The recovery trade: the one you open for your account, not for the market

Hi trader,

second piece in the series “The mistake I keep seeing”.

Last week we talked about the reflex break even, the cautious move that takes away your best trades.

Today it’s the turn of its nasty cousin.

The one that isn’t born from the fear of losing, but from the need to not have lost.

The scene

Stopped out.

Nothing unusual, it happens. The trade made sense, the market said no.

But it stings.

And while you stare at the red number, a harmless-sounding line starts playing in your head: “come on, I’ll win it back”.

You go back to the chart.

You’re not looking for a setup. You’re looking for an excuse.

And you always find one, because when you look with that kind of hunger the chart hands you ten.

You’re in.

A bit bigger than usual, “so I get it all back in one go”.

With the stop a bit wider, “I’ll let this one breathe”.

On a level that wouldn’t have convinced you with a cool head, “let’s give it a shot”.

And four minutes have passed since the last stop.

Why it feels like the right thing

This isn’t just about anger.

It’s about a way of keeping score that looks logical and isn’t.

When you take a stop, your head doesn’t log “I made a trade and lost”. It logs “I’m down today”. And an “I’m down today” wants to be closed out by the end of today.

The day turns into an account to settle.

The problem is that the day is a unit of measure you made up. The market doesn’t care whether you finish the session flat or in the red.

But you do, a lot.

Behavioural economists call it the break-even effect: after a loss, people tend to accept bets they would normally turn down, as long as those bets offer a chance to get back to even. Richard Thaler and Eric Johnson described it in 1990.

And it’s not just students in a lab.

Joshua Coval and Tyler Shumway studied the locals in the T-Bond futures at the CBOT in 1998, traders on their own account who did this for a living every single day. Those who reached midday with a loss tended to take on more risk in the afternoon, buying at higher prices and selling at lower prices than everyone else. And the prices set by those trades reversed faster than the ones set by traders operating with a clear head.

Professionals, on the floor, who made their living doing this.

So if it has happened to you, you’re not weird. You’re normal. Which doesn’t make it any cheaper.

The signature

I’ve already described the scene, but I want you to recognise it on yourself, not on some imaginary trader.

The recovery trade almost always carries these marks, and usually more than one shows up.

Size goes up. Not because the setup is better. Because the hole to fill is bigger.

The stop gets wider. You tell yourself it’s to give it room. Really, it’s because you couldn’t handle a second stop right now.

The level is weaker. You can tell from the words you use to justify it: “might”, “let’s give it a shot”, “it’s right there anyway”. Words that aren’t anywhere in your plan.

Time gets shorter. Between the last exit and the new entry, minutes go by, sometimes seconds. You haven’t redrawn the map: you’ve just jumped back in, in the same direction or the opposite one.

You watch the P/L, not the price. The question you ask yourself isn’t “where is it going?”. It’s “how much do I still need?”.

If you spot two of them together, you’re not trading.

You’re paying off a debt the market never asked you for.

Where the cost is

Let’s take it step by step, with round numbers.

Say you normally risk 100 euros per trade. You take a stop: minus 100.

You open the recovery trade with double the size and a stop 50% wider. Without noticing, you’re risking 300 euros.

If it goes wrong, you’re at minus 400.

Four normal losing trades, in two operations. And you picked the second one worse than the first.

But that’s not the real cost.

The worst case is when it works

This is the part people underestimate the most.

If the recovery trade goes wrong, at least it hurts. You feel it, you remember it, maybe next time you think twice.

If it works, though, it teaches you something false: that it works.

You took a stop, you jumped back in bigger, you closed flat or green. The day is saved. You almost feel good about yourself, because you “reacted”.

And your brain takes note.

Next time you take a stop, that road will already feel tried and tested.

And since it doesn’t always work, sooner or later the day comes when it goes wrong three times in a row, with the size growing every round. That day you don’t lose a day. You lose a month.

It’s like a driver who loses two places in the pit stop and, on the very next lap, goes for an impossible overtake under braking. Once it comes off, and it becomes the overtake of the century. The other nine times he ends up in the gravel, and that’s where he loses the championship, not in the pit stop.

The opposite mistake

While we’re at it, there’s a flip side here too.

After a stop, some people freeze. The good setup shows up, the real one, and they don’t take it because “today’s not my day”.

That’s not right either.

A sensible trade doesn’t become less sensible because the previous one lost. The market doesn’t know what you did half an hour ago.

The question isn’t “did I just lose?”.

It’s “would I have taken this trade even if the previous one had gone well?”.

If the answer is yes, it’s a trade. If the answer is no, it’s a recovery.

The eye-opening test

Ok, vamos. A small assignment, like last time.

For your next twenty trades, add two things to your journal.

1. Does this trade come after a loss? Yes or no. And if yes, how many minutes after.
2. Were size and stop the usual ones? Yes or no.

That’s it.

At the end, split the trades into two groups: the ones that came right after a loss and all the others. Compare the results.

If the first group shows bigger sizes, wider stops and a worse result, you don’t need me to tell you. Your own numbers are telling you.

For this kind of count, memory is the worst ally there is: of your recovery trades, you only remember the ones that saved your day. If you don’t have somewhere to log them, use the TradingBlog Diary: it’s free, it lets you note your emotional state on every trade too, and you look at the numbers instead of remembering them.

And if you recognise yourself more in tilt than in the single trade, that is when recovery trades turn into a streak, here’s the piece on revenge trading with the daily limit and the pause after a stop.

So what do you do?

I know, this time too you’d like the rule.

How many losses I allow myself in a day, and what I do when I hit that number, is another story. It’s part of how I build the whole session, and taken on its own it would be a number to copy without the rest.

For today, one thing is enough.

Next time you take a stop and your hand goes back to the mouse before you’ve finished breathing, stop for a second.

And ask yourself who you’re opening that trade for.

For the market, or for your account.

Suerte Amigo!

Tiziano Brunno

Tradingblog

Disclaimer: purely informational and educational content. It does not constitute financial advice or an invitation to trade. Trading involves the risk of capital loss.