Have you ever lost a trade and became so upset that you felt like a complete idiot afterwards?
Did that one loss affect how your future trading activity would play out?
Well, if you did you're not alone. In fact most people come across the same instinct, it is human nature to want to always be a winner. No one enjoys losing.
We were brought up always seeing the winner being rewarded and the loser being mocked or eliminated from a competition so we bring that same thought into the trading world believing that if you take one loss you may as well stop trading. A series of losses may traumatize a trader forever.
This is where proper money and risk management come into play.
Trading is a business. Your trading account is your physical business. You are exchanging wins and losses for gains and forfeiture.
The goal is to build your account to the largest amount overtime so you must think long term.
The problem is you're afraid of taking a loss. Most retail traders are afraid of closing out a loss because they do not understand why they took the trade in the first place, they just focused on the positive outcome of winning that they ignored their defense.
"The single most important thing in trading is becoming a master of losing. Don't focus on making money, focus on protecting what you have." - Baja Pips
You must lose and become extremely good at it. The more you lose the less afraid you'll be of taking a loss in the future. When you build the habit of taking losses on the regular, that's when you'll start to see winning opportunities more frequently.
Your mind will become configured to accepting the loss and moving on, that's when great trades will start to appear.
Holding losses also eats up your available margin which will be a restriction on you when the time comes to open a potential winner.
I'd like to share with you a real example of improper money management and how i had screwed up on a single trade that cost me a huge portion of my account. I will then explain the importance of trading with a large enough amount of capital as opposed to a small trading account.
As you can see in the photo above, this specific account has over -20% drawdown at the time of typing this blog. I run a few live accounts because I test out different strategies and compile what I've learned into one complete algorithm. Many of my trading accounts are actually "training accounts". I deposit a small amount into them and run them as if they were the same as my main account, this is called "forward testing". On this particular account I was winning and actually at a positive net gain a few days ago simply by closing out my losers and taking small winners over time. One day I saw a great trading opportunity and took it and forgot to assess my risk which ended up hitting my stop loss and wiping out all of my previous gains and more. Was I emotional? Nope!
I did use proper money management, because that could have been my entire account on the line had I not used a stop loss. But I did adhere to my risk management.
Risk management would have warned me that the trade I was taking was a more volatile pair, therefore I must reduce my lot size to be able to take a loss but only lose a smaller percentage of my trading account if a loss were to occur. Mistakes happen and this is the importance of making sure that a loss is of a substantial amount that would have little to no impact on you're total capital. I am grateful that this was just a training account and not my actual main account. I took the loss and instead of becoming emotional over it I simply took note and learned a valuable lesson that I will carry on into all of my future trades.
The Importance Of A Large Enough Trading Account
You may have heard that you can start trading with as little as a few hundred dollars. In fact, it is marketed on many offshore brokerage websites, some would even give you a deposit bonus or match! That sounds almost too good to be true! Don't you ever think it actually may be so?
What these brokerages and even trading con-artist/con-groups are not telling you is that you have a high percentage chance of either blowing your small account or taking enough losses that you run out of margin to take another trade and must deposit more to stay in the game.
You also cannot adhere to proper risk management neither. You may have every other rule down and completely ignore the risk management factor. Like my example above, if you are trading on a small trading account you may be forced to take a specific lot size and end up losing that trade forcing you to take a bigger overall hit. If you are trading with a few hundred like these dodgy brokerages promote for example, you may only be able to trade up to a few pennies before reaching your maximum margin, as a result you'll be forced to open trades on more volatile pairs resulting in a significant large portion of your trading capital.
When you have a large enough trading account ($50,000 USD minimum) you can avoid this outcome because you'll have enough margin to reduce your lot sizes small enough to take as many loss in pips and still only lose the same amount of overall capital as your other trades. Why do you think most DEMO accounts have the default standard at $50,000+?
Well I hope you learned something from this blog. That's all I have to write this week.
I try to write a blog a week to help the public out for free as I do believe in paying it forward for nothing in return.
I wish I could help everyone become a consistently profitable trader, unfortunately I do not have the time on my schedule to walk everyone through the process which is why I have created my FOREX Academy to help people on a more personal vantage point who are ready to take their trading to a higher level.
I have been trading the financial markets for the past decade and have failed to the point where there were no other ways to fail. I trade for myself with my own financial resources and enjoy the freedom of being my own boss managing my independent business built from the ground up. Feel free to message me anytime with questions.