Drawdown to Recovery – Overcoming Big Losses

Drawdown – a decline in an investment or fund.

Most veteran traders have experienced what they would refer to as a “drawdown” or a “big” loss at some point within their career, some have experienced many (God help them). Several traders have requested that this topic be addressed, so here it is. I reached out to a number of traders within the trading community in an attempt to receive mixed insight on how different traders handle a big loss. The responses that I received varied greatly from “take a day or two off,” to “put it out of your mind and move on,” to just “whiskey.” Just as the size of a “big loss” will vary greatly from trader to trader, as will their methods of recovery from such a loss.

Taking It On the Chin

So you got beat by the market? Or beat by yourself? The majority of truly successful traders have taken their fair share of losses. Whether we like it or not, losing and being wrong are both part of this business. How you handle those losses could make or break you as a trader.

Drawdown recovery - Arnold Strength Quote

It sucks, I know… but it’s time to take the hit. For starters, own the loss. Don’t deny it. Understand that you and you and alone are the reason for the loss. Not the government, not the FED, not the analyst who downgraded the stock… you. You took the trade. It is you who is responsible. Once you’ve owned it and accepted the fact that you were wrong, it’s important that you reflect. What the hell happened? What did I miss? What could I have done differently to have finished profitable? Some will know immediately what went wrong, others may have to dig for it. Don’t just “take the loss and move on,” understand what caused it.

You might find that the drawdown was due to positioning heavier than you should, holding overnight at uncertain times, holding into earnings, not honoring a stop, or just breaking the “rules” you would typically follow when you trade. Hell… it could even be your ego, just too proud to take the loss until it builds and builds into something you never expected. Big drawdowns hurt, but they can be healthy reminders of what can get us into trouble. If you want to succeed as a trader, wallowing in a loss won’t do you any good. We have to be resilient. Just as you shouldn’t get too cocky after a big win, don’t get yourself too down after a big loss.

“Rules can be written down and agreed upon, but they don’t really become rules until the pain of breaking them is so carved into your soul that you follow them from a deep sense of self-preservation… because the agony of going beyond your limit is a place you don’t ever want to return to.”  – @PsychoOnWallSt

Now that you understand why it happened, figure out how to prevent it from happening again. For some, one way could mean establishing a “max pain” threshold with your broker. If you so choose, you can call your broker and have a “max pain” number set on your account. Once set, on any given day if you hit that number in losses, the broker will shut down and prevent you from trading anymore for the remainder of the session. This will work for well for some, but others may not like the thought of being cut off by their broker mid-day.

Tune Out the Noise

Traders tend to get themselves into trouble through the influence of other sources, which is to say that the “noise” gets into their head. After a big drawdown, you may lose conviction in your strategy and/or your ideas, causing you to turn to other sources for confirmation, or even a guiding hand. Careful when doing so. Crank up your “mental filter” to what the talking heads on CNBC or the Twitterfolk are saying. It’s difficult to understand how Cramer or the cast of “Fast Money” can advise someone without knowing their risk profile, trading style, timeline, etc. Or how about the trolls of Twitter? After a big drawdown, a troll on the other side of your next trade calling you an idiot, saying you don’t know what you’re doing could influence your strategy, as you may have lost conviction in your trading.

These things are all just “noise,” distractions that require discipline to tune out. Do what you can to keep your emotions low, and your influence from other sources at zero.

Take a Leave of Absence

It’s only human nature to beat yourself up over the loss. Try your best not to. I know, I know… “Easier said than done.” It’s understandable to be upset about what happened. Take the rest of the day, maybe the next full day off, and come back to the market with a different attitude, refreshed. A great analogy for a big loss would be like playing a round of golf. You might take the triple bogey on the 13th, and be mad at yourself about it until you reach the 14th tee. It’s a new hole, and a new performance. Trading can be similar in that regard. Try to treat it as such.

Drawdown recovery - Hogan quote

A very common practice to a larger than average drawdown is to simply take the next day off. This shouldn’t be confused with “taking a break.” Taking an extended leave of absence after a significant loss may actually cause you to doubt yourself more and pour salt on the open wound. Think of taking one day off as therapeutic. Do something you enjoy that day, get outside, spend time with the family, whatever you have to do, just get your mind off trading. Think of it like a “mini vacation.”

Try to come back fresh, after you’ve given your mind a solid 24 hours to digest what happened. A lot of people think taking a “break” is a good thing, and perhaps it is for you. If you have confidence in your trading, remind yourself that you’re good trader. Then remind yourself that you’re human, and that you can get sloppy or careless from time to time. The best thing you can do is get right back on the horse after a quick breather and continue to do the things that got you to where you are today. Try not to let the market control you and bring you down – it has no emotions or ill will. Why should you?

Assess. Adapt. Evolve.

Drawdown Recovery - Ray Lewis quoteOne of the worst things you can do in a sizable drawdown situation is to let the loss govern your actions thereafter. Your thought process moving forward shouldn’t be “I need to make those losses back.” Throw that out right now. If your focus is solely on recouping your losses, it’s essentially another form of “trading your PnL,” which likely won’t end well for you. Don’t focus on the money, focus on trading well. The rest will take care of itself. Don’t let a big loss effect your mind state as a trader. You know who you are. You know your strategy, and what works for you. If you aren’t confident in your strategy, go back to paper trading. No joke. Take the time. Assess. Adapt. Evolve.

“Somebody can tell you how to be a successful trader a million times, give you all the horror stories and warning signs in the world to back it up, and you can ‘yes’ them to death that you understand, but until you make the mistakes with your OWN money…you’ll never really learn.” – @DGTrading101

A good way to look at it is “don’t let a bad drawdown go to waste.” Make the most of it. Use it as fuel to the fire. Let it guide you into becoming the most disciplined version of yourself to date. The best version of yourself. There are positives in every negative situation, and you need to seek them out – resiliency is your most valued attribute as a trader. Stay positive, your mindset is so important. Zero out negativity. Overcome it. Look at it is an opportunity, or rather a challenge to become better. Years from now, it could just be a story you tell with some trader buddies over a round of drinks.


As traders, we all make mistakes. We’re all human. Don’t let a mistake define who you are. Take a day off to rejuvenate, paper trade for a while, trade smaller size than usual, but the real key is that we should always be managing risk first. Make every effort to define risk. In TM’s interview with SunriseTrader, Sunrise gives a great example of how to manage your risk. Make sure you check it out.

Newer traders always believe they have to be right, that they have to green every trade to succeed. A seasoned trader can obviously see that they are wrong. It typically results in “Oh well. Setup looked good, but didn’t play out. Next.” While it’s tough to see heavy red, try to stay positive about it and bounce back.

In the end, it’s about taking the value you can from the situation. If you took a big loss and learned nothing, consider it a complete waste of your time. However, in the future, you may look back thinking you’re happy about taking that loss. Surprised? Don’t be. Many traders share the same sentiment. Lessons learned.

I hope you found this information helpful. If so, please share it with others.

Overcoming Big Losses

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