If you have been trading for a while, you have probably been there. You have been thrown around in the markets, taking different directions over time, only to lose every time you put money into play. The average trader will have made the following mistake: getting angry about the way the market has “taken” their money and placing an even larger trade to get back what was lost. This almost never works and can lead to ruin. Guess what? This is how I blew my first account.
In this article, I will explore the idea of blowing up an account, and what to do next.
The quickest way to blow up an account is to be emotional about your trading. It isn’t a stretch to think about how losing money can cause a significant amount of anger, and therefore have people making risky trading decisions. In my past, I used to fall for this danger quite often. When I blew my first account, it was after losing money in the GBP/JPY pair, as it is so volatile. The market was chopping around as it can do at times, and I was trying to scalp smaller positions. However, I lost several times in a row, and in both directions.
As I got angry, I noticed that I had lost a significant amount of my trading account doing this. The reason for the significant losses was due to the high leverage I was using. As I kept destroying this account, I eventually felt as if the market “owed me.” I put on a huge position, at least in relative size of my account. The market broke out of the range it had been trading in, and it looked like I was about to make a ton of money. However, this move was based on a rumor that was very quickly disproven, and the market fell apart against me. At this point, I lost a lot of money as the return to stability took a while, and the sellers got a bit overaggressive. Because of this, I got a margin call.
There are few things out there that will crush your spirits like the markets can. The few moments after blowing up were very interesting as I look back. This was before a lot of the newer regulation came into place, so I was trading at 400 to 1 leverage. (I live in the United States.) The markets moving the way that they did made trading this situation very dangerous, and with that kind of leverage, it was always going to end up the same way.
I took this loss very personally. It is hard not to let it effect the way you think about yourself, as you question whether you can succeed as a trader. It also doesn’t help that you feel a bit stupid as well. The loss of money is a powerful driver of negative emotion, and I was certainly feeling it. I felt like I had done something extraordinarily stupid, and quite frankly, I had. After all, I had let greed get ahold of my thought process. This then lead to the feeling of loss and dismay. I had just ruined an entire account, and due to this I began to question whether I could succeed as a trader. I felt as if the market was unfairly targeting me, as ridiculous as that sounds. (Believe it or not, this is a common feeling in traders that have blown up or have taken horrific losses.) The average person tends to personalize their situation, and trading won’t be any different. Don’t believe me? All one must do is pay attention to how smart you feel after a particularly good trade goes to plan.
Once I had calmed down, the next thing I did was paper trade. This was probably the smart decision I ever made when it comes to trading, because I spent the next two months (roughly) trading the markets and paying attention to the thought process. It was around that time that I had also discovered my first mentor, a guy from Florida that opened my eyes to technical analysis, and relative strength, a hallmark of what I do these days.
Once I had a profitable few weeks in a row, I put money to work. However, this time I didn’t deposit everything I could into my account. Instead, my mentor suggested that I deposit something like $500 to start out with. This allowed me the ability to trade real money, but not so much that it was going to be detrimental to my financial future. Before I knew it, I was up a whopping $50, or 10%.
It was after a few months of trading small amounts of money in a consistent manner that I began to deposit more money into the account. By the time I was back up to a reasonable amount, I had established a longer track record of winning, something you should be doing to begin with. I know that there are plenty of people out there willing to tell you to demo trade profitably before putting money to work, but there is a reason that so many people say this – because it is true. It is something that I wish I would have paid attention to before my blow up, because it would have saved me a significant amount of money.
In the end, I suppose I could chalk it up to being an education, but that’s nonsense, as it doesn’t need to be that expensive. Any idiot can realize that if you can’t profit in a demo account, you certainly won’t profit in a real one. However, this idiot didn’t understand that, and it cost him quite a bit. There is something alluring about the possibility of making money that clouds the judgement of far too many of us in the trading world.