Pretty much every retail trader can relate to losing in Forex trading. Because of this, I wanted to write a post dedicated to helping anyone that has suffered a large loss and wiped out a significant portion of their account. Here is the trading psychology behind recovering from a large trading loss.
The fact is, losses happen. The first lesson of this post is to show you that even professional traders at the firms I have worked at and with over the years make similar mistakes to any normal retail trader reading this post.
The issue has nothing to do with a lack of knowledge or skill. The issue is simply trading psychology.
Before we get too deep, it is important to highlight that losses are a normal part of every trader’s life. The issue is those losses that are large enough to damage the status of the account or even just damage your own mind-set.
If you have ever had that sinking feeling in the pit of your stomach after a bad trade or run of trades, then it is highly likely that you have lost too much. This would qualify as a ‘large loss’.
If you are disheartened and feel like giving up or even that you need to find a different or ‘better’ strategy then you are no different from the millions of retail traders that have tried or are still trying to master the financial markets.
The reality is that a professional trader never has these feelings, and instead they focus on making their loss back and carrying on. The point bears repeating that the issue is nothing technical but all psychological.
When a retail trader has a big loss they instantly look to external things, things like systems, strategies, more knowledge, better training or even someone else to do it for them.
When a professional trader has a big loss they instantly know that it was their fault and the mistake they made was all in their own mind. Their immediate thought is internal, and how they can recover and avoid that same thing happening again.
How professional traders recover from losses
There is never any doubt in the professionals mind about their role. They are a trader, and no matter what has happened to their account, trading is their job and they must find the solution through trading.
So how do they do it?
Well I have written some key steps that traders use to recover when they have just experienced a large loss on their account
- They immediately investigate and determine why the loss happened
There first, almost instinctive move is to examine exactly what happened and why they experienced such a loss. What did they do wrong or what common mistake did they make that lead them into the trap of a large loss.
Professional traders have enough knowledge and tools to know exactly how to avoid large losses. They don’t use too much leverage, they don’t trade based on emotion and they always have an income plan that they follow.
As soon as they deviate away from this, mistakes and losses happen.
When I was trading client accounts for the first time, I remember that my biggest issue was something we call FOMO (Fear of Missing Out) … This FOMO would lead me to getting in too soon on a regular basis… Simply because I didn’t want to miss the move.
The net result was larger draw down than normal and less ammunition to take better opportunities that came along later.
Whatever it is, you need to quickly identify it and make sure that you do everything in your power to avoid being exposed to that situation in the future.
- They take a break and assess the situation
After the damage has been done they then focus on the plan to rebuild. This always starts with a period of detachment from the current situation.
No one ever made a good plan when they were charged with emotion and still heavily involved with the scenario they are dealing with. So after you have recognized your error you need to switch off the computer and completely disconnect from the world of trading.
During this time you can accept what has happened, take responsibility and then make a plan for how it won’t happen again.
- They come back and start chipping away at the loss, bit by bit.
There is no glorious ‘roll of the dice’ where the trader wins it all back in a short space of time. The professional approach is to simply get your head down and resume the trading that got you to your previous level of success in the first place, with one eye on never allowing that same mistake to happen again.
There are very rare occasions when the markets give you an exceptional chance to make back losses quickly, such as when the BoJ unexpectedly announced QQE in October 2014 or when the UK voted to leave the EU in 2016, but on the whole you will need to go back to standard, safe, steady gains.
In the end, you will realise that all you have really lost is time, because successful trading doesn’t leave you overnight and you don’t suddenly lose the ability to make money with one bad run.
If you are in a cycle of blowing accounts then the most important issue that you need to resolve is your trading psychology, because this is definitely the issue holding you back.
Advance from retail to professional trader
There are some key principles that you need to be aware of and follow in order to change your mind set from that of a retail trader (always swapping strategies and looking for external things to improve your results) to that of a professional trader (knowing you are a trader and never doubting your abilities).
They are all psychological in nature but absolutely crucial to your success.
The first is to be aware of your own psychological state. Know what you are feeling and how this tends to make you act. Understand which emotions are the most dangerous for your trading account.
Secondly, you need to act when you start to feel those emotions taking hold. The best course of action is to simply stop trading and detach from it until you feel that those emotions have passed.
Finally, you need to understand what it feels like to be in ‘the zone’. And then you need to work out the process for getting yourself into that zone at will, whenever you need to.
The ‘zone’ is often talked about by athletes and also traders and it is simply the state in which you perform a difficult or challenging task without thinking or without worrying about how it will all pan out. You have the necessary skill set and you just apply those skills as you go.
It’s where you automatically look for opportunities, place and manage trades inside your risk parameters and take profits without hesitating.
You may need to research this topic further, but once you nail it, you will instantly see a major difference in your trading performance.
When you reach this level, you will have the right mindset to recover from mistakes which result in large losses.
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