6 Reasons Why Retail Traders Are Blowing Up This Year

Leverage can be your best friend or your worst enemy in trading. For most new traders, it’s their worst enemy. Leverage is simply borrowing money from your broker to buy or short-sell more stock. When used correctly, it can increase the size of your winning trades. When used incorrectly, it can significantly increase the size of your losing trades. And most traders use it incorrectly and use it to average down on a losing trend. They end up blowing up, and worse, go into debt to their broker.

It can happen to anyone who is careless, no matter how many years of trading experience you have or how much money you’ve made. Never risk more than 1-2% of your trading capital on 1 trade when you are new, and do not have a proven track record in the markets.

2. Stubbornness

Stubbornness is one of the worst traits for a trader. Attachment to your opinions is one of the most common causes of account blow-ups. It’s most often the smartest people who have done the most research on a company that fall victim to this. They refuse to believe that the market’s opinion is correct and don’t liquidate their position before the loss consumes their trading account.

Remember, as a trader, your goal is to make money, not to be right on every trade.  “Markets can stay irrational longer than you can stay solvent”. Sound risk management prevents stubbornness from consuming your trading account. Check out this video lesson to learn how to manage risk correctly in the current market conditions:

3.No Stop Loss Strategy

“I just froze”. “I thought it would come back”. “It’s not a loss until you sell”. Most new traders make the mistake of assuming that every trade they put on will be a winner. They fail to prepare for the scenario of their trade becoming a loser. As a result, they don’t keep their losing trades small, and eventually, lose all of their money. Stop losses are not optional. No trading strategy has a 100% win rate. You need to have an exit strategy in the event a trade goes against you. For some of our favorite stop-loss strategies, check out this article here.

4. Greed

Everyone heard the phrase “to the moon” over and over again last year. This is exactly the type of greed that causes profits in winning trades to evaporate, and eventually lead to account blow-ups:

Stop expecting every trade to be a home run. Stop turning your day trades into swing trades, and your swing trades into long-term investments. Understand how stocks move (we teach this in our Live Trading Boot Camp), and you will know the high probability areas to take profits on a stock so it doesn’t reverse into breakeven or a loss.

5. Revenge Trading

Traders when they lose control give back weeks and months’ worth of gains after just a few hours of revenge trading. It is natural to make back the money you just lost. But you cannot force trades on subpar setups. Traders are at their most vulnerable right after a losing trade, as they often get emotional.

We misperceive opportunities in the market because we want to make back the money we just lost so badly. To combat revenge trading, we recommend using a daily max loss, meaning that after you lose a certain amount of money during the trading day, you stop trading for the day.  For more tips on how to combat revenge trading, check out this article here.