The Dangerous Math of "Making Up" for Losses

Your position just closed for a $1,200 loss. It happens, you sold a cash-secured put, took assignment at what you thought was a reasonable strike, and the stock kept dropping. Now you're out of the trade, and that $1,200 feels like a hole that needs filling.

The thought arrives almost immediately: "I need to make that back."

This single sentence, this seemingly reasonable response to a loss, is where more trading capital gets destroyed than in the original losing trade itself. It's the psychological trap that turns a manageable setback into a cascading disaster, and it's one of the most common ways experienced traders sabotage themselves.

Let me show you why this instinct is so dangerous, and more importantly, what to do instead.

The Fallacy of "Getting Back to Even"

Here's the core problem: when you shift your focus from executing your strategy to recovering a specific dollar amount, you've fundamentally changed what you're doing. You're no longer trading based on probability and edge. You're trading based on emotion and narrative.

The market doesn't care that you lost $1,200. It doesn't owe you anything. There's no cosmic ledger that needs balancing. But your brain desperately wants to believe otherwise, because humans are wired to seek closure and resolve emotional discomfort.

This is called the "break-even effect" in behavioral finance, and the research is clear: traders who've recently experienced losses take significantly larger risks in subsequent trades compared to their baseline behavior. A 2018 study tracking retail options traders found that after a loss exceeding 10% of account value, average position size increased by 40% in the following week. Win rates during that period dropped by 12%.

Translation: traders tried to make it back, sized up their bets, and made things worse.

The Math That Makes It Worse

Let's walk through the actual numbers, because this is where the trap becomes visible.

Say you have a $50,000 account. You lose $1,200 on a trade. That's a 2.4% loss. Painful, but manageable, well within normal variance for options trading.

Now your account is at $48,800. To get back to $50,000, you need to make up $1,200. But here's what your brain misses: that $1,200 isn't a 2.4% gain anymore. It's a 2.46% gain on your current balance.

The percentages matter because your risk calculations should be based on your current capital, not your former capital. If you were risking 5% per trade before, that's $2,500 on a $50,000 account. After the loss, 5% of $48,800 is $2,440. You have less capital, so you should be deploying less capital.

But what actually happens? You size up. You convince yourself that you need to deploy more capital to make back what you lost. Maybe you risk $3,000 or $3,500 on the next trade instead of $2,440. You've just increased your risk from 5% to 7% of your remaining capital, right when you're most vulnerable.

If that trade loses too, you're not down 2.4% anymore. You're down 9.5%. And the hole gets deeper.

The Revenge Trade Pattern

This pattern has a name in trading psychology: revenge trading. It follows a predictable sequence that I've watched play out hundreds of times over two decades.

Stage one: The initial loss. This could be from anything, a directional bet that didn't work, a credit spread that got tested, a covered call where the stock tanked. The loss itself isn't the problem. Losses are part of trading. They're expenses, like rent or electricity for a business.

Stage two: The emotional response. Frustration. Anger. A feeling of being "behind" or "down" for the month. Your mental accounting kicks in, and you start thinking about your P&L relative to where it "should be" rather than where it is.

Stage three: The strategy deviation. This is the critical moment. Instead of executing your next trade according to your system, same strategy, same position size, same risk parameters, you modify something. Maybe you sell a put closer to the money to collect more premium. Maybe you buy a weekly call instead of selling a monthly spread. Maybe you double your usual position size "just this once."

Stage four: The rationalization. You tell yourself this isn't emotional. You've done your analysis. This is a high-probability setup. The risk-reward is favorable. But here's the tell: if this exact setup had appeared before your loss, would you have taken it with the same position size? Usually, the answer is no.

Stage five: The outcome. Sometimes you win, and the relief is enormous. You've "made it back." But you've also just reinforced a dangerous pattern. Your brain now associates increased risk after losses with positive outcomes, making you more likely to repeat the pattern.

More often, you lose again. And now you're in a deeper hole with even more emotional attachment to getting back to even.

What Your System Would Tell You

Let's contrast that sequence with what a systematic approach would look like.

You take the $1,200 loss. Before you do anything else, you record it in your trading log. Strategy: cash-secured put. Capital deployed: $8,000. Outcome: -$1,200. Return on capital: -15%.

Then you calculate your account balance: $48,800. You update your position sizing: 5% is now $2,440 per position.

Next, you review your system. If you're running the Wheel, your system says: look for stocks on your watchlist trading at technical support with reasonable premium. Sell puts 30 to 45 days out at your predetermined delta. If you're running credit spreads, your system says: scan for high implied volatility, sell spreads at your usual strikes, take profit at 50%.

Notice what's absent from this process: any reference to the $1,200. Any desire to "make it back." Any modification to your strategy or position sizing based on previous outcomes.

Your system doesn't care about your last trade. It only cares about the current opportunity and whether it meets your criteria. This is the fundamental discipline that separates sustainable trading from gambling.

