How to Recover from Big Trade Losses

You know how it goes. You spot a potential short term trade. The technicals look good. There is a strong growth story behind the company. Price starts to spike and you're afraid you'll miss a once in a lifetime opportunity so you chase after it and buy. Then, the stock tops out and does a sharp retracement back to support. You scratch your head thinking why it went down. You cling on to hope. You research more about the company to convince yourself that it can still go up. You start going to forums and seek comfort from fellow traders who are in the same predicament as you. You wait. And wait. And wait. But nothing happens. Years pass by and you are left with nothing but a bloody portfolio that is invested in a stock you were only meant to trade for a short while.

Unfortunately, this is the story of many new traders out there. The stock market is a tricky business. Even if you have a strategy, one lapse in risk management can cause damaging losses to your portfolio. However, every great trader have had their fair share of losses. Some of the notable ones even had their portfolio completely wiped out. But the common denominator about them is that they are committed to learning the market which is why they are able to turn failures into great learning opportunities.

In this post we will outline some helpful tips on how you can get back up your feet and recover from big trading losses.

Know the Strategy that Fits Your Skill Level and Lifestyle

When you were a child, your parents never let you handle a kitchen knife. Why? Because you will end up hurting yourself. This same analogy applies to trading, when you are still beginning, it is very unwise to be entering high risk speculative plays, moreover, highly volatile pennystocks. These plays demand a deep understanding of technical analysis and require a strict adherence to risk management.

Trading a huge portfolio ( 6-7 digit fund) without careful planning is dangerous. You should align the amount of money to the risk of the trade you are taking. For long term investment placements, it is advantageous to place a huge amount of money especially if it is in a multi year support level. But when you are doing short term trading, moving a 7 digit fund in and out requires extreme caution. One wrong move and you'll be nursing deep losses.

Your lifestyle plays an integral role in the investment choices you make. People with demanding careers may not be able to monitor the market as much as they want to. A long term investment strategy through an index fund may be the best option for them. If positioned at multi year support levels, this can be a strong investment vehicle as the market moves up again.

For those who are truly interested in trading and speculation, an active trading strategy may be a good choice. However, this holds a steeper learning curve, but the reward upon proper execution is definitely worth it.

Limitless Opportunities

The stock market holds vast opportunities to compound your wealth. However proper timing and preparation is key. But from time to time, we do make mistakes and making a mistake in the stock market means losing money. When you hold on to painful losses, you completely take away the chance for you to participate in these opportunities.

There is no easy money in the stock market, everything boils down to proper preparation and a clear expectation of results.

Be Clear on Your Expectations

There are many stocks out there that require varying strategies. Each demand a different skill level depending on the the amount of risk involved. Check your portfolio right now and see if you have bought a stock that matches the correct strategy model based from the list below:

Passive Investing

• Goal: To build wealth over time

• Risk: Low

• Strategy: Cost Averaging

• Holding Period: Long (8yrs - 10yrs)

• Type of Stocks: Index Fund, Blue chip stocks

Active Investing

• Goal: To leverage on stocks with high growth potential

• Risk: Low - Medium

• Strategy: Position Trading

• Holding Period: Medium - Long (2yrs - 10yrs)

• Type of Stocks: Undervalued stocks with strong fundamentals

Active Trading

• Goal: To generate income

• Risk: High

• Strategy: Momentum trading, Reversal trading, Swing trading, Day trading (scalping)

• Holding Period: Short ( intraday - a few weeks, depending on the strategy used)

• Type of Stocks: Any stock (usually speculative issues) with high volume and good technicals

Rectifying the Mistakes

Here comes the difficult part. Now that you know the appropriate strategy model for each category of stocks, it is time to check if your portfolio aligns to these models. Remember that no other person can turn your portfolio around but you. It is your hard earned money and you have to be accountable for it.

If you have bought fundamentally robust stocks at a discount and the market is still down, your losses now will be temporary and will shift into profit once the overall market recovers. But if you have bought speculative stocks that have turned sour, it will be very hard to gauge if it will ever go back to the price where you bought it. Waiting time could be a couple of weeks to several years. No one really knows. This is why experienced traders approach speculative and volatile plays with a risk management element to cut losses quick if the set up fails. If you have failed to cut early and losses have compounded drastically, it is really up to you if you can bear to wait indefinitely or take a painful loss now and re-calibrate your investment correctly moving forward.

Remember this, every great trader/investor who are now millionaires or billionaires have had the challenge of dealing with big losses just like all the others. What is different with them is that they have the courage to deal with the mistakes early on and turn them into learning opportunities to get better over time. Opportunities always appear in the stock market and those who are prepared for it are the ones who will enjoy the reward.

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