Sunday, September 16, 2007

Why Traders Blow Their Account?

If you are reading this, it is likely that you have experienced destroying your account out at least once. I know I did multiple times.

If you have not experienced this yet, you want to do everything in your
power to stay un-experienced. If you have experienced all that goes along
with blowing your account out, then you want to do everything you
possibly can to prevent from experiencing it again.

Remember, survival is the number one goal.

One client wrote me after going through my Self-Destructive Trader
course and stated that the reason that he has experienced blowing his
account out multiple times was, and I quote "if I had used correct money
management I would have been hit, but lived to fight another day"

It is absolutely true that improper money management is the number one
contributor to blowing out trading accounts, by far. Many traders know
this, so the question is why do we not use proper money management

There are, of course, several answers to this question...all of which I
won't be able to get into today. I'll list the major ones and then
focus on one for now.

1.We have a lack of knowledge and understanding of what money
management and more importantly proper money management is.

2.We are greedy, therefore even if we knew and understood proper
money management, we would still apply improper money management

3.We don't have a trading plan and therefore fear, panic and
possibly even rash decisions are made in the heat of the battle.

4.We are prideful and have ego problems thinking that we are good
enough traders that we don't have to learn, understand or use proper
money management strategies.

5.We are greedy.

There is a joke that talks about how a wife says to the husband how
"we" need to do this and "we" need to do that, and she follows it up with
"of course when I say 'we' I mean you".

When I say "we" above, I do mean "we". I am speaking from experiencing
all of the above and all of the above more than once. I am also
saying "we" because I have spoken to enough traders to know that there are
precious few who don't or have not experienced one or all multiple times
as well.

Today, I'm going to start with greed because I believe that more
traders have a problem with this more often than anything else. I mean,
becoming knowledgeable and understanding money management more
than 95% of
anyone in the industry is simple.

But beyond that, greed is something that easily entraps us as traders.
It is so slick in fact, that it would take several emails to really
uncover all of its ugliness...and I would probably still miss a lot.

So, I'll start with this email and see where we go.

The first thing I want to point out about greed is that it blinds us
(although it is not the only thing that blinds us). How does greed blind
us? First, by making us think that we are not greedy when some or all
of the evidence points otherwise. There is nothing wrong with wanting
to make the most of your efforts in trading. In fact, if you are not
willing to put 100% into trading, or anything in life, why make any
effort at all. So don't get me wrong, trading can be lucrative and you
should want to make the most of it.

Greed shows up when we want to make the most of it but ignore the
evidence that shows that if we are not extremely careful, not only will we
not make the most of it, we won't make anything at all.

What evidence? Take for starters, the fact that 95% of all traders
lose...and this is regardless of how many years they have been trying to
make the most of it. Greed, mixed in with a little ego, blinds you into
thinking that this probability does not apply to you.

More evidence exists in the fact that most traders get involved with
live trades with very little education and preparation (greed blinds you
into thinking that you don't have to know a whole lot to be

More evidence exists in the fact that most traders quit during
drawdowns that are within completely reasonable expectations for the system or
strategy being traded.

More evidence exists in the fact that many of those traders quit
because they didn't take the time to figure out what the reasonably expected
drawdown would be.

More evidence exists in the fact that if traders did know what the
reasonably expected drawdown was, they traded the strategy being
undercapitalized (over trading).

Greed is intangible. It is not something I can pick up and throw at
you. But make no mistake about it, there is clear evidence that can
point to the fact that behind many of our trading decisions lurked some
ugly and blinding greed.

And that is the Truth About Trading for today.

(Quoted from Ryan Jones at