Active trading in the stock market can provide you with the potential for huge returns. That being said, you won’t be able to make profits without putting any money at risk. A lot of new traders tend to focus on their profit potential instead of thinking about their downside. With great risk comes great reward, but you should never forget about the possibility of a loss. One of the worst things that can happen is when a trader “blows up” their trading account. This occurs when a trader has lost all of their initial capital that was deposited into their account.
Blowing up an account is more common than you might think for traders. The truth is that most successful traders have blown up an account or two before achieving success. It can be demoralizing, frustrating, and flat out depressing to experience huge losses in your trading account. Making money in the market, particularly with day trading, is going to require accepting a few losses. The good news is that can avoid blowing up your account if you learn proper risk management strategies and create a set of rules that you will always follow. We want you to avoid blowing up your trading account at all costs, which is why we’ve put together a list of 4 ways to avoid doing so below.
- Focus on Risk Management
One of the most important concepts to focus on as a trader, regardless of your experience level, is risk management. What tends to happen to a lot of new traders is that they skip this all-important step and take on a lot more risk than they should. This can lead them towards a downward spiral of making mistakes like revenge trading in order to make up for sharp losses. Before you make any trade, you need to determine your downside risk and how much you are alright with losing. Experienced traders usually try to keep their risk to within 1-5% of their total account value on a single trade. That means that your account value will never experience massive downswings based on the results of a single trade. Sure, it is possible that you still blow up your account even with proper risk management techniques, but it will be a gradual and slow loss instead of quick and massive losses.
- Be Patient with Your Progress
We are currently living in an age that is dominated by technology. One of the side effects of having instant access to the internet and unlimited information is that we tend to expect results immediately. This mindset can be detrimental to your trading and lead to you blowing up your account if you aren’t careful. If you are expecting to get rich quickly from trading, the market will humble you sooner rather than later. Swinging for the fences with a trade is an easy way to suffer crippling losses in your account. The key to trading success is developing a consistent routine and strategy that works for you. Trading is a marathon, not a sprint. If you really want to avoid blowing up your account, you have to be alright with patiently awaiting results.
- Keep a Trade Journal
Many traders that continuously suffer big losses do so because they never learn what is going wrong. They routinely make the same errors over and over again and take their account value right to zero. That’s why keeping a trading journal is so important. The idea is to track every single one of your trades in a journal so that you can make improvements and analyze your mistakes. Only then will you be able to make actionable adjustments to your strategy and game plan. Even if you do end up blowing up your trading account, if you kept up with a trading journal, you can learn from your mistakes and avoid doing it again.
- Don’t Start Trading Too Soon
The last tip to avoid blowing up your trading account is to make sure you are confident and have a lot of practice before you start trading with your actual money. Trading, and particularly day trading, takes a lot of training and experience to master. If you are new to trading, make sure you are paper trading and working hard to learn as much as possible before you make your first trade. The more you can educate yourself ahead of trading, the better the chances are that you will avoid account blow-ups.
With these suggestions in mind, you will be much better suited for avoiding massive losses and blowing up your trading account. Remember that consistently increasing your trading account value is a slow and steady process, while blowing up your account will often happen a lot faster than you think.