The Ten Commandments to Avoid Blowing Up Your Trading Account
Limit Your Trades: Restrict yourself to a maximum of two or three trades per day for instance, spaced at least three hours apart. This discipline helps prevent impulsive decisions, such as trading against a new trend without realizing it, and allows you to maintain a clear market perspective. Giving your trades time to breathe offers the opportunity to reassess the market and ensures you don’t miss key news or speeches that explain the situation.
Avoid Revenge Trading: After a loss, the temptation to recover immediately is strong. This impulse can lead to costly mistakes and a vicious cycle of losses.
Prioritize Capital Growth: Avoid taking risky positions by increasing the percentage of the position, even if they seem obvious. The “trade of the century” doesn’t exist; it’s often the one that ruins you. Each trade should be thoughtful and aligned with your overall strategy.
Respect Your Stop-Losses: Never move a stop-loss if the market turns against you. Accept losses as part of trading and protect your capital. If you move your stop to avoid liquidation, you’ve opened a door you won’t be able to close; you’ll continue doing it until you find yourself with a 100% loss instead of 1%.
Manage Winning Positions: When in a winning position, consider cutting 50% to secure a break-even point in case of a market reversal. This approach significantly reduces stress and secures part of your gains or compensates in advance for potential losses.
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Choose Entry and Exit Points Carefully: Base your decisions on key levels or divergence signals. Avoid trading on unfounded impulses.
Ban Martingale and Casino-Style Trading: Avoid strategies that involve increasing stakes after a loss in hopes of recovering previous losses. This approach is risky and often counterproductive; in a few trades, your risk can escalate from 1% to 100% even before the market turns in your favor.
Manage Your Emotions: Trading is a marathon, not a sprint. Don’t let panic or euphoria influence your decisions. Stay calm and rational, even after a series of losses.
Avoid the Vicious Cycle of Debt: Don’t go into debt to finance your trades. This can lead to excessive pressure and hasty decisions. Also, don’t trade to solve financial problems or emergencies; you’ll worsen your situation.
Accept That the Market Isn’t Always Favorable: Don’t fall into paranoia, thinking that the market, the “big players,” and the “whales” are playing tricks on you. Even if manipulation exists, trading is about probabilities and risk management.
The Analogy with Poker
While trading shouldn’t be equated with gambling, it shares similarities with poker. When playing without money, there’s a tendency to bet on weak hands and bluff frequently. However, professional players, when playing with real money, bet primarily on hands with a high probability of winning. Similarly, in trading, beginners may take reckless risks on demo accounts, but once on a real account, it’s crucial to focus on opportunities with high gain potential and manage risks strictly
Anecdotes of Notable Traders
The history of trading is filled with examples of traders who suffered colossal losses due to impulsive decisions or risky strategies. For instance, Nick Leeson, a trader at Barings Bank, caused the institution’s collapse by accumulating losses of $1.3 billion after risky bets on the Asian market. Similarly, Jérôme Kerviel of Société Générale incurred losses of $7.1 billion by taking unauthorized positions on European markets. These examples illustrate the devastating consequences of a lack of discipline and risk management in trading.
Moreover, a study by the Securities and Exchange Board of India (SEBI) revealed that between 2021 and 2024, 91.1% of retail traders in derivatives experienced losses totaling 524 billion rupees (approximately $6.3 billion), while only 7.2% made profits.
These statistics highlight the importance of discipline, education, and rigorous risk management to avoid becoming part of the majority who lose money in trading.
By applying these ten commandments and adopting a disciplined approach, you’ll increase your chances of success in trading and grow your capital over the long term.
