Traders around the world usually unanimously agree that trading and investment is not a destination; instead, it is a journey. No matter how experienced an investor is he or she can never be sure of success. This is what makes the share market such an exciting place. At the same time, it does not mean that experience at the share market counts for nothing.
Experience counts for a lot when trading, especially when you learn from your mistakes. Hence, although a setback may seem like a major blow at the time, it is not the worst thing if you are learning from it. Many investors agree that they have learned a lot when they have experienced a loss or have been pushed to the corner. Many believe that blowing up a trading account can prove to be an essential learning curve that can eventually help investors eventually get better returns.
Blowing up a trading account, or taking the trading account to zero where the trader is unable to trade anymore, is not necessary for success, but at the same time, it has helped many successful traders learn vital lessons.
One of the first things that you need to know when you hit rock bottom at the trading market is to identify what went wrong. If you do not identify what wrong decisions you have made, then you would never be in a position to rectify your mistakes. If you have never experienced your trading account blowing up, then we have accumulated a list of things that can cause your trading-account to blow off. You will find out here what is trading account blow offs and what are the lessons that you could learn from it. These mistakes will ensure that you do not make the same mistakes, yet you will be able to learn from these mistakes and make more knowledgeable and smart decisions when trading.
Reasons that can Cause Blowing Up of a Trading Account
Trading without a Stop Loss
There are times in an investor’s life when they have the feeling that they have finally found the magic solution to success in trading. People would identify a particular trend that has worked for them a few times and believes that it always works that way. Many investors see the price hit the stop loss and come back to its original entry point or even move into profits. Based on this experience, the investors make up their mind that the next time the trade moves close to the stop loss, it would be wise to either remove the stop loss or move the stop loss further away from the entry. This is based on the assumption that the market would soon come back to the breakeven. This is a mistake that has the capability to destroy even the strongest of trading accounts completely.
It is thus needless to say that such a critical mistake should never be made by any investor, as disregarding the stop loss can cause a severe dent to the health of your trading account.
Excessive Focus on Potential Gains
Those people who believe that it is always better to see the glass full rather than the glass half empty must not have suffered at the share market because of excessive positivity. When you only concentrate on the positives and think that you are immune to losses, you tend to take excessive risks which may eventually cause your downfall. In such a situation there is a tendency to trade bigger than you would normally do. Such a mentality gives us the freedom to use more leverage without necessarily having more capital. You also tend to take bigger risks to attain your financial goals without worrying too much about the consequences of the losses that you could suffer.
Thus, it is perhaps a good idea to keep in mind the potential losses as well as the potential gains. This based on history, as no investor in the market, has never faced losses. So, this way you will ensure that when you do come face to face with a loss, you don’t end up losing everything. One good way to get the thing into your psyche is that if you risk 10% of your total capital, then it only gives you the leeway for ten mistakes. After just ten mistakes it could be all over. Whereas, if you only risk just 1% then even after ten mistakes you would still have 90% of your capital to play with. Hence, it not risking too much puts you in a much better position to stay in the market and earn back your losses than risking everything and in the process having nothing left.
Lessons that should be learned from Blowing up a Trading Account
Taking Greater for the Actions Taken
The first thing that a trader should take away from a failed investment is that they are not perfect and they made a mistake. One must take responsibility for the mistakes made and look to correct them. A little bit of self-introspection can go a long way to improving the gains. A careful analysis must be done to a solid foundation for the future. It is not necessary for the trader to investigate every small step that he or she may have made, rather an analysis of the overall behavior and temperament is enough to bring about a change in the results.
An example of identifying a problem and ironing it out can be taking a piece of advice about a methodology straightaway without testing it beforehand.
Risk Management Strategy
Another very important lesson that should be learned from a failure in the market is that even though a person may be absolutely correct, still it is possible to lose money. Thus, it is essential to have a risk and money management strategy in place. Having a secure strategy for risk management will mean that even in case of a loss, it does not have a crushing effect. This will thus ensure survival, which will give the chance of gaining back the losses.
Practice makes you perfect – this is an anecdote which holds true in almost every walk of life and so is the case when trading as well. Deliberate practice must be practiced not only for self-awareness but also to improve the ability to analyze. Regular and repetitive practice will ensure that an investor acclimatizes to the market at the earliest. It also helps the investor to build good trading habits while avoiding the habits that can cause losses. Hence, deliberate practice can make the difference when it comes to trading successfully.