Member Query: I am a small trader. In your experience & interactions with professional traders globally, please share 3 major blunders traders often make that leads to massive losses.
Reply: Most professional traders when interviewed about their early days share that they have all blown up their accounts. Three factors that rank at the top are:
A] Averaging losses and Hedging
Averaging losses continuously is putting good money into bad with a HOPE that bad money shall turn good some day. That’s not all. Small traders then add positions in the other direction perceiving it as a hedging strategy. This BLOCKS most of their capital leaving them with very little margin to trade. There is ZERO possibility to come out of such situation without blowing one’s account
B] Wide Stop Losses combined with averaging losses
Wide Stop loss trades never make sense. If one is wrong just once, it shall blow up the entire account. Averaging losses with wide stop loss is even worse. It speeds up the process. Getting it right once is more dangerous. It compels one to do it again with more capital and larger exposure.
Example 1: - In Dec 2018, a WTI trader shorted at $44, cost averaged at $45, $47 and so on, setting SL at $55. SL hit blowing up the entire account.
Example 2:- Another WTI trader shorted at $47, cost averaged through $50's, then went long [Hedging] at $57 through $60s blocking all his capital leaving very little free margin, finally blowing his account.
Example 3:- OptionSellers, a very popular hedge fund, lost $150 million of its Client’s money in 4 days when Natural Gas spiked to $4.9 in Nov 18. Averaging with no risk management bankrupted the company in just 4 days.
C] Trading on a poll of buy/sell calls on large forums without understanding the fundamental/technical basis OR Trading on Headlines/Reports
Most professional traders completely shut off from large trading forums because it has a tendency to influence one’s decisions, evoke emotions and create crowd psychology. This inevitably leads to over trading and revenge trading.
If you want to be a better trader, shut off from all buy/sell polls that do not have a basis. Also, do not trade news/tweets. Do not believe CNBC/Bloomberg headliners. The headlines are always retrospectively linked conveniently for ad revenues.
Fundamentals dosen't mean NEWS or HEADLINES. Fundamentals means DATA related to an event. Always look for depth in data.
Get rid of (A),(B),(C) just for a few months and you shall see a drastic improvement in your trading performance