We want to recover our losses in trading because we feel we lost something and want to gain back in the same place. But the Irony is
The more you try to recover the loss, the more you lose.
I experienced this during my trading journey; you must have felt that.
We feel frustrated and regretful for losing our hard-earned money.
Our ego will also be affected because we feel that all our experience and knowledge is not helping to make money from trading.
In that frustration, we tend to make more mistakes than usual. The most common mistakes I made are:
- I went against the market to prove that I was right.
- I increased my position size because I got only 50% of the capital, so to make up for the lost money, I used to double my position size (worst mistake).
Take a look at the table below to understand better (The more you lose capital, it gets difficult to gain back)
- I jumped into random trades because of the urge to recover lost money immediately. ( basically, I've got no patience back then)
- I overtraded (which led to significant brokerage charges)
If you have done/doing any of the above mistakes - Stop them immediately. Otherwise, there is a high chance that you may lose even more.
Over time, I found a better approach to view the losses differently and slowly grow the capital.
Before we dive in, I just wanted to give this update:
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A practical approach to loss recovery:
The basic rule that you must always remember is
Never enter any trade with the mindset to recover losses.
Let's say you have 2 Lakhs of capital, and you lost 1 Lakh (50%)
At this point, you must realise something is wrong with your trading system.
Follow the steps:
1. List down all your lost trades because of which you lost 1 Lakh and arrange them in descending order.
2. Let's say you identified 10 loss trades; for every loss trade, you must mention the detailed reason for the loss. The reasons can be categorised into three types:
- Technical Mistake:
A few examples of technical mistakes are 👇🏻
| Not following the right strategy
| Taking trades without doing a higher timeframe analysis
| Entering a trade a fakeout
| Not waiting for the candle to close before taking entry
| Enter trade without any confirmation
| Late entry etc.
- Risk Management Mistake
Examples 👇🏻
| Taking the wrong position size
| Risking more than what you are supposed to
| Taking trades even after reaching your daily trade limit
| Wrong placement of stop loss
- Emotional Mistake
Examples 👇🏻
| Taking boredom trades
| Taking revenge trades
| Taking trades based on biased views
| Averaging a losing trade
| Not existing trade even after reaching the stop loss etc.
3. Find out the mistakes you made repeatedly, which gave you most of the loss.
4. Start working on them - One at a time
Working on Technical Mistakes:
If you are making more technical mistakes, check your average win rate; if it's below 50, you must start checking if the strategies you are following are correct.
You may need to upgrade your knowledge in technical analysis and price action. Stop trading and spend time learning the correct stuff.
Working on Technical Mistakes:
If most of your mistakes are due to improper risk management, remember that you will eventually blow up your account.
You can mess with technical analysis but not with risk management. No matter how perfect your strategy is, it's nothing without the right risk management.
Also, learn how to calculate the right position size for your capital and adhere to it.
Try not to risk more than 2% of your capital per trade and not lose more than 3% daily. Stop trading for a few days if you lose more than 10% of your capital, and just relax. Maybe the markets are not good, or you cannot trade properly. Take a break.
Working on Technical Mistakes:
In my experience, if you always follow the right risk management and do not have false expectations of making huge ROI from trading quickly, then most of your emotions will be under control.
One more thing that can help is to think in terms of the long term; small improvements can add up over time.
Later you can easily scale up, but if you mess with your psychology from the beginning itself, then eventually, you either quit the market or end up losing all savings.
Take it slow; gradual and small improvements matter. Do not get excited by seeing big profit screenshots. Stop comparing with other trades if that's not helping you.
Pro tip: Until you become a profitable trader, never rely only on trading income, have other sources like a job etc. Also, never trade with borrowed capital. Most psychological trading issues happen because of commitments or a strong urge to make money.
Final Thoughts:
Start accepting the losses without regret but remember and learn from your mistakes. Even if you consider the losses as fees paid to learn trading better, it's okay.
You start getting better results when you constantly correct your mistakes and are not emotionally attached to recovering the losses.
Eventually, there is a better chance to grow your remaining capital.
But if you fall into the trap of recovering losses mindset. No one can help you.
As Einstein quote says, "Insanity is doing the same thing over and over and expecting different results.”
Keep that in mind, and enjoy the rest of your day.
– Arun Bau
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Hope to see you live next Saturday @ 5 AM
