Catastrophic Losses
If you are a disciplined trader, you should never really find yourself in a position where you suffer a huge loss that wipes out a big chunk of your trading capital.
That’s because the general rule is that you should never risk more than 2-3% of your overall capital on any one trade, so if you stick to your stop losses and apply these money management rules, your losses will always be relatively small when they occur.
However the reality is somewhat different because even the most disciplined forex traders can lose their discipline and become too heavily involved in a trade on occasions.
For example, they may be extremely confident that a particular currency pair is going to fall, but if their initial short position moves against them and the price keeps on rising, they will keep on adding new short positions as the price moves higher and higher.
Sometimes traders can get lucky and the price will eventually fall in these scenarios, but when it doesn’t, they will often wipe out most of their capital.
Why It Is So Difficult To Recover Your Losses
When traders do end up losing a lot of money with one catastrophic trade, the major problem is that it is extremely difficult to recoup these losses.
To demonstrate this point, let’s say that you started off with £10,000 in your trading account, and lost 60% of your capital with one disastrous trade.
You are now left with just £4000 in your account, but the key point here is that you will need to generate a total profit of 150% just to get back to where you were!
This is hard enough in normal circumstances, but when you are trading the markets on the back of a heavy loss, the temptation is always there to chase your losses and try to win your money back as soon as possible, which once again rarely ends well.
How To Recover Your Losses
It is therefore vitally important that you retain your discipline when you have experienced a heavy loss.
If you have a profitable trading strategy in place, you really need to stick to your system and make every effort to trade with the same money management rules as before.
If it helps, you should put post-it notes on your computer to remind yourself not to over-commit yourself on any one trade, and to always stick to your stop losses.
It is not a nice feeling when you have lost a lot of money, but you have to avoid chasing your losses at all costs, otherwise you will probably end up losing even more money.
The good thing about forex trading is that it is possible to recoup these big losses with the help of leverage if you are using strict stop losses and have a reward/risk ratio of about 2:1 or higher. You just have to stick with your system, apply stop losses and keep plugging away.
If you were investing in stocks, however, it could take years to recoup your losses if you have to make 100% or more, for example, just to get back to where you were before.
Of course if you ended up wiping out most of your capital because your trading strategy failed you, then you will have to use different tactics. This is not a time to return to the markets.
This is a time to take a long hard look at your system, determine why it failed and work out how you can tweak it to ensure that it is consistently profitable in the future without racking up big losses.
You may even have to abandon it completely and try to come up with a completely new strategy in order to return to profitability over time.
Final Thoughts
The key point is that you shouldn’t panic when you suffer a huge loss. The markets will always be there, so there is nothing wrong with taking a break from trading and attempting to clear your head.
You will have a lot of negative thoughts and emotions, and will have feelings of self-doubt and anger after you experience a big blowout, so you need to get your head right before you start trading again.
Once you do this, it is all about your trading strategy and discipline. With a good trading system that targets large winning trades and keeps losing trades small, it is definitely possible to regain your lost capital over time with a disciplined approach.
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