To recover stock market losses and make more money, you need to be very disciplined, always a student to the markets and managing your risk well. Keep your risk to the minimum with 1% rule and maximize the profits.
Stock trading involves a lot of risk to your capital or money. Majority of the retail traders lose money in stock trading. Even then, it remains a popular method of making quick money.
Stock losses are a part of stock trading. We can’t do anything to completely avoid them. What we can do is to cut the losses short. Making our profits bigger and cutting the losses short is what makes us money in the stock market.
Reaping large profits and exiting with small losses is what makes you a successful stock trader. Professional traders and big fund houses follow the same strategy to make money in stock market. It is never like they do not face losses.
Reasons For Stock Market Losses
Let us find out the main reasons which result in stock trading losses. The reasons are not anything extraordinary but same basic things we read repeatedly but tend to ignore them.
- Not choosing the right trading tool suitable to you ; Cash trading, Futures & Options Trading
- Not adopting appropriate trading strategy suitable to you ; intraday trading, swing trading or positional trading
- No risk management
- Inappropriate position sizing
- Ignoring the importance of stop losses
- Trading under the control of human emotions ; greed and fear
- Over-trading or revenge trading to recover the losses in previous trades
- Trading without gaining adequate knowledge about stock trading and its risks
- Trading on the basis of own opinions and believes instead of studying the market data and technical charts
- Following trading tips from others to enter a trade
How To Recover From Stock Losses
This is the question we always face when we incur losses in stock trading or in a streak of losing trades. It is said that there is no way you can recover the money lost in trading. Market is not going to deal with love in your next trade even if you are consistently loosing.
So, what to do when you loose money in the stock market?
Question before you is ; how to recover my loss in share market?
You can recover or compensate from the stock market losses in your next trades. For that, you would need to learn the stock trading basics. You need to learn how to manage the risk in trading. How to turn the odds in your favor in stock trading.
Most of the retail traders get into trading without learning the stock trading basics. They are novice and inexperienced. They do not know about risk management.
They are concerned only with making big profits in stock markets. Then they face the losses, do over-trading and revenge trading to recover the losses and pile up more losses. Unable to make money in stock market, they exit trading without analyzing what was wrong with their trading. Instead they blame the stock market for their own mistakes and losses.
Before we want to recover our losses, we have to create a trading capital. This capital will be used for trading because that is the method which can help us recover our losses and also make more profits.
Your trading capital is your spare money. The money you don’t need. It is advisable to start with small capital. With successful trades, the capital will appreciate.
Lets us know what to do to recover your stock market losses!
Learn The Basics
First of all, we need to know that stock trading is based on the stock price action. You can study this price action by technical analysis.
As a stock trader, you should trade a stock between only support and resistance price levels. You should buy a stock above support level and sell the stock at or below the resistance level. Thus, support is your stop loss and resistance is your target for long trade or buying trade.
With technical analysis, you can also find various technical chart patterns which give you levels where you should buy a stock and sell a stock.
Learn about different important technical indicators which are complementary to chart patterns. They give more accuracy to buy or sell signals.
Build A Trading System
A trading system is a chart based system which gives you buy and sell signals on technical charts. It gives you the support and resistance price levels, important part of trading.
After you learn the basics of technical analysis, you should build a trading system for you.
A trading system consist of technical chart along with commonly used technical indicators like moving average convergence divergence (MACD), relative strength index (RSI), Stochastics oscillators and commonly used moving averages.
You should study the chart for every stock with these indicators to find the ideal stock for trading. The ideal stock is which gives you buy signal with most of the indicators and chart pattern indicating possibility of price rise in the stock.
Use simple system with simple technical indicators. There is no need for complex indicators. Keep the number of indicators to maximum of 2 or 3. Study about these indicators well; how to find buy or sell signals.
You should trade only those stocks which are eligible for trading on the basis of this system. Otherwise, stay on the sidelines and wait for appropriate signals. Never trade on your own assumptions or what you think market may do in future.
Screen the stocks for trading only where the risk to reward ratio is at least 1:2 or more than that. Do not trade for 1:1 or usually 1:2 risk reward ratio.
Choose Right Trading Tool
Choosing a right trading tool is very important. You should choose it according to your risk profile, your personality or the time you can give to trading. After that stick to it and do not jump unnecessarily between them. You will loose your focus otherwise.
