Most common mistakes traders make: Trying to bounce back

• Trying to bounce back from account drawdowns can create emotional imbalance, which reduces a trader’s ability to place trades based on rational decision-making.
• Natural biases arise, like the affect heuristic and the recency bias, affecting traders’ thoughts and actions.
• When decision-making gets influenced, what could be a small drawdown from a losing trade could turn into a gigantic hole in one’s trading account.

Trading inherently involves mistakes; even advanced algorithms make them, and so traders need to be aware of the different and common types of trading errors.

What truly distinguishes the top traders is their approach to recognizing and reacting to such errors, and transforming them into positive contributors to their trading.

In this final edition of the series, we explore the most common mistakes traders make and examine how emotions like fear and greed, along with other behavioral errors, often hinder traders from advancing.

The example we will explore is a very common misstep: Trying to bounce back from an account drawdown.

Losing money is, unfortunately, an inevitable part of trading.

Even if all fundamental and technical aspects align toward a specific outcome, the actual market flows may totally differ from the expected results. This creates frustration, as any well-thought-out trade could still result in a drawdown.

Many issues and biases arise when a trader cannot overcome the frustration that comes from losing trades, such as overtrading or failing to take losses on a position.

The issue that arises is that losses can change one’s perspective on the market and lead to detrimental behaviors and decision-making.

One of the most common mistakes a trader can make when their account falls in value is trading to recover losses. Let’s discover why.

A large part of our human mental predisposition requires equilibrium. It may be physical or emotional. Trying to bounce back from a drawdown tackles both.

Emotions tend to be costly in terms of mental energy. After a fun afternoon or weekend, it is common to feel some kind of blues, which arises from elevated mental activity slowly shutting down.

This is why anger, sadness, and happiness tend to “mean-revert” to a more neutral state as our nerves calm down over time.

This mental equilibrium is heavily disturbed when a trader observes their account regressing; hence, one of the most instinctive actions after a loss is to try to recoup the losses by trading, thereby bringing emotions back into balance.

The issue is that when traders make decisions based on emotions, they tend to overlook their system or even the entire trend right in front of them.

Psychological biases often arise when traders let emotions dictate their decisions. The ‘recency bias’ is a common trap where a trader believes that after a losing streak, a win is “due”, leading them to ignore the actual market action and trade solely based on the expectation of further success.

Similarly, the ‘affect heuristic’ occurs when immediate emotions — whether fear, excitement, or gut feelings — override a rational, well-thought-out trading process, causing decisions to be made on impulse rather than through analysis.

This could lead to poor-quality setups being taken and completely deviating from one’s game plan.

This can create two distinct scenarios. In the first instance, a trader might actually bounce back or win despite flawed reasoning, but this success is dangerous — it anchors bad habits. Since trading is not a one-time event but a long-run probability game, focusing solely on the "win" without evaluating the process is a recipe for disaster; one must always consider the implications of future losses when luck runs out.

This inevitably leads to the second, darker scenario: clouded by emotions, the trader fails to read the price action objectively, neglects their pre-defined risk management plan, and trades despite being in an emotional imbalance.

What starts as a relatively benign and manageable loss can then spiral into a catastrophic drawdown, wiping out a significant portion of their account in a single, avoidable event.

A trader’s best friend is their game plan. The best way to avoid the pitfall of trying to bounce back is to take your time and make sure your head is in the right place to trade:

• It could be a time rule, where a trader can get away from their screen to avoid taking impulsive decisions after realizing a loss. This could allow one to come back with a fresh mind, ready to make objective decisions and trades.
• It can also be a process-oriented decision-making approach (as opposed to a result-oriented one), where a trader focuses more on their mental state and decision-making process rather than their account position. Respecting risk management is natural when turning to such a solution, and taking a look at the numbers after the trading session can hence allow the trader to follow their game plan without being unsettled by numbers that could disrupt their behavior.
• A final solution can be to considerably reduce one’s size to limit the potential damage after a substantial drawdown. At least, frustration can be expressed naturally, but the account drawdown in case of further losses will be significantly reduced.

Attempting to recover losses can lead to a destructive cycle of emotional strain and escalating financial risk.

This pursuit, driven by a desire to recoup previous losses, shifts the focus from objective market analysis to an urgent, reactive approach. The emotional toll of this effort — stress, anxiety, and frustration — further impairs sound judgment, often resulting in deeper dollar losses and a reduction in trading capital.

The key to breaking this cycle is implementing a strict trading discipline and meticulous planning.

By adhering to a personalized game plan, respecting stop-loss limits, and managing position sizing, you can control emotional impulses, protect your capital, and ensure that future decisions are based on logic and market conditions, rather than the pressure to break even.