How Traders bust their trading account ?

By | January 20, 2018

Shared by Raj

Taking excessive risk in relation to their trading account.

When you take excessive risk in relation to your trading account, you are creating a higher level of mental engagement and stress, which impacts upon your decision making. The financial swings of each price movement are so great that they release adrenaline into your system, and whilst this trading may be exciting, the end-result is that often the trader snatches profits as soon as they can to avoid large swings into negative P&L territory, or if they are already in that
territory they hang on and hope that the market comes back to avoid them having to take a big loss.

 

Not Placing the Right Stoploss wrt to Trading Capital

Placing stops at levels where the financial cost of executing the stop is not comfortable. If you are only comfortable losing Rs 10,000 on a trade, and a stop puts you in a situation where the loss would be Rs 20,000, what do you think will happen?

It is going to be difficult to take a loss that you are not comfortable with! As a part of your trading strategy, you need to consider where your stop needs to be from a strategic perspective, but also from a financial and psychological viewpoint. The challenge is to then size your position to allow each perspective’s goals to be achieved.

 

Not fully accepting losses as a part of trading.

At a deep level you have to internalise that taking a loss is a natural part of trading, and get to the level where the thought of a loss itself is not an issue for you. Mark Douglas in Trading in the Zone suggests that until a trader gets to this stage he will not be able to truly enter the zone state or trade to his potential.

Not having stops or profit targets in the first place.

This makes defining where to get out difficult and more discretionary. So on the downside it is easy to keep moving the stop as price moves, after all ‘it could come back!’, and on the upside you have no idea where price may go so any tick above zero is potentially a profit taking opportunity. Of course different traders have different styles and the use of stops and targets is a much talked about topic and there is no one solution. However, from a risk and money management perspective, and from a psychological viewpoint, they can be very useful.

 

Trading when you need to make money.

Desperation is one of the most destructive states that you can trade in. I have, unfortunately, seen many traders lose their trading accounts due to trading in this mindset. When a trader is desperate to make money any time a trade ticks into profit becomes a chance to bank something, and so profits are cut short. Every time a trade moves offside and towards their stop, the trader cannot mentally afford to take that loss, so they often hang on, hoping and wishing for the market to
come back and save them.

2 thoughts on “How Traders bust their trading account ?

  1. Sudakaran Sokkaingam

    Nice article.I thank for reminding Mark Douglas author of ” Trading in the zone.” Every trader should read it.

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