Every trader is sure to face a significant loss (or several losses) in their career, whether due to a technology crash, a lack of discipline, or a continuous flow of trading capital. How to recover after a big loss is not complicated; it can be achieved with a few simple steps. What is difficult is fixing the psychological damage that occurs, especially the damage to confidence.
Loss Day
Every trader has bad days. As a rule of thumb, do not let a bad day cost you more than you would earn on an average winning day. If you are averaging $700 on winning days, do not lose much more than that on a bad day. Control the downside.
Accept Responsibility
It may have just been a few bad days, or perhaps it was your largest single loss, or maybe it was a life-changing loss. In the case of facing financial ruin, there is not much to be done. Do not trade until the issue is resolved. Once it is resolved, you can proceed with the next steps, but not before that. Do not trade while carrying a massive debt over your head with the intention of using it to get rid of that debt; that is significant pressure and could lead to a worse situation.
Redirect Your Focus
When you started, you were probably very confident, but the market put you in your place. You developed healthy confidence over time by building your trading system, testing it, practicing it, and then using it in successful real trading. Confidence is built by doing difficult tasks and improving our performance in them, and in trading, our task is to execute our trading plan. Confidence grows as soon as you see the positive results resulting from that trading plan.
Practice and Rebuild Confidence
After a big loss, confidence may be low, which means the mind may not be in a good state to trade. A lack of a clear mind can lead you to skip some trades, or withdraw from them in a state of panic (trading not to lose), or be overly reckless in trying to quickly return to your old winning ways. None of these things are good. Take a step back and trade in a demo account for a few days. If you are losing, you are likely saving yourself money. Since it is not real money, there is less pressure in a demo account, making it easier to focus on trading without worrying about the financial side.
Start Small
A few winning days in the demo account will boost your confidence and put you in a better mindset to face the markets again with real money. After a string of losses, start small; do not jump straight back into the same position size you were trading before. On the first day back, trade with a small position size. A winning day with a small position size will help build confidence, and you can increase the position size the next day. If you have a losing day, the loss on small position sizes is easier to handle than another losing day on full position sizes.
Conclusion
If you have taken a big hit, stop trading for a few days. When you return, review your trading plan and your trading, discuss the issues that caused the problem, and make any necessary changes to the trading plan. Then trade in a demo account for a few sessions to rebuild confidence. Switch to real trading only after you achieve winning days and feel as successful as you were before.
Frequently Asked Questions (FAQs)
I lost a lot of money in day trading. How can I write it off on taxes?
Capital gains and losses (incurred from day trading) are reported on IRS Form 1040 Schedule D. You will know when your broker sends you a 1099-B. Remember that only $3,000 of capital losses can be deducted from ordinary income in a year. Any amount over $3,000 can be deducted from capital gains in the following tax year.
How
Do you know when to cut your losses in day trading?
Knowing when to cut your losses in trading depends on your strategy. If you are trying to short-sell a stock, you will want to cut your losses if the stock breaks above its last high – this is the point at which you know you did not catch the top in time. Some traders may give themselves more leeway in stop-loss orders than others, but many trading strategies rely either on a level of resistance or support. When it comes to cutting your losses as a day trader, in general, you may want to consider stopping trading if you are building debt or noticing negative effects on your mental health.
Source: https://www.thebalancemoney.com/bouncing-back-after-a-big-trading-loss-4005884
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