Building a Trading Recovery Plan

After a significant loss, the worst thing you can do is jump back in without a plan. The second worst thing? Creating a vague plan that you abandon the moment emotions flare up. A real recovery plan is specific, measurable, progressive, and — most importantly — enforceable.

This guide walks you through building a comprehensive recovery plan from scratch.

Why You Need a Written Plan

Trading without a plan is how you got here. Trading without a recovery plan is how you stay here — or make it worse.

A written plan serves multiple functions:

Decision outsourcing. When your emotional brain is screaming at you to double down, you can defer to the plan. The plan decides, not your feelings.

Progress tracking. Without defined milestones, you'll have no way to know if you're actually recovering or just treading water.

Accountability. A plan you can show to someone else creates external accountability that's much harder to override than internal commitments.

Phase 1: The Assessment (Days 1-3)

Before building forward, you need an honest look backward.

Quantitative Assessment

Pull your full trade history for the period leading up to and including the blowup. Calculate:

• Maximum drawdown: Peak-to-trough decline as a percentage
• Current equity vs. peak equity: Know exactly where you stand
• Average win vs. average loss: Were you cutting winners and letting losers run?
• Win rate before and during the blowup: How did performance change as emotions escalated?
• Trade frequency during the blowup: Did you overtrade?
• Largest single loss: Was one trade catastrophic, or was it death by a thousand cuts?

Behavioral Assessment

Answer honestly:

• What was your emotional state leading into the blowup?
• At what point did you deviate from your strategy?
• Did you increase position size after losses?
• Were you trading to recover losses rather than on genuine setups?
• Were external factors contributing (financial stress, personal issues, sleep)?
• Did you have written trading rules? Were you following them?

Root Cause Identification

Based on your assessment, identify 1-3 primary root causes. Common ones include:

• Absence of hard risk rules
• Revenge trading after initial loss
• Oversized positions relative to account
• Trading too many markets or strategies
• Emotional trading driven by external stress
• Overconfidence from a prior winning streak

Phase 2: Rule Design (Days 4-5)

Rules are the backbone of your recovery plan. Each rule must be:

• Specific: "Risk no more than 0.75% per trade" not "manage risk better"
• Measurable: You can objectively determine if you followed it or not
• Enforceable: Ideally automated or externally monitored

Core Rules (Non-Negotiable)

1. Daily loss limit: Maximum daily loss in dollars. When hit, stop trading. Suggested: 1.5-2% of current account equity.

1. Per-trade risk: Maximum risk per individual trade. Suggested: 0.5-1% of current equity during recovery.

1. Trade frequency: Maximum trades per day. This prevents overtrading spirals.

1. Position sizing: Fixed percentage of equity model, calculated on current (not peak) balance.

1. Cooling period: Mandatory waiting period after any loss exceeding your per-trade risk limit.

Guardrail Rules (Based on Your Root Causes)

If revenge trading was a factor:

• No trade within 15 minutes of a loss
• Mandatory trade journal entry before each new trade

If overtrading was a factor:

• Maximum of X trades per day
• No trading in the last hour of the session

If position sizing was a factor:

• Position sizing calculated by a spreadsheet or tool, not mental math
• No discretionary size adjustments

Phase 3: The 6-Week Schedule

Week 1: Paper Trading / Observation

• Trade your strategy on paper or simulator
• Focus exclusively on rule compliance, not P&L
• Success metric: 100% rule compliance across all trades
• Journal every trade with emotional state rating

Week 2: Micro-Sizing

• Trade with 25% of your normal position size
• Continue daily journaling
• Success metric: 100% rule compliance, positive or breakeven P&L
• If you violate any rule, stay in Week 2 for another week

Week 3: Small Size

• Increase to 50% of normal position size
• Continue daily journaling
• Success metric: 100% rule compliance for the full week
• Begin tracking weekly performance statistics

Week 4: Moderate Size

• Increase to 75% of normal position size
• Reduce journaling to end-of-day review
• Success metric: 100% rule compliance, consistent execution

Week 5: Near-Normal Size

• Increase to 90% of normal position size
• Begin transitioning to your standard routine
• Success metric: Consistent execution without feeling the need to override rules

Week 6: Full Size (Re-Entry)

• Return to 100% of normal position size (based on current equity)
• Normal trading routine with permanent rule monitoring
• Success metric: Completing the week with full rule compliance

The Reset Rule

If at any point during the 6 weeks you have a rule violation that results in a loss exceeding your daily limit, you reset to the beginning of your current phase. Two resets in a single phase, and you drop back one phase.

This sounds harsh. That's intentional. The cost of a reset is much less than the cost of another blowup.

Phase 4: Monitoring and Adaptation

Daily Checklist (5 Minutes)

Before each trading day:

• [ ] Reviewed yesterday's trades and journal
• [ ] Emotional state check: am I fit to trade today?
• [ ] Confirmed today's risk parameters (daily limit, per-trade risk)
• [ ] Market conditions assessment
• [ ] Recovery plan phase confirmed and limits set

Weekly Review (30 Minutes)

Each weekend:

• Total P&L for the week
• Number of trades taken vs. signals generated
• Rule violations (if any)
• Emotional highs and lows
• Adjustments for next week

Monthly Assessment

• Overall recovery progress
• Changes to risk parameters
• Strategy performance analysis
• Decision on phase progression

Common Recovery Plan Mistakes

1. Making it too complicated. A recovery plan with 50 rules is a plan you won't follow. Start with 5-7 core rules.

2. No enforcement mechanism. Rules without consequences are suggestions. Build in resets and accountability.

3. Skipping the paper trading phase. "I already know my strategy works" — maybe, but you need to prove you can follow it under stress.

4. Setting a time target instead of a process target. "I'll be back to full size in 4 weeks" leads to premature sizing up. Tie progression to rule compliance, not calendar dates.

5. Doing it alone. Share your plan with someone. Accountability dramatically increases follow-through.

Key Takeaways

• A recovery plan must be specific, measurable, progressive, and enforceable
• Start with a thorough assessment — you can't fix what you don't understand
• Design rules that address your specific root causes
• Follow a 6-week graduated schedule from paper trading to full size
• Build in resets for rule violations — no exceptions
• Review daily, weekly, and monthly to track progress
• Share your plan with an accountability partner

The best recovery plan is one you'll actually follow. Start simple, be honest, and commit to the process.