For trading vehicles, there is cash trading and futures & options trading.
With cash trading, you can trade with the amount only available in your trading account. Futures & options trading is margin based trading. With margin trading, you risk and reward potential increases several folds.
You should choose the right vehicle which suits you according to your risk taking capacity. I would suggest to go with cash trading. Futures & options are mainly for the institutional and fund houses.
Then, there is intraday trading, swing trading and positional trading.
Intraday trading is the method of trading purely on intraday basis only. Intraday traders do not carry forwrd their positions to next day.
Swing trading is the method of taking trading position for few days to weeks. Here, the traders hold the position for several days and keep trailing their stop losses as the stock keeping moving further.
Positional trading is done for weeks, months or years. If you can hold the position for so long, you can go for positional trading.
You should decide what time frame suits you best. Choose that method of trading only. If you are in a regular job and can not sit before screen the whole day, do not go for intraday trading.
With right trading vehicle and right time frame, you can avoid unnecessary trades and consequential stock market losses from trading and brokerage or commission charges.
Risk Management and Position Sizing
Risk management is the most important part of stock trading. Unfortunately. it is the most ignored part by the retail traders.
Always remember the two rules, ace investor Warren Buffet gave:
Rule Number 1 – Never Loose Money
Rule Number 2 – Never Forget Rule Number 1
Risk management involves protecting our capital which we want to put into trading. If you do not protect your capital exposed to the market, you will be left with no capital for trading after few trades.
This is the capital you will use for your trading and making profits to recover your losses in previous trades. Of course, you can again incur losses in next trades but our strategy is to keep our losses to the smallest and the profits to the biggest. Our net result should be gains or profits in trading.
Always remember rule of 1% for risk management in stock trading. Rule of 1% means you will never risk more than 1% of your total trading capital in any trade. Stick to it even if you are very sure of your trade reaching the target.
Let us understand the rule of 1% with an example:
You have a trading capital of ₹ 100,000. You find a stock trading at ₹200. Stop loss for the trade you want to keep is at ₹195.
That means you can risk to loose only ₹ 5 per share in this stock. According to our rule of 1%, you should risk only ₹1000 out of ₹100000.
With a risk of ₹5 per stock and with total capital risk of ₹1000, you should buy only 1000/5 = 200 stocks. So, you are buying stocks of worth 200 x 200 = ₹40,000 and not total capital of ₹100,000 (500 stocks). In case, stock hits your stop loss, you will loose only ₹1000 and not 5 x 500 = ₹2500.
In your next trade, you can easily recover your loss of ₹1000 than ₹2500.
In stock trading, you need to take care of risks, returns will take care of themselves. If your stop loss is hit, exit the trade immediately and do not make it an ego issue that you can not go wrong. Market is always right.
If your trade starts moving in your favor, hold the stock and let the profits run with trailing stop losses. Take the profits by selling the stocks whenever you trading system gives you sell signal for your trading position.
Always remember ;
Money is made by selling the stocks and not buying the stocks.
So, sell your trading position immediately after your targets are hit or stop-loss is hit or your system gives you signal.
With such risk and trade management, you can still make profits even if you face a series of loosing trades. A big profitable trade can compensate multiple small losses.
This method helps you earn the compounding returns on your capital. With winning trades, your saving account keeps swelling and you incrementally keep on increasing your exposure while in losing trades, you again keep decreasing your exposure.
Quitting trading after bearing losses is not the right solution. Consider your losses as a tuition fee to learn trading in stock market.
In any profession, before start earning, first we study and invest for gaining knowledge. After years of hard work, we are able to earn our income. Then how can we start making money in stock market from day 1, without any knowledge and learning.
Educate yourself regularly, learn to manage the risks to your capital and make an appropriate strategy. Do all the preparation while market is close. Make your rules based on the knowledge you gain and stick to them. Correct your mistakes and be disciplined. Keep your approach professional.
Cut your losses short if a trade is not working as per your expectation. Plan a new trade. When the trade starts working, let the profits run using trailing stop losses and book profits timely.
Sticking to these ways with proper discipline, you would definitely recover you stock market losses incurred in earlier trades and turn your losses into profits.