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8 Ways to Blow Up Your Trading Account
01/22/2015 6:00 am EST
Veteran trader Mike Bellafiore, of SMB Capital, shares a question-and-answer between him and a trader in which he outlines eight of the less obvious things that a trader must still strive to avoid at all costs in order to improve as a trader—and more importantly—to not blow up.
I was just getting some hummus and crackers when a quote from Charlie Munger popped into my head and I immediately rushed to my email so that I wouldn’t forget about it later. Basically, it goes “Tell me where I’m going to die, that is, so I don’t go there.”
So, I knew of no better person to ask in regards to trading since I’m guessing you’ve seen numerous traders blow up before.
If you’re not busy, I’m just wondering which places and things I must avoid at all costs to not blow up. Some are obvious—I think—like don’t use options to make total account bets and stuff like that. But I’m just wondering what you think are the less obvious ones.
1. You would rather be right than trade right. For short-term traders, adding to a position with price trading against you is arrogant. Losers add to losers. No one cares what you think about XYZ stock. Get over it.
2. A trader without edge is a trader about to go over the edge. Strategies work and then they don’t. Too many follow gurus who are not teaching a strategy with edge. Learning a strategy with edge still requires you to internalize that edge for your trading.
3. Trading a time frame great for your neighbor and expensive for you. If you think slowly and comprehensively, as described in Thinking Fast and Slow by Professor Kahneman, being an active scalper will not work for you. If you are a fast-thinker, trading a macro strategy is just as foolish.
4. Commissions, commissions, commissions. I have heard countless stories of traders with commission structures that give them little chance to succeed. You might call this a trading death by a thousand cuts. As way of comparison, our professional firm traders are charged less than $1 per thousand for their trades.
5. You have no trading skill. Unlike what the Financial Media Entertainment propagates endlessly, trading is a game of skill and not talking your book. Take a course. Read some books. Trade on a demo. Study trading. Develop an edge. Then dip your toes into the shallow end of the trading markets, incrementally risking more only after success in real-time.
6. You bet too big. Bet 1k on a trade after you have proven in real-time you can successfully bet $750. Leaping from 1k of risk to 10k of risk per trade will lead to risk of a trading account blowup. Incrementally increase your risk.
7. You have no process to improve as a trader. You either get better everyday as a trader or you are eliminated.
8. Your trading plan is about to be planned. In One Good Trade, I outlined a trade plan before each trade. Markets move fast. Without a detailed trading plan before each trade, the market will have an unwelcomed plan for you.
By Mike Bellafiore of SMB Capital
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