Account blowup: what leads to it and how to avoid it?

Every trader has experienced a deposit loss at least once. The problem is that most trader mistakes are psychological. They can only be upgraded over time, or you can use a risk manager robot. Let's analyze possible errors in order of importance.

Category 1 (most dangerous)

Daily drawdown limitation. The biggest danger. Since you can get into a state of tilt (it’s like in poker – an unlucky hand and the loss of your entire deposit) Exit: set a loss limit for the day, for example 100 points.

Play for everything. Opening a transaction with a volume that does not correspond to your risk. Thus, you can lose your entire deposit in just one trade. Exit: use a position limit. For example, 0.01 lot per trade.

Not a permanent stop loss. Beginners very often push back the stop loss in the hope that the price will return. This is very dangerous, as there may be a strong trend in the market that will quickly wipe out your deposit. Exit: use a stop loss limit. For example, 50 points. The smaller the size of your stop, the more sophisticated your entry into the market will be required. This will force you to think 10 times before each entry.

Category 2 (medium danger)

Several open trades. There is no point in opening more than 3-5 transactions, since in Forex most currencies are very highly correlated with each other. This means that the more open trades there are, the greater the chance of falling into a drawdown. Solution: use a limit on the number of open transactions.

Trading exotic pairs. It is best to use only the base currencies for trading, EUR/USD, GBP/USD, etc. Other forex currencies may be subject to greater volatility, which means there will be a larger spread and you will need a larger stop size. Solution: It is better to limit your trading to selected currency pairs in advance.

Avoid correlation. It is better not to open transactions on two currency pairs close to correlation. For example, buy GBPUSD and EURUSD. Solution: set yourself a limit on transactions on correlation pairs.

Limit or stop orders. It is better to enter the market only with pending orders. There's no need to rush here. It’s better to measure 7 times and carefully consider each entry point. First, by using a limit order you get a better price. Secondly, it will be entering the market without emotions. Exit: do not open market orders, but use only limit or stop orders.

What can't be controlled?

Login by strategy. Trading strategy is a very important parameter, and it is thanks to it that your system will work. When trading manually, it will be very difficult to control yourself, since the human head is much smarter than a computer. Only experience and time will help you here.

The ability to hold open positions and not leave the market ahead of time. A very important point. Only thanks to him your deposit will begin to increase. This only develops over time, so you always want to lock in profits quickly. Learning to wait and always respect the risk to reward ratio is the key to success.

How to avoid losing your deposit and learn to trade?

Many traders wonder how to learn to trade in financial markets. Many are looking for a super strategy that will solve all your problems. But it's not that. Everything is much more complicated. Trading is about analyzing yourself, dealing with your emotions and psychological problems.

Don't get hung up on finding the best trading strategy. You can use intuitive trading and trust your intuition. And intuition is our experience, which tells us where the right decision lies.

5 components of successful trading:

Psychology – 50%. This is the most important thing in trading. Constant control of your emotions, which will be very difficult to control. Control comes only with time. You can control your emotions with the help of a robot that limits the daily drawdown, does not allow you to increase your stop loss, etc.

Strategy + testing – 20%. You must have your own understanding of the market, entry and exit rules. There can be no confusion here, everything must be clear according to the rules. Strategy can only be obtained through testing. You will have to check on history whether it will work, find its pros and cons, and plan for potential profitability.

Capital management – 15%. A very important component, since in every transaction you need to use a constant, time-tested risk. A trader's deposit is the most valuable thing he has. A trader can only work when he is there, so take care of your deposit.

Tools – 10%. These are conveniences of trade, just as a builder should have a convenient screwdriver or drill. Also in trading you should have your own assistants. For example, the economic calendar reports new events. Indicators or advisors help your trading.

Statistics – 5%. Thanks to it, you will hone your strategy and understand your strengths and weaknesses. You can use a trading journal or trade diary to help you analyze your statistics. For example, you may see that the JPY and CAD pairs are doing poorly for you, so you may want to exclude them from your trading.

The right risk to reward ratio

It is very important to understand what money management is and how to use it. Trading profitably without statistics and money management rules will not work. Only by using a constant stop loss, take profit and position size can you count on stable profits.

I have drawn a diagram that shows the number of trades, as well as the ratio of take profit to stop loss. From the diagram we can conclude that the minimum profitable risk-to-reward ratio is 1 to 4.

With a risk of 1%, you need to lose 100 trades in a row for the deposit to be lost. In practice, to trade with such risk, you need a deposit of $1000 with a risk of $10, and $10,000 with a risk of $100. If there are losing trades for 3 days in a row, you should stop your trading and take a break.