Recovering Losses in Forex Trading

  • June 12, 2023
Recovering losses in the forex market

The forex market is unforgiving, we know this. We’ve all, at one point or another, been at the mercy of the markets and taken fairly substantial losses in our trading accounts. When you’re in this position, it can be really hard to know how to actually recover the money in your account. Do you stop trading? Do you increase the risk to earn profits faster? Do you reduce the risk?  

In this article, we are going to look at exactly what you should be considering when starting to rebuild your forex trading account or funded account after a string of losing trades. Let’s get into it!

How To Recover Lost Money In Forex Trading

We’ve all faced draw-downs and losing streaks in the markets, but rarely do consistent traders end up losing larger percentages of their account than is within the norm. When these losing streaks come, emotions are flying and it’s often hard for inexperienced traders to keep calm and think logically. Half of your brain is telling you to withdraw all of your remaining funds and leave this game alone. The other half of your brain is telling you to earn this back as quickly as possible and use a Martingale strategy to increase your risk. The reality is, neither of these approaches are a good idea. With our funded trading accounts, we place a strong emphasis on risk management and sustainable trading – which is what we’ll dive into now…

Assessing Market Conditions

The first point of call is to assess the overall market conditions and sentiment. This can frequently be a cause of why traders are facing significant drawdown in the markets. For example, when COVID 19 news was breaking, you can see the drastic effects this had on the financial markets. Start by taking a look at the currency pairs you’re trading and see if there are any well known fundamental factors that could be affecting the price of these currencies. For example, outbreaks, wars, political unrest and many more. These factors don’t always cause prices to flow uncontrollably in one direction. In fact, often these will cause very choppy markets, unpredictable price action, and it’ll take numerous traders out of the market. If there are no fundamental factors associated with your losing streak, you’ll need to run through the options below.

Reduce Risk Exposure Per Trade

Risk exposure per trade is something that you need to heavily consider if you’re taking heavy drawdown in the markets. It’s something that needs to be really thought about before making any decisions, as it’s not as simple as it may seem. Firstly, you could reduce your risk. This will be better for your trading psychology and hopefully keep you further from breaching the drawdown rules of a prop firm funded accountHowever, by reducing your risk per trade, you’re also ensuring that it’ll take you longer to get back to breakeven. We would also recommend that traders use 0.25% – 0.5% as a maximum per trade, depending on their experience and strategy.  

Secondly, you could keep your risk per trade constant. This will be tough for you from a trading psychology perspective, as you know that each trade you lose from now on will dig you further in the hole you’re in. It’s human nature to want to pull back. However, by keeping your risk constant, you’ll be more accurately trading your strategy and be closer aligned to the true profitability of your trading strategy. If traders mess around with their risk per trade frequently, they can actually become unprofitable with a profitable strategy, believe it or not! 

Look At Your Back Test Data

If you’re in a drawdown without first conducting a thorough back test of your trading strategy, you might be in trouble! See, many traders are trading strategies that are literally unprofitable so regardless of how good of a setup they take, or their risk management capabilities, it won’t matter. For the context of recovering from a losing streak, let’s assume that you have already completed a back test and your trading strategy is profitable over 500+ trades. Your back test may show you that in 2019, for example, there were 15 losing trades in a row, and you would have incurred a 15% drawdown. It may be larger or smaller than this, of course, but you should have a number in mind of how many trades your system can lose in a row.

If you’re still within this maximum losses number, you’re fine! You know that the probabilities are on your side, and you need to continue trading the strategy as you were – things will most likely even out. If you’re breaching above the maximum number of losses that your trading plan has taken in a row over the last few years, you need to look at why this may be. Are you actually following the plan? Have you missed winning trades? Are you being too aggressive? Is your back test data accurate? It’s possible that the trading strategy is still profitable, you’re just seeing the largest drawdown to date!

Don’t Shoot For Home Run Trades

Traders can often get lost in hunting down home run trades. These are those gigantic trades you typically see on social media, with traders netting 1000+ pips and managing to ride a trade to a 1:20 risk to reward ratio, or something crazy! Many traders look at these trades and think, ‘one good trade will put me back at breakeven on this account’. Oftentimes, this may be true, but from a back test, you’ll understand that these home run style trades are few and far between. Some years, you won’t even see a single one! Typically, they’re a perfect combination of technical analysis and fundamental factors that play perfectly into your hands. When you’re in a drawdown and looking to claw back your lost capital, it’s important to chip away, slowly. You aren’t in a rush. You need to stick to your trading plan and lock in these small profits time and time again, with good risk management, rather than holding out and leaving a trade to run for much longer than your plan states!  

Many of our Elite Funded Traders take profits small and often, rather than making huge profits in a single trade.

In Conclusion – How Do You Recover Lost Money In Trading Accounts?

In summary, when you’re looking to recover lost money in the markets, you need to assess the market conditions. Look at potentially adjusting your risk exposure per trade, check your back test data to see if this is normal and chip away at your drawdown, rather than searching for home run trades. This is a sure fire way to help you hopefully trade your way out of your drawdown!

Are you looking to become a funded trader? Work with Lux Trading Firm now!