The 7 Psychological Mistakes Traders make That Blow up Their Accounts

How well traders managed risk and how fast they could cut losses when they were wrong. If you made money this week BRAVO! great job! However the vast majority of traders likely lost money in the Bernanke Put trade finally failing and becoming a sell the news event. Most call option buyers were losers this week and most put sellers were crushed. This is the week that traders discovered if they were managing risk and would suffer single digit losses or blow up in leveraged positions. Buy the dip traders lost money for the first time in a long time. This market has been a difficult environment for most both emotionally and financially with many head fakes and reversals then THE PLUNGE this week. Luckily the market forces traders to take two days off each week. It is time to reflect and count or winnings and losses and see what we can do to get better. For most this week was not their fault it was just a volatile and choppy week that caused many systems to lose. This is the kind of week that separates the traders who manage risk from the traders who do not, and this makes all the difference.

“Where you want to be is always in control, never wishing, always trading, and always, first and foremost protecting your butt.” -Paul Tudor Jones

Many will be surprised that great  traders are not born that way, most blow up there first accounts, Alexander Elder, Dan Zanger had to start all over again after going to near zero the first time out of the gate. Nicolas Darvas also had a huge draw down at first of over 50% before making his $2 million. While the 1% risk rule can change a blow up into a draw down thinking errors are what cause traders to risk big and the wrong times. Account blow ups usually stem from wrong thinking not bad math.

When a trader blows up their account it is usually due to not implementing proper risk management but psychological mistakes are WHY they stop managing risk.

Trading too big to “get back to even”.

Going “all in” on one trade that they believe they just can’t lose.

Being on the wrong side of an asymmetric trade.  Being short options for possible small gains if right but big losses if wrong.  In the long term eventually this blows up.

Fighting a trend over and over again, a trend that a trader or investor cannot even believe is very dangerous because shorts look better the higher a stock goes and longs look like they are getting a bargain the lower the stock sinks.

In a losing trade the trader starts thinking “add more to a losing position” instead of “I need to cut my loss short”.

The trader believes they are right and the market is wrong.

Traders are trading markets they do not even fully understand and a trader must fully understand the risk and leverage involved in currencies, futures, options, and commodities to prevent possible blow ups due from ignorance.

If a trader can tightly control risk and position sizes this will get them closer to getting in the club with the 10% of winning traders.

“The elements of good trading are: 1, cutting losses. 2, cutting losses. And 3, cutting losses. If you can follow these three rules, you may have a chance.” -Ed Seykota

Source: Trader Planet