How To NOT Blow Up Your Trading Account

By Nial Fuller   Posted in Forex Trading Blog

So, you’ve been studying the markets for two years now, you’ve read all the books, taken numerous home-study courses and even attended a trading seminar, your demo trading results seemed pretty good, then you went live and lost 50% of your account in two weeks. You decided to go back to the drawing board and learn a different system, because you figured it must be your trading system’s fault that you lost all that money so fast; you just need to find the ‘perfect’ trading system…

Sound familiar? For many traders, this story is all too familiar. The majority of the people who come into the markets end up blowing up their trading account at some point, and many traders blow it up multiple times. Trading can almost seem “rigged” at times, because it seems so easy and effortless when your demo trading or when you’re not in the market and you’re just observing. But, the minute you enter the market with real money it seems like the whole game changes and someone changes all the rules to keep you from making money. I know it seems that way, I’ve felt like this before too, every trader goes through the same trials and tribulations while learning how to trade successfully. Some give up, some never change and just continue losing money without trying to make a real change in their trading habits, and some traders push through to the other side and become consistently profitable. In today’s lesson, we are going to discuss how you can become one of the profitable traders and how you can stop blowing up your trading account.

The typical journey of a Forex trader…

There are different stages in the journey of learning how to trade the markets. The stages consist of approximately the same elements and traders tend to progress through these stages in a similar sequence. Some traders progress through each stage quickly whilst some get stuck in one stage for months or even years. Let’s take a look at the 6 general stages of a Forex trader…

Stage 1:

Problem - You hear about Forex trading from a family member, a friend, a colleague, a T.V. commercial, the internet etc. It seems like a legitimate and exciting way to make money. You get dollar signs in your eyes and dreams in your head. You can’t wait to learn all about trading so that you can tell your boss to “shove it” and live the life you’ve always wanted. Case in point, you’re interest switch has been turned on and your gas tank is full of rocket fuel…you are chomping at the bit to absorb everything you can about trading, open an account and watch the money pile up.
Solution – While there’s nothing wrong with being excited and interested in the potential lifestyle to be lived by being a full-time Forex trader. You should be cautiously optimistic at this stage rather than planning to put all your eggs in the Forex trading basket and dreaming of life styles of the rich and famous. Trading is anything but a ‘get rich quick scheme’; it takes discipline, dedication, organization, logic, and patience, if you think it’s a way to some ‘fast and easy’ money, then you’d better think again. If you want to build a sustainable Forex trading career you’ve got to be realistic and understand from the beginning that developing the proper trading habits is what determines whether you become a successful Forex trader or fall to the wayside like most traders.

Stage 2:

Problem - You start doing some research on the internet, Googling everything you can think of regarding Forex trading. There are a lot of different options for trading systems, trading strategies, trading software, trading courses, seminars, and the like. You decide to learn the basics of Forex by taking a good free forex beginners course like mine or another. After this, everything is making sense to you, you are excited about the opportunity in Forex and now you just need to decide on what trading strategy you will use. After a lot of research and thought, you finally decide on a trading method that you feel confident will help you trade the market successfully. The problem with this stage is that many traders start out by learning a trading system or strategy that’s far too complicated. They’ve got Elliot Waves, MACD’s, Stochastics, expert advisors, and other indicators plastered all over their charts. These things are not conducive to developing and trading from a relaxed and confident Forex trading mindset.
Solution – Instead of learning about a million different indicators or purchasing expensive trading software, you should begin by learning how to trade off the raw price action of the market. I’m not only saying this because I teach price action trading, but also because you really do need to know how to read the raw price action of a market, no matter what trading method you eventually end up using. I suggest you stick with pure price action trading strategies, like the ones I teach and trade, but whatever method you end up using, you will trade it better by understanding the price dynamics occurring on the chart below it.

Stage 3:

Problem - Whilst the first two stages discussed above are pretty consistent amongst most traders, stage 3 is where traders’ paths might diverge. At this point, most traders are trying to learn a trading system, a trading strategy, they’ve purchased a Forex trading robot or they are trying to trade with a bunch of different indicators. Most traders tend to demo trade for very little time, if any, on their first attempt at learning to trade. It seems to be human nature to want to jump into the markets as soon as possible and start risking our hard-earned money.
So, at stage 3 most traders have spent a little (too little) time learning some trading method and then after they see one or two instances of it working out they open a  live account and begin trading with real money. Typically, traders make stupid trading mistakes like entering the wrong lot size or buying when they wanted to sell, etc. These are mistakes that are the result of not taking the time to properly learn about your trading platform and how it works. In stage 3, traders typically blow out their first trading account, or lose such a large portion of it that they take a break from trading for a while, at least until they learn another trading system. (Note, some traders do avoid ever blowing out a trading account, and it’s typically because at this stage they begin trading with proper trading habits and they never waver, they stay on track and don’t give into the temptations of trading like a gambler).
Solution – Whatever system or strategy you decide to start learning how to trade from, BE SURE TO DEMO TRADE IT FIRST. Many traders seem to think they don’t need to demo trade, or they don’t do it for long enough. You need at least one or two months of demo trading the exact same strategy or system you are planning on trading live with, if you don’t do this you’re a fool. Remember, this is your hard-earned money you’re risking, waiting two or three months to start trading with it is not going to hurt you, especially if you consider that doing so will allow you to become more familiar and confident with your trading method, which will ultimately cause you to trade much more effectively.  Demo trading your trading strategy and the trading plan you’ve built from it, will increase your odds of not blowing out your trading account dramatically.
Most of the time, traders blow out their first account by getting too excited and too anxious; they skip demo trading, they have a mediocre grasp on their trading method, and let’s face it, they really just want to get in the markets and throw some money around because it’s fun at first. Well, I assure you that blowing out your trading account that you worked 6 months or a year to save up for will not take you 6 months or a year to blow out, and the fun and thrills you felt when first starting to trade live will end very quickly once you realize you have no idea what you’re doing and the market is eating your money like a hungry Great White Shark. So, make sure you have MASTERED your trading strategy and that you have demo traded it for at least two months or more before you even think about risking your real money in the markets.