The Correct Question After a Loss

When you close a losing position, there's only one question worth asking: "Was this trade consistent with my strategy and position sizing rules?"

If the answer is yes, you did nothing wrong. The trade was a legitimate execution of your edge, and edge manifests over many occurrences, not individual trades. You file it in your log, learn whatever lesson is available (maybe your stop loss needs adjustment, maybe there's a technical pattern to avoid), and move on.

If the answer is no, you have a different problem. You deviated from your system, and now you need to understand why. Was it FOMO? Boredom? Overconfidence? This is worth examining because these deviations are where real damage happens over time.

But in neither case is the correct response to change your next trade to compensate for the loss. Your next trade should be completely independent of your previous trade, evaluated solely on its own probability and potential return relative to your system's criteria.

Position Sizing as Insurance Against Yourself

This is where proper position sizing reveals its true value. It's not just about limiting market risk. It's about limiting psychological risk.

When you risk 5% or less per position, no single loss can trigger the revenge trading cascade. A $1,200 loss on a $50,000 account is noticeable but not devastating. You don't feel desperate. You don't feel like you need to "do something" to fix it. You can absorb the loss, process whatever lesson exists, and execute your next trade without emotional baggage.

Compare that to risking 15% or 20% per trade. Now a single loss is $7,500 or $10,000. That hurts. That changes your month. That triggers all the emotional machinery that leads to poor decisions.

I'll tell you what I've told every trader I've mentored: your position sizing should be boring. It should feel too conservative when you're winning. That's how you know it's right, because the real test comes when you're losing.

The Compounding Truth

Here's a perspective that helps: compounding doesn't require home runs. It requires consistency and survival.

A trader who generates 2% monthly returns with occasional 2% losses, properly managed, will dramatically outperform a trader who swings between 8% gains and 10% losses while trying to "make it back" each time.

The first trader might look boring month to month. No dramatic recoveries. No exciting comeback stories. Just systematic execution, position after position, with the occasional loss absorbed into the process.

The second trader has better stories. They'll tell you about the time they were down $10,000 and made it all back in three days with a perfect directional play. What they won't tell you about are all the times they tried the same recovery attempt and dug the hole deeper.

After 23 years, I can tell you which trader is still around.

A Framework for Your Next Loss

You will take more losses. That's certain. Options trading, even done well, involves losses. The question is how you respond.

Here's a practical framework:

First, close your platform. Give yourself 30 minutes to feel whatever you feel. Frustration is natural. Disappointment is fine. Just don't act on it immediately.

Second, log the trade. Force yourself to record the details dispassionately. Numbers only. This creates psychological distance between the emotion and the next decision.

Third, recalculate your position sizing. Update your account balance and your maximum risk per trade. This is mechanical, not discretionary.

Fourth, return to your watchlist and criteria. Evaluate opportunities exactly as you would if the previous trade had never happened. If nothing meets your criteria, you don't trade. If something does, you execute according to your rules with your recalculated position size.

Finally, zoom out. Look at your last 20 trades. What's your win rate? What's your average return per trade? Are you profitable overall? If yes, this loss is just variance. If no, you have a system problem that won't be solved by sizing up your next trade.

The Invisible Skill

The best traders I know have a skill that's invisible to outsiders: they treat every trade as independent of previous trades. They don't carry emotional baggage forward. They don't trade to restore their ego or balance their mental ledger.

This isn't natural. Humans are story-creating machines, and we desperately want our trading to follow a narrative arc with setbacks and comebacks. But markets don't care about your narrative.

The skill is learned through discipline and repetition. Every time you feel the urge to "make it back," you pause. You acknowledge the feeling. And then you execute your system anyway, with no modifications, no size increases, no strategy deviations.

Over time, this response becomes automatic. Losses stop triggering the emotional cascade. They become data points, feedback from the market, expenses in your trading business.

When you reach that state, you've solved one of the hardest problems in trading: yourself.

Your Only Job

Your job isn't to make back what you lost. Your job is to execute your edge repeatedly over time with consistent position sizing. If you do that, probability takes care of the rest.

Some months you'll be up. Some months you'll be down. Over years, if your strategy has a genuine edge, you'll be profitable. But you'll never reach those years if you blow up your account trying to make back a single loss.

The next time you close a losing trade and feel that urge to "make it up," remember: the market doesn't know you lost $1,200. It doesn't care. It's offering you the same opportunities it offers everyone else, nothing more, nothing less.

Take those opportunities according to your system, or don't take them at all. But don't take them because you're trying to balance an emotional ledger that only exists in your head.

That $1,200 is gone. The only question that matters is: what's your next high-probability trade according to your system?

Answer that question with discipline and consistency, and your P&L will take care of itself.

Probabilities over predictions,

Andy Crowder

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Disclaimer: This is educational content only. Not investment, tax, or legal advice. Options involve risk and aren't suitable for all investors. Examples are illustrative. Real results will vary. Talk to professionals before you risk real money.