How to Recover From Day-Trading Losses

Successful day-trading demands massive discipline but most traders eventually fall prey to emotional trading. This causes huge drawdowns. Before you call it quits, here are strategies and alternatives to recoup losses.

According to the social trading platform eToro, a whopping 80% of day-traders lose money over the course of a year with a median loss of -36.30%. It’s no surprise why most day-traders quit.

There are stress-free, yet highly profitable, alternatives to day-trading which we’ll get to shortly.

For those who aren’t sure what day-trading is, this is a trading style that aims to profit from minor price differences throughout a trading session. Traders open and close a position on the same day to mitigate the risk of a strong overnight move, for example, due to surprise news.

You can imagine that day-trading is highly emotional and stressful.

Why Day-Traders Lose Money

Let’s try to understand why these traders lose money and why others can profit consistently in the long term. The reason why most day-traders lose money is a lack of discipline. They trade out of gut feel and have not worked out trading rules that give them a competitive edge.

In 1999, the North American Securities Administration Association (or NASAA) reported that 70% of day-traders lose money:

An analysis of trading patterns at one day-trading firm in the study showed 7 out of 10 day traders lose money, while fewer than 12 percent made a profit on their short-term trades.

A lot of people simply overestimate their abilities and assume that they are smarter than the average. Their hope is that they will somehow land in the 12% category that doesn’t lose money. This is a mixture of overconfidence and naivety.

If anyone promises easy money from day-trading, run far away from that person.

We are naturally prone to lose because of how we are hardwired as human beings. Behavioral psychologists use the term loss-aversion when they refer to our instinctive fear of losing. We feel a loss considerably stronger than a profit.

Day-traders may refuse to close a trade because they hope that the market will magically turn around and help them get out at breakeven. If that turnaround does not materialize, they want the pain to stop fast and close the trade regardless.

Day-traders who are on such a losing streak often can’t stop and resort to recovering their losses as soon as possible by picking tops or bottoms. They go against the grain and try to time the market in order to squeeze out any tiny profit that the market offers them. This rarely ends well.

How to Recoup Day-Trading Losses

The first step to recovery is to stop trading for the day. Allow some time to cool down and review your trades in the evening or the following day. Make a printout of your trades to analyze your mistakes. This will help you identify where you can improve.

If you continue to trade right now, things will only get worse because the same behavioral patterns that got you where you are will simply exacerbate your losses. Get rid of any wishful thinking.

Ego is your worst enemy and admitting to yourself that you were wrong about something, is a hard pill to swallow.

The second step is to work out an improved strategy with which you can get back on track.

The mistakes you identified in the first step should hint towards what you can improve next time. You may also want to consider a different trading strategy altogether by finding one that’s more suitable for your personality.

A strategy must have a statistical edge. It can be a favorable risk-to-reward ratio so that expected profits always far outweigh expected losses giving you more room for mistakes. Increasing accuracy by having more winning trades than losing trades also leads to an edge. This time around you should also implement strategies on how you can overcome emotions because they are definitely going to cause trading mistakes again in the future.

If your trading rules already guarantee an edge, analyze why you were unable to follow your own rules. Face the reality that the recovery process is going to be a slow grind.

What Alternative Is There to Day-Trading?

Day-trading isn’t for everyone. Some people are not made for this stressful lifestyle, others simply don’t have the time or interest to stare at charts all day long.

I tried day-trading in the beginning myself and gave up for the same reasons mentioned above. I remember waking up each morning, shivering in my room on a hot summer day. That wasn’t the lifestyle I envisioned for myself.

Nevertheless, letting money work hard for you is a great concept and financial markets are certainly the place to be. Day-trading, however, simply doesn’t seem to fit that concept. Luckily, there are plenty of alternatives to day-trading. You can swing trade stocks by holding positions over many days. There is an even better approach.

It’s called ‘trend following’ which suggests following large trends in the bigger picture. Its core idea is to be in a long position when markets are rising but to reverse short when markets are about to crash.

Trend followers are agnostic to which way the market is going to move next and won’t bother making any predictions. They simply trade the trends that the market offers them, be it up or down. The trend is your friend, as people say.

Trends don’t come and go by the day, but they unfold over several weeks to months. That allows you to sail through weeks and months without taking a single action. These are the kinds of trends I profit from and I don’t understand why anyone would favor something else. Trend following suited me perfectly. It’s stress-free, more accurate, and the best way to make consistent profits.

Following my trades in the E-mini Nasdaq-100 (NQ) can swiftly help you recover from your day-trading losses. I immediately cut your losing streak and put you on a path to long-term profitability.

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About Matthias Hagemann

Matt Hagemann

I share my 15+ years of trend following experience. Aspiring traders come to me because they want to make consistent profits without stress and without day-trading.