History is full of people who have lost a fortune in the financial market. For example, in 2018, it was widely reported about a Barclays trader who lost about $19 million trading Turkish bonds. A few years ago, some German speculators lost more than $1.9 billion in the oil market.
Sadly, these are the stories we know. In reality, millions of traders blow up their accounts balances every year.
Indeed, recent statistics have placed the percentage of traders who lose money at more than 70%. In this report, we will look at some of the key tips on how to blow up your trading account.
Table of Contents
What does blow your trading account mean?
Blowing up an account means losing your money when trading. For example, if your account has $10,000 and a single or several trades leads to substantial losses, it means that you have blown up your account. The process can happen within a long period or within a few minutes.
At the same time, it can happen to both retail and institutional investors. In the past, we have heard many well-known hedge fund managers and institutional investors blow their accounts. A good example of this is Bill Hwang, a hedge fund manager who lost more than $20 billion in three days in 2021.
Related » How to recover your blown account
Strategies to avoid a blow up
Paper trading
A common mistake that most people do is to start trading as soon as they see an online trading advert. They start trading without taking time to learn about the market and how trading works.
This is a terrible mistake!
Instead, you should first do what is known as paper trading or using a demo account. This is a process where you use a trading platform that is provided by a company.
The platform gives you access to all the tools you need to trade, including live data. If you are a beginner, you should develop your trading strategy (here are some suggestions of four evergreen strategies) using a paper trading account.
Indeed, experts recommend spending at least 3 months on a paper trading account before you start trading with your real money.
Related » 10 Handy Tips to Practice Day Trading!
Risk management
Another common mistake that most people do is to avoid the concept of risk management. In simple terms, this is the process of ensuring that you are not risking all of your money on a single trade (so.. no yolo trades!). It also ensures that you are not exposing yourself in assets that you don’t know well about.
There are several important risk management strategies you can use. The most important are:
- Leverage – While leverage can help boost your profits, too much of it is dangerous, especially if you are a new trader.
- Stop loss – No matter how certain a trade set-up looks, there is always a risk that it will not work out well. Therefore, ensure that you protect your trades with a stop loss. Better still, use a trailing stop loss to protect your account.
- Trade what you know – If you are a specialised forex trader, we recommend that you focus on it. Similarly, if you are a stocks trader, focus on stocks that you know.
- Don’t overtrade – A common reason why many people blow up their accounts is that they overtrade. You can reduce this risk by putting more efforts on what works.
- Lot sizes – The volume of your trades is very important. We recommend that you use limited volumes especially if you are a new trader.
Role of volume
A common mistake that has cost people a lot of money is volume. Volume refers to the amount of money that is being traded in an asset. As a trader, you should always check out the volume before you initiate a trade.
For example, a stock of a company can jump by more than 10% in premarket trading. If this upward move is not backed by volume, there is a likelihood that a reversal will happen. Similarly, your most popular technical analysis tools may show a bullish signal. But, you will likely lose money if this trend is not backed by volume.
There are several tools that can help you understand the volume in the market. Some of the most popular volume indicators are accumulation and distribution, money flow index, and on-balance volume.
By using these indicators, you can understand howc money is flowing in and out of stocks and then interpret it.
Psychology/emotions
Trading is a difficult thing. As such, you want to give it your all if you are to succeed. A common reason why many people blow their accounts is that they trade when their emotions are not ready.
For example, they start trading immediately they have a big loss. When this happens, it increases their likelihood of making a loss. Similarly, when you trade when you are under pressure, it could affect your results.
Some emotions are really harmful, and could destroy your account. For example, if you can’t control your emotions when you lose money, you should work on how to improve it.
Without this, you will often find yourself opening a trade in the opposite direction hoping to recoup your losses (yeah, we are talking about revenge trading). Similarly, if you get overexcited about small wins, you can lose money because of overtrading.
Final thoughts
It is easy to blow out your trading account. Indeed, experienced and novice traders do it all the time. Still, we believe that these tips can help you reduce your risks and maximise returns. Other things that will help you in this are taking profits early and avoiding overnight risks.
External useful resources
- 4 Steps to Bounce Back After Blowing Up Your Account – Babypips
