Forex Trading- Recovering losses

Finding yourself all at sea in an ocean of losses can happen all too quickly.

A new trader friend, a successful businessman, wisely opened his first live Forex account with $1000. He had spent 6 months researching the market, and trialling different strategies at length on demo until finding a method that he believed consistently profitable. Within a month of going live, he had converted his $1000 into $4,200. This was quite an achievement, especially for a first “outing”.

A few weeks later, I ran into him again. Things were not going so well. His early success had given him a false sense of confidence. Believing he had the formula right, he started to take on greater levels of risk (larger position sizes) and in more volatile currencies (Yen pairs). When the losses began to kick in, he attempted to cover the losses as many new traders do, by increasing his position sizes further. He related that because it was just a mini-account, he found it difficult to treat it in the same way as he would a larger account, he felt more comfortable taking larger levels of risk because the actual money involved was not huge. It was unfortunately, just a few short weeks before his fantastic start had come completely undone. Blown account. Back to square one.

Being able to treat a mini account with the same respect and discipline you would a larger account is a necessary bridge to success.

Account Drawdown

The issue with drawdown is the compounding factor – and the subsequent level of profit the trader needs to generate in order to recoup the loss. This table illustrates why keeping drawdown as low as possible is so important.

Original Account Amount- Account Balance – % Loss – % Profit Required to Recoup

$1,000 $900 10% 11.1%



$800 20% 25.0%



$750 25% 33.3%



$600 40% 66.6%



$500 50% 100.0%



$250 75% 300.0%



$100 90% 900.0%



As shown on the chart, the drawdown problem compounds at a fierce, almost suffocating rate. The profit percentage required to recoup losses grows exponentially with each losing trade. When the account is deep in the red, recovery becomes extremely difficult. It is not however, mission impossible (although it may certainly look that way). It will take a much longer period of time (patience) and a very consistent string of positive trades to recover the losses.

The “Usual” Quick Fix

Once a trader begins to take losses, the first response is very often an attempt to fix the drawdown problem by taking higher levels of risk.

Let’s think for a moment about what this approach does. Backing our own judgement, we’ve had a few, usually quite a collection, of losing trades. So then, to fix the problem, backing our own (already proven dubious) judgement again, except this time, increasing (sometimes doubling) the stakes in order to fix the problem, we launch the next trade (this is usually where prayer comes in).

The “increase the stakes” approach to addressing drawdown is not trading, it’s gambling.

The Other Quick Fix

Another way that traders often seek to address drawdown is by re-funding the account with much higher amounts. Red numbers suddenly look much less red with a nice big green injection of fresh capital Sounds good, except, there’s a minor technical hitch. The skill needed to get it right this time (instead of wrong) has not yet been proven. Until it is proven – the trader’s ability to put one positive trade on the board after another, the outcome to re-funding much higher amounts will very likely be exactly the same, more and much greater losses. This is especially so if the “raise the stakes” gambling ethos is still at work in the trader’s mind.

The Right Fix

The objective with trading is not to make a truckload of money in a hurry. The objective is to put consistent positive runs on the board (regardless of size). Putting one foot in front of the other, and repeating the process so that your account continues moving forward, one step at a time, not back. Developing this skill needs to become the #1 focus of each and every trade, because it is this same skill that will both recover drawdown losses and put the trader on the road to long term success.

Re-funding a mini account with further small amounts may be a necessary and valid response (there is a limit to how low an account can go before it is not worth your while), just keep any re-funding amounts small not big. Once trading a mini account successfully, the mini can then become the seed capital for a larger account, or the trader can then add fresh larger capital amounts (because the proven track record required for success has already been laid down, the hard evidence of this being the profitable mini account).

Red numbers remind us of our failure. The emotional response to it is an urge to obliterate the evidence, to replace the confrontational nature of it with something more positive. Resist the temptation to take the easy way out. Use the red numbers and the urge it generates to motivate and train yourself in the skills you will need for the long haul. Learn to swim through the ocean to dry land, one stroke at a time.

Recovering losses occurs in exactly the same way it happened, but in reverse; it also happens in exactly the same way that your account will grow and remain solid into the future – one successful (disciplined) trade at a time.

Source: Jade Gate