Stage 4:

Problem – In this stage, most traders begin a frantic search for a ‘better’ trading method than the one they were using. There are so many options for trading systems and strategies on the internet these days that it can be nearly impossible to not get tempted into buying one of the ‘too good to be true’ sounding ones… and there are plenty of those. This is the stage where traders really try to find that “Holy-Grail” trading method that they ‘know’ must be out there…after all, someone is making money in the markets so there must be some ‘ultimate’ trading system out there (or so they think). In this stage, traders end up dropping some serious money on some Forex trading systems or other trading products that they feel will help them correct their previous trading mistakes.
Solution – This solution is pretty straight forward; if it sounds too good to be true…it probably is. The Forex industry is FILLED with trading systems, strategies, courses, books, and you name it that sound really great; they make trading seem easy. Truth is, trading is not easy, and it’s a battle against your own emotions that only you can overcome. Yes, the strategy that you use matters, a lot, but it is not true that more expensive trading systems or more complicated and fancy sounding ones work better than plain old price action trading strategies. In fact, I can tell you from experience that they don’t. I’ve tried them all, in my early trading days I too set out on the “Holy-Grail” trading system quest. Eventually, through trial and error, logic and commonsense, I realized the markets were best traded by just analyzing the naked price action of the charts that had been staring me in the face the whole time.

Stage 5:

Problem - This is the stage where traders feel they have found the ‘perfect’ trading system or strategy and they are ‘finally’ ready to start making money in the markets. Typically, in this stage, a trader will either develop good or bad trading habits and this is also the first stage where some traders have a real shot at going on to make consistent money in the markets. However, what happens to most of them is that they aren’t properly prepared with a Forex trading plan, trading journal, and a concrete trading routine. Instead, they are all hopped up over their new trading system and they start trading with it without any sort of organized structure or plan behind them. This typically leads to over-trading, risking too much, and for most traders it starts them down another path to blowing out their trading account, again.
Solution – Don’t fall off track. Many traders get excited about doing the right things in the market. They have a trading plan, they have a trading journal, and they know what they are looking for in the markets. Then after a few losing trades they seem to forget about their trading plan and they start ‘winging it’ a little more, they’ve also stopped filling out their trading journal, etc. You see, it’s REALLY REALLY easy to stop being discipline and to get out of control in the markets. In fact, it’s far easier to trade in an undisciplined manner than it is to remain disciplined and patient and develop the proper trading habits. The trick is that the longer you remain disciplined, organized, and patient, the easier it will become, and eventually you will enjoy trading the right way because you will have forged these things into positive habits. You’ve got to stick it out long enough and endure some ‘pain’ to see the long-term reward. Nothing worth doing in life is easy, trading is no different. If you give in to what you ‘feel’ like you want to do in your trading, rather than what you know you should do, it will only be a matter of time before you blow out your trading account.

Stage 6:

Problem - At this stage, you’re either on the right track because you’re remaining disciplined, organized and patient, or you blew out your account in stage 5 because you got too excited and emotional. Having blown out two or more accounts at this point, you are really starting to feel depressed about your trading, you think it’s ‘impossible’ to trade successfully and that you just don’t ‘have it’. You fall into a ‘downward spiral’ of losing money because you feel like you’ve lost so much to this point that you start to feel like you don’t care if you lose anymore, so you start taking bigger risks and trading more frequently, in other words, you’re gambling in the markets now.
Solution – Time to take some time off. Stop trading real money, and if you need to, stop demo trading and forget about the markets for a month or two. They will be here when you return. The best medicine for ending a period of emotional trading is to simply remove yourself from the markets for a while. If you feel like you’ve reached this stage, and you really need some help, then I suggest you simply stop trading for a while. Come back later after you’ve got some trading education and you’ve demo traded for a while. There’s no rush. In fact, the more you rush and try to ‘force’ money out of the markets, the more the money you so badly desire will elude you.
In closing,
I hope today’s lesson has helped to open your eyes to the fact that you are NOT ALONE as a trader who has committed emotional trading mistakes or who has blown out a trading account or two (or three or four). It happens to all of us, it’s part of the game. You either figure out that what you were doing before wasn’t working and try to fix it in a logical and straight-forward manner like we’ve discussed here today, or you continue on in your old gambling ways, or you give up trading all together. Those are really the only 3 things that can happen to you from here.
I trust that because you’re on my website and you’ve read this whole article, you’re committed to righting your trading wrongs in a logical and no-nonsense manner. If that’s the case, I suggest you check out my Forex trading course and members’ community for further training and fellowship with like-minded traders who are committed to learning how to trade with simple, logical and effective price action trading strategies. If you have any questions or feedback, please feel free to contact me.