I hear lots of people talk about blowing their account, and it seems to happen as a single, instantaneous event sometimes. Others say you havent passed a level of maturation until you blow your account (wow, not even sure what to say to these people). I wonder though - how does this happen? I am trading index e-mini futures (dow, s&p). I daytrade, usually only holding a position for 3-6 minutes. When my initial order goes in, a take/profit and a stop/loss also goes in. I don't think my platform supports 'market if touched', but a stop-limit order goes in. With those parameters, haven't I limited my risk? Can I lose more than my stop? If not, then how could I ever blow up? Just trying to understand what my real risk of blow-up is, since I don't see it. Unless - does it need to be a catastrophe like electricity in North America is shut off for 3 days?
You should change your order from a stop-limit to stop market order. If the market is moving quickly away from you, your stop could be triggered, but not executed because you have the limit in place. Now you're down more than you ever imagined (depending upon the size of the move) so maybe you decided to double down or trade out of the position or hold on, thereby potentially compounding your loss. That's how accounts are usually blown out.
The issue with stop or stop limits is two fold. First is the gap scenario. With a stop market, if the price gaps way down past your stop you will get filled at what ever price becomes available after the gap. With a stop limit order, on a gap, you will not be filled at all until the price moves back up to the limit portion of your stop limit order which could be a year from now. The second issue is visibility. You want to make sure your broker doesn't place your stop order to the market until it needs to be filled. Otherwise you may have bottom feeders that can see your stop and pick it off just before the price moves in your favor.
ego.. anger.. vanity.. lack of patients(sp?) letting me have your money... etc.. excercise goodrisk mgm (likeit seemsyou are) and you should be able to play for a while
Can you explain the latter part how bottom feeders pick your stop? How does that happen? I think you mean to say market makers or exchange people?
You will blow up if you do not employ position sizing. At some point in your career, you will take a series of losses. This will make you angry, and you will most likely revenge trade. As your account gets smaller. you must develop an algorithm to manage this. Failure to do so will result eventually in you being too highly leveraged in a parabolic move that was opposite your trade. The market will gap past your stop. Or, it will trigger your stop several points more than you intended to lose, which will anger you, which will cause you to...... you get my point. Get an algorhytm to manage your position sizing.
If you have the discipline to follow above rule strictly and doesnt hold overnight, then you most likely wont blow out your account so to speak, but bleed to death slowly in worst case scenario (ie: your trading strategy doesnt work at all in current market etc...)
True, with the strategy described by the OP, a blow-up is nearly impossible... but it's still likely to fizzle out in the end.
Until you can handle a chain of losses emotionally, take the "position-sizing" strategy seriously. I had similar concerns like you a few months ago. I became consistent and a bit cocky trading. Started leveraging my positions to a crazy amount. I made some big wins (non-consistently) that surmounted my losses. This blinded my emotions...leading to over trading, then got caught in the volitility switching to a bullish trend last week, lost all my profits in the last fwe months and incurred losses too. the losses piled up not only on one trade, but the subsequent once when i tried to "win it back". the moment you do this, you are screwed my position size stayed the same which led me to even more loss for the next few days. lesson learned: - position sizing - if you have a good LONG streak, don't be afraid to bring up your position size a bit. if you hit a big loss - just take the loss and LOWER your position alot until you build your confidence back up - don't be afraid to not trade - don't be afraid to take a day off my 2 cents...