Day trading is an activity that has a substantial risk-reward ratio. While it is possible to make a lot of money, there is a bigger likelihood of losing a fortune in the industry.
In the past, some well-known day traders and hedge fund managers have lost a lot of money. But they are still in business, and each year they are able to generate huge profits. Very simply, they have not given up and have been able to react to a challenging situation.
Well, you should realize that you can too! Therefore, this article will look at some of the best strategies to use to recover your blown account.
Reasons why you may blow your account
There are several reasons why many day traders blow their account. Some day traders have seen their trading account balances plunge from over $10,000 to less than $1,000! This situation can happen within a few weeks or even a few days.
We know how annoying it is to lose money and stick to a series of bad trades, that’s why we have also covered the steps to follow not to blow up your account. But there are a few factors involved that can upset this and jeopardize your account.
Let’s highlight some of the top reasons why an account can go through a big drawdown.
Leverage refers to the loan that is offered to you by an online broker. The goal of this leverage is to help you maximize your returns when day trading.
However, it can also lead to bigger losses when things are not going on well. Therefore, we recommend that you take a measured approach to leverage.
You can make a big loss when trading if your calls in the market are not accurate since no trader is right all the time.
Making a wrong prediction is part of the trading game. And at times, it is possible to make numerous wrong calls, which will lead to huge losses.
Dollar Cost Averaging gone wrong
Dollar Cost Averaging is a trading strategy where people add into a losing position, hoping that a reversal will happen.
For example, if a stock is trading at $15, you can keep adding into that position. If things go well, DCA can lead to strong profits if the reversal happens. However, the opposite will happen if the stock continues falling.
Another reason why a huge drawdown can happen is when you don’t use a fixed or a trailing stop-loss. A stop-loss is a tool that stops a trade automatically when it hits a certain level. Trading without a stop-loss can lead to substantial losses if the trade goes against you.
There are other reasons why your trade could go to zero. Some of these reasons are not having a trading strategy, huge volatility, high greed, revenge trading, and high position sizing.
Steps to recover after blowing your account
Recovering from a big loss is not the easiest thing to do because of the emotional issues involved. So, let us look at some of the top strategies that can help you recover your account.
Accept the losses and responsibility
The first step when dealing with big losses is to accept that the losses happened and then take responsibility for the mistake. In other words, don’t blame anyone for the loss. Instead, accept that the loss happened and purpose to learn from the mistakes that happened.
Acceptance is one of the best ways of dealing with issues in life. For example, a drug addict can only come clean by accepting their problems. Similarly, you can only move out of depression or stress by accepting the issue.
The same applies to trading and investing. In this case, the best way to get over the big loss is to accept the situation. As you do this, we recommend that you give yourself time away from the market.
This is the only way to clear your mind and avoid terrible mistakes like revenge trading. Do you need a break? Take a break!
One soft skill that can be very helpful to you in this task is resilience. The aptitude for accepting that things go wrong, and reacting promptly without losing your mind by letting this negativity slide, plays a crucial role in a trader’s career. And if you don’t have it, you can still develop it.
Identify the cause of the big drawdown
The next stage is to use the trading journal to identify the cause of the big loss. A trading journal is a document where you write all details about your trades. A simple journal can have the categories like:
- The asset
- Opening and closing prices
- Loss or profit
- The reason for executing the trade
Having a journal is so important in that it will help you identify patterns in your trading journey. It will also help you to identify the popular mistakes that you typically make in your trading activities.
As part of assessing your trading journal, you will often find the reasons why you blew up your trading account. We have mentioned some of these reasons above.
Assess, test, or create a new strategy
One reason why you likely blew your account is that your strategy failed to work. Some of the most popular trading strategies that traders use are scalping, VWAP, swing trading, algorithmic trading, and pairs trading.
In this stage, assess the performance of the trading strategy and review its effectiveness in the past. If the strategy was successful in the past, it means that you can fix it. However, if the strategy was not successful in the first place, you should focus on creating a new strategy.
In most cases, creating a strategy can take a few months since you need to test its effectiveness for long enough. You should test and backtest the strategy for a while. Backtesting is a process where you use historical data to assess the performance of the strategy.
At the same time, you should do forward testing, which is a process where you use a demo account to assess its performance.
Finally, you should restart your trading journey. There are several things that you need to do. We recommend that you start small with money you can afford to lose. Also, start trading a few times per day. The goal of this stage is to prove that the strategy works. Then, as you grow your account, you can increase your funds and trade sizes.
There are other things that will help you rebuild your trading career. Some of the most recommended ones are:
- Watch live trading – You can watch other people day trade. TraderTV is one of the best live trading channels to use.
- Talk to a mentor – Further, find a mentor who has been in the industry for a long time. This mentor will give you guidance on what to do.
- Focus on discipline – Above all, be a disciplined trader who sticks to his trading strategy and rules.
Losing money is not fun and rebuilding your trading account is not an easy process. This is because you will most likely have to venture into something very, very difficult: changing your habits, the way you approach trading, and your routines.
In this article, we have looked at some of the top reasons why you can blow your account and some of the top strategies to use to rebuild it.
External useful resources
Bring Your Trading Account Back From the Dead – Learn To Trade The Market