Blowing Up Accounts - Money Management
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Many traders will tell you how they have blown up entire accounts. Some end up blowing up several accounts and they have to quit trading fort a time. Others never make it past the initial learning curve and end up quitting trading for good. Money Management is a very serious issue.
What happens is people are very excited to start a trading account that the first thing they do is jump in a trade as soon as their deposit is confirmed. I will share with you a few rules in this article you will be able to adapt to or improve on.
Money Management rules are the safety nets that will do their best to prevent you from blowing up your account. A trader named Dr. Alexander Elder mentioned how there are two types of threats everyone should watch out for: Sharks and Piranhas.
Sharks: The shark threat is when you enter a losing trade that takes out a large chunk of your account. It will damage not only your physical capital, but your mental capital as well. Imagine wiping out 35% of your account in one trade. It really is the equivalent to the shark bite.
Piranha: The Piranha is when you keep trading small losses over and over. Eventually this series of losses overwhelms you. If you ever google how Piranha’s feed the slow death of their target is similar to what happens in your trading account. A lot of small bites before death. Continuous small losses will have your trading account bleed and die.
Lets say you start a trading account with $10,000. If over a series of trades you bring the account down to $9,000 or 10%, You start to trade as if you have $8,000 in the account instead of $9,000. If you drop the account another 10% to $8,100 you start trading as if you have $6,480 in the account.
I prefer to keep it simple, there are a lot of other variables I use to base risk on. Not all trading ideas and setups are created equal. If you have very strong ideas you can get away with risking more. The general principle, especially when you are a beginner is to have a money management plan for your trading account.
Authored by WildWestTrades.