Stock Market Trading is an activity that has a substantial risk-reward ratio. People are attracted towards the Financial Market to get better returns. More and more awareness and past performance is the main reasons for many people coming to this platform. While it is possible to make a lot of money, there is a big risk of losing capital in the industry.
In the past, some well-known traders and hedge fund managers have lost a lot of money because of whatever reason like in Bitcoin/Financial turbulence/Covid scenario. But they are still in business, and each year they are able to generate huge profits for them or for customer. Very simply, they have not given up and have been able to react to a challenging situation by overcoming the hurdles they came across.
Well, you should realize that you can too! Therefore, this article will look at some of the best practices/strategies to use to overcome situations of heavy losses and steadily come in green.
Main reason for losses: There are several reasons why many traders go deep red in their account. Some traders have seen their trading account balances plunge from over 100000 to less than 1,000! This situation can happen within a few months or a few weeks or even a few days.
It is annoying and irritating to lose money and stick to a series of bad trades, that’s why we have also covered the step to avoid losses in Market accounts. But there are a few factors involved that can upset this and jeopardize your account.
Let’s highlight some of the top reasons why an account can go through a big drawdown.
No Skill for trading:
In today’s world, technology makes trading very easy through brokers websites and trading apps. These are created to give easiness to traders, but They never check whether you have required skills and knowledge to do trading as their business is solely on your trading amount and quantum, they charge brokerage and fees despite you make profit or loss. If a person spends 4 to 5 years in getting degree (diploma/bachelor’s degree), why people think that they can do trading without studying or getting training. People should spend time and money to get proper training from a certified person/Trainer.
Leveragerefers to the loan that is offered to you by an online broker. The goal of this leverage is to help you maximize your returns when day trading.
However, it can also lead to bigger losses when things are not going in favor. Therefore, we recommend that you take a measured approach to leverage. Moreover, Broker charges fees and brokerage for the trades you carry.
You can make a big loss when trading if your calls in the market are not accurate since no trader is right all the time. “Trader what you see , not what you think”. Traders think much and based on his/her own thought , they tend to take wrong trades.
Making a wrong prediction is the main reason to lose money. And at times, it is possible to make numerous wrong trades when trader psychology is to recover past losses, which will ultimately lead to huge losses.
Averaging of losing position
Averaging is a trading action where trader add into a losing position, hoping that their buying or short selling position is near to current price and reversal will benefit to them. This is the most common mistake traders do and lose huge sum of money.
Another reason why a huge drawdown can happen is when you don’t use a fixed or a trailing stop-loss. A stop-loss is a tool that stops a trade automatically when it hits a certain level. Trading without a stop-loss can lead to substantial losses if the trade goes against you.
There are other reasons why your trade could go to zero. Some of these reasons are not having a trading strategy, huge volatility, high greed, revenge trading, and high position sizing.
Steps to recover the losses.
Recovering from a big loss is not the easiest thing to do because of the emotional quotient involved. So, let us look at some of the top practices/strategies that can help you recover your account losses.
Accept the losses and responsibility!
The first step when dealing with big losses is to accept that the losses happened and then take responsibility for the mistake. In other words, don’t blame or curse anyone for the loss. Instead, accept that the loss happened and purpose to learn from the mistakes that happened.
Acceptance is one of the best ways of dealing with issues in life. For example, a drug addict can only come clean by accepting their problems and willingness to quit addiction. Similarly, you can only move out of depression or stress by accepting the issue.
The same applies to trading and investing. In this case, the best way to get over the big loss is to accept the situation. As you do this, we recommend that take break and give yourself time away from the market.
This is the only way to clear your mind and avoid terrible mistakes like revenge trading. Do you need a break? Take a break!
Identify the cause of the big losses!
The next stage is to use the trading Plan/Journal to identify the root cause of the big loss. A trading journal is a document where you write all the details about your trades. Record all the past trades in sequence with following but not limited to below information.
- The asset-Name of equity, commodity, Currency, options, Script.
- Buying and selling price.
- Time of entry and exit
- Loss or profit
- The reason for entering the trade.
- The reason for exiting the trade.
- The total amount involved.
- If the losses are more than your risk appetite, make it bold.
Having a journal is so important in that it will help you identify patterns and behavior in your trading journey. It will also help you to identify the major mistakes that you typically make in your trading activities. This may be like missing positional sizing or each trade or over trades.
As part of assessing your trading journal, you will often find the reasons why you blew up your trading account. We have mentioned some of these reasons above.
Assess, test, or create a new strategy!
One reason why you gone into major losses in account is that your trading style failed to work. Some of the most popular trading strategies that traders use are news based, herd mentality, scalping, candlestick pattern based, Indicator based, Volume based, Intraday trading, Swing trading, algorithmic trading and pairs trading.
In this stage, assess the performance of the trading strategy and review its effectiveness in the past. If the strategy was successful in the past, it means that you can fix it. However, if the strategy was not successful in the first place, you should focus on creating a new strategy. If you cant find reason for entering and exiting into trade in past trade, that mean you are not working systematically and you are simply putting luck in trade.
In most cases, creating a strategy can take a few months since you need to test its effectiveness for long enough to have confidence. You should test and back test the strategy for a while. Backtesting is a process where you use historical data to assess the performance of the strategy.
At the same time, you should do forward testing, which is a process where you use a demo account to assess its performance. Another way is to get training from a certified trainer to get required skills and knowledge and develop own Trade plan or journal based on your own strength. Like some traders want to do pullback trading only and accordingly develop trade plan based on pullback trading only.
Finally, you should restart your trading journey. There are several things that you need to do. Our recommendation is that you start small with money you can afford to lose. Also, start trading a specific trade per day/week. The goal of this stage is to prove that the strategy works. Then, as you grow in profit percentage and profit per trade in your account, you can increase your trade lot and trade sizes.
There are other things that will help you rebuild your trading journey. Some of the most recommended ones are:
- Daily/Weekly Marking on charts – You select your favorite scripts and start marking on charts for trading opportunities. When the opportunity as per marking exists, Take trade and keep record on paper for writing all trade related information as mentioned above.
- Talk to a mentor – Further, find a mentor who has been in the industry for a long time. This mentor will give you guidance on what to do.
- Focus on discipline – Above all, be a disciplined trader who sticks to his trading strategy and rules.
Losing money is not fun and it shakes your confidence and rebuilding your trading account is not an easy process. This is because you will most likely have to venture into something very, very difficult for changing your habits, the way you approach trading, and your routines.
Psychology and mind set will make 70% impact of your trading style and one need to work on same as you can understand yourself much better way than others do.
Happy Trading 😊