing trades with no need to gamble on unproven set-ups or strategies, or press harder while trying to get more from your existing methodology.
See also: Learn How Not to Trade, Too
You know, it’s kind of a shame that nobody ever has trouble dealing with winning trades, because that would be a much better problem to have! Instead, though, it’s finding how to recover from losing trades that gives us trouble, but at least there are a few good solutions for that, too.
Essentially, none are better than identifying exactly what happened to cause the losing trade and then truly learning from it to make sure it doesn’t happen again. Now, that’s often tough because it may require you admitting you were wrong and at fault, but there’s really no better way to learn a valuable lesson than by doing it the hard way.
What almost certainly won’t help you recover from losing trades, however, is getting angry or emotional about them, and then trying to “take out your aggression” on the market with the next trade. React properly to losing trades, not emotionally, and you’ll not just get back on track that much sooner, but develop a professional-caliber habit that can further your trading career in the long run.
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