Every trader experiences this. It's not a question of 'if'. It's a question of 'when'. Downward spiral is basically having the wrong perspective and loosing a lot more than you intended continuously, thus psychologically and financially wrecking yourself. Example(my story): I quadrupled my secondary forex account in 4 days. I was on a winning streak. I was having large wins and very small losses. All of a sudden, I made a tiny mistake. I was caught on the wrong side and when I looked at the markets, I was down by a larger amount than my average losses. Since I wasn't psychologically accustomed to losses like this, I waited for the market to turn even when the system is screaming to dump the trade(mistake 1). Losses kept getting larger and larger until a "tipping point" where I realized that there's no turning around. I just lost half of my account. The next day, I re-entered my market with an intention to win my money back(mistake 2). Eventually I lost that too and was down by more than half of my account. In the end, I ended up where I began. THIS is a downward spiral. It's inevitable: Beginners have large downward spirals and professionals have smaller. It's inevitable. It's a part of trading. How to protect yourself: 1)The most important and the first step is to recognize that you're in the beginning stages of a downward spiral once your unrealized loss is bigger than your average losses. 2)Perspective shift: In my case, I have never really lost anything. I ended up where I began but psychologically I was beaten up into a pulp. I want to win my money back. This is the perspective shift. After a lot of winning, you are "accustomed" to a win. Taking losses gets infinitely harder. You need to always look at things in a broader perspective when you're caught up in short term psychological conflicts. In my case, i would have been just fine if I had sat down and analyzed the trade from a broader perspective (I was still up by more than 100% !!). I'm predicting that 100% of you reading this article will get into a downward spiral. You cannot escape from it. So, recognize it when it's at it's early stages and kill it before it becomes a big problem.
You're using the word "win", that's a mindset problem. You need to look at trades from a cold statistical standpoint. If you quadruple your account in 4 days then you're not really managing risk but gambling. Swings are normal but swings that size mean that your blowup is inevitable.
yes. I mentioned it "secondary account" Was trying different techniques to improve small accounts with out-of-the-box strategies. Learned a lot already
2 critical lessons here. #1. Though some say you should trade without stops, you've just seen why that notion is folly. #2. You have to be ever vigilant about a market "change". It will often/eventually (depending on your time frame for trades) change enough so that what you were doing when you were winning will will become wrong. Of course I'm not sure that's exactly what happened in your case here... market "shifted" and you didn't catch it quickly enough.... or perhaps you got greedy or a little careless. All kinds of ways for the market to take your money. Classic example... we all know about "BTFD". I know of a case in the tech wreck back in ~2000 where an adviser kept BTFD in the Rydex leveraged NDX fund. It eventually lost 97.5% of its value from its high... so regardless of where he BTFD, he lost... BIG. Wiped out his clients accounts and his own. Said it wrecked his life. Not an isolated story unfortunately.
Stops are the absolute worse psycho fix for a bad strategy often forcing a retreating trader to sell at the bottom or buy at the top. I don't know what BTFD is, but an unrealized loss of 97.5% on a position which is maxed out at 25% of your account is then only a 25% loss. Large bets on one sided positions are usually an indicator of unrealistic expectations.
However, if forex markets are being traded then stops are absolutely necessary as these markets can more faster than you can move the computer mouse.
Large moves down to a fader, whether it be a fundamental bargain hunting value investor or a gambling buy low sell high speculator present 3 opportunities and a 4th scenario. 1. enter new long 2. add to existing long whether it is sitting on an unrealized profit or loss 3. exit old short either at a profit or a loss and 4. do nothing and enjoy existing short move in your favor or endure old long move against you no fast mouse needed if limits are already in place. Limits are superior to stops and trailing limits are superior to trailing stops. Of course, any method is dependent on diversification so no one move can destroy you. The psycho trauma comes in when all diversified positions are moving against you simultaneously. Not so bad if you are independent but put me in the psycho ward once when it was OPM. (It was the fear of explaining that finally got me.)
I think that the start of any downward spiral is a trade not wanting to accept that the losses are part of trading and that they are still learning. Once you realise that and believe it. There is much less pressure when a trade goes against you or closes at a loss
Taking losses is job #1. Never meet any trader's that went broke from cutting their losses. I use a bracket order. With some experience you will get good at placing stops so that it is not in an area with clustered orders were stop gunners are going to try to pick off. 9 out of 10 times my stop did protect me from taking larger loses. If my stop is hit and price reverses I can always get back in.