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In this episode, you’ll discover 5 simple techniques to save your trading account (so you won’t bust your account again).
So tune in right away…
Resources
How to be a Profitable Trader Within the Next 180 Days (Even if You’re New to Trading)
Forex Risk Management and Position Sizing (The Complete Guide)
Transcript
Hey, hey, what’s up, my friend?
In today’s episode, I want to share with you 5 simple and effective ways to save your trading account.
I get it that most of your accounts are probably in the red now. Maybe you’re losing for months or even years, or maybe you’ve blown up multiple trading accounts and you’re thinking, “Why is this happening to me?” I get it.
So let me share with you 5 techniques that you can use that could save your trading account. I can’t guarantee that you’re going to be a profitable trader, I can’t guarantee that you’re gonna make money next month or next year.
But I can assure you that if you follow these techniques, there’s a good chance of stopping the bleeding of your account.
Let’s get started.
1. Plan an exit for your trades
You must have a predefined point on the chart such that if the price reaches it, you’ll exit the trade.
Once you have a stop loss in place, once you have a plan for an exit, then the damage is contained, the market can’t take any more from you because you have contained the damage.
Often traders only think about the entries, they don’t think about what to do if the market goes against them. The only point when they exit the trade is when there are no more funds left in the account or when the broker manually closes the position for them.
That’s how they exit their trades. And that’s why many traders go belly up because they don’t take control of the exits. So have a planned exit in place by using a stop loss.
Or you could be doing some rebalancing of your portfolio if you’re trading stocks. I think that’s more advanced stuff, but basically have a planned exit in place.
2. Risk a fraction of your trading capital on each trade
This is especially if you’re trading leveraged instruments like forex or futures. Yes, you can have a planned exit in place, but what’s the point of having a stop loss if the price hits your stop loss but blows up 70%, 80% of your capital?
I would say that is pretty silly. Because it’s going to be very difficult to claw your way back up when you’ve lost 70%, 80% of your capital.
My suggestion is to make sure that whenever a trade goes against you, the loss on that trade is not more than 1% of your capital. This way, you can sustain 15, 20 losses but you’ll still be in business. You can still trade your way out of the drawdown.
But if you are risking like 20%, 30% or 40% of your account on each trade, then it’s a matter of time before you lose everything and more.
I know some of you are going to say, “Rayner, but if you use fixed fractional position sizing, even you risk 10%, 20% on each trade, you’ll never go to zero.” I know you’re a smart guy.
But my point is that the more you risk on each trade, the harder it is to claw your way out of a drawdown.
Next…
3. Stop averaging into your losses
I get it, this is a thing that I do myself in my early years of trading when I was trading stocks.
The broker would call me and say, “Hey Rayner, your current position on Sembcorp Marine has gone against you, tell you what, I think you should buy another 2,000 shares, this way, if the price goes up 10 cents, you can get out at breakeven.”
At that point, I thought it make sense to buy another 2,000 shares of the Sembcorp Marine, so if it goes up 10 cents, I could get out at breakeven, instead of waiting for the price to go up to 20 cents or 30 cents.
That line is sexy, because you only need the market to go up a little bit to get out at breakeven or even to make a profit. But guess what? The market has a funny way of doing things that deal the most damage to you.
Instead of going up 10 cents, it could drop another 30 cents and now you’re even deeper in the red. So don’t average into your losses.
If you know what you’re doing, and you’re an advanced trader, then fine. Average into your losses if that’s part of your trading strategy. But if you’re new to trading or have no idea what you’re doing – don’t ever average to your losses.
The losses are will snowball even bigger and even faster.
4. Have a trading plan
Before you put on a trade or an investment, have a plan. If the market moves in my favour, how will I exit the trade? Will I be using a trailing stop loss? Or do I have a profit target in mind?
Now, what if the market moves against me? Where do I exit the trade? Will I exit if it breaks support? Or when it hits my stop loss? Will I exit if it closes below the previous day low? And stuff like that.
Have a trading plan that tells you what to do in any market circumstance, whether the market goes in your favour or against you. This way, nothing can break you because you have a plan. Make sense?
And finally…
5. You must have an edge in the markets
That’s the only way you’re gonna make money consistently in the long run. Many of you might not agree, “No Rayner, an edge is simply having a minimum of 1:2 risk-reward ratio and risking 1%, 2% on each trade, that’s my edge.”
I’m afraid not. That’s not an edge in the market. An edge in the market is something that you do repeatedly over time that will yield a positive expectancy.
Take for example, you go down to the nearest casino with the best risk management and you bet 1% of your capital on each bet. You even bring down a fantastic psychologist with you to hype you up and give you the best discipline or the best psychology.
But guess what, the longer you stay at a casino the more you’re likely to lose money over time. That’s because the casino has an edge over you. The house has an edge over you despite your risk management, despite your discipline, despite your psychology.
All of that doesn’t matter if you don’t have an edge over the house and this is the same for trading. You must have an edge in the market. You can be using proper stop loss, risking 1% of your account on each trade, you can be very disciplined in your rules.
But if you don’t have an edge in the markets, then you suffer death by a thousand cuts where your account slowly bleeds trade after trade and you lose 80%, 90% of your account until you give up and that’s it.
Then you’ll be thinking trading’s a scam, it doesn’t work. Well, that’s because you don’t have an edge in the markets. That’s important as well. Don’t forget that.
Here’s a quick recap…
Recap
- Always use a stop loss and plan your exit ahead of time before you even put on a trade.
- Risk a fraction of your capital on each trade. This means that if you got stopped out, that loss won’t put your account down by 50% or 60%.
- If you don’t know what you’re doing, don’t average into losses.
- Have a trading plan for when the market moves in your favour, against you, and for when market conditions change.
- You must have an edge in the markets.
With that said, I wish you good luck and good trading. I’ll talk to you soon.
