Follow this simple 3 step process to help you recover from large trading losses:
1. Realize your folly- Investing in the stock market can be very frustrating, especially after suffering a large loss or multiple losses in a row. The key to getting back on track is to realize why the losses happened and to learn from your mistakes. Is your strategy not as effective as you first believed? This can be tough for traders to come to grips with, as this reason will certainly be a big hit to their ego. But you must be honest with yourself if you’re going to learn from this experience and transform yourself into a successful trader. Were you too emotional before or during the trade? Emotions are known as the killer of profits in the trading world, so the sooner you can become robotic with your emotions during trading, the more your trading will progress over time.
2. Plan out every trade- Not following this step may be the reason your account is not profitable in the first place, so implement this practice in order to help you turn your trading around. In order for a trade plan to be successful, it must contain three important elements. These are a planned entry price, exit price, and a price at which you will cut losses. All of the elements of this plan need to be developed before you enter the trade, as opposed to entering the trade and then selling yourself on why you should stay in it, even after it has turned against you. Once you’ve planned your trade and included all three necessary elements, stick to it. If you enter a trade and it turns against you, cut it once it reaches the level at which you planned to cut losses (also called your stop loss level).
3. Scale down to build confidence- Once you’re ready to start trading again, try trading with a smaller dollar amount, as this will help take the edge off and relieve some pressure. Once you’re back on track and executing winning trades consistently, increase your position sizes and repeat this process until you’re back where you originally left off.