I hope you’re enjoying your weekend.
This week’s question comes from Janene, who asks:
Hi Justin, what advice would you give to someone who just blew their Forex account?
No trader wants to think about blowing an account. That feeling of going from $5,000 to $1,000 or less is never pleasant.
If it’s happened to you, you may have felt sick to your stomach, frustrated, or helpless. Perhaps you were even ready to give up.
If it hasn’t happened to you, chances are you will experience an extreme drawdown event at some point in your career, so it’s best to be prepared.
As unpleasant as they are, blown accounts happen. Read through books like the Market Wizards series and you’ll see you’re not alone.
Heck, even I went through a couple accounts in my early days. Not huge sums of money by any means, but enough to leave an impression for a few weeks.
Nobody gets a free pass in this business. You pay market tuition not only via mentors and courses but also trading losses. It just so happens that those who pay to educate themselves end up losing less money over their career.
Either way, the market never lets you pass without first paying your tuition.
The three-step process below will help you navigate a blown account should it happen to you. You’ll learn a few of the most common factors that contribute to losses and how to fix each one.
I’ll also share with you a set of rules I use during drawdowns to help remove my emotions from the equation so I can get back on track.
Let’s get started!
There are two types of Forex traders. Those who will want to take a break from trading following a blown account, and those who will immediately attempt to earn back what was lost.
If you’re the latter, this is one time when you will want to put the brakes on. I admire your fortitude, but your emotions will surely get you in trouble.
Also, that account you just blew is a suggestion. Rather, it’s a big red sign with flashing letters.
It’s telling you that something is wrong. Whatever you were just doing that led to the account going up in smoke isn’t working.
It doesn’t mean you have to start over from scratch, but it does indicate that some changes are in order.
That’s where your hiatus from trading comes into play. It allows your emotions to settle so you can later focus on fixing the problems.
How long of a break you take is up to you. However, I’d recommend no less than one trading week. Anything less than that and your risk of repeating this unpleasant experience increases substantially.
That means no trading or even looking at a chart for one week. Spend time with your family, enjoy the outdoors or find a hobby but whatever you do, don’t look at those charts.
Once you’ve had some time away from the market, you can start thinking about diagnosing the problem. And chances are there isn’t just one.
The first thing you need to do is figure out what went wrong. That’s easier said than done given the wide range of factors that can influence your trading performance.
Luckily, there are a few logical places to start.
What time frame(s) were you using when you blew the account?
Were you using the 5 or 15-minute charts or were you on the higher time frames such as the 4-hour and daily?
The difference between the two is night and day. And while it may be possible to become consistently profitable using lower time frames, I’ve seen far more traders improve after moving from lower time frames to higher ones than the other way around.
If you’ve been trading the lower time frames, try switching it up. Stick to the daily charts for at least 60 days and see if your results don’t improve. I’m betting that they will.
How many trades were you averaging each month when you lost control?
Just like the time frames, your trading frequency has a massive impact on your performance.
Remember, in this business less is more. It’s always quality over quantity, never the opposite.
If you were taking more than 15 or 20 trades each month before, try scaling back to 5 to 10 once you’re back on your feet. Combine that with the daily time frame and I can all but guarantee you’ll see an immediate improvement.
Trading Forex successfully is about surviving. It isn’t about aiming for home runs that will net you 50% profit.
While a 50% return on a single trade may sound like a good thing, we have to examine what it takes to achieve such a profit to determine whether it is actually good.
Even if the distance to the target was five times the distance to your stop loss, it means a loss would have cost you 10% of your account. At that rate, it won’t take long to blow an account.
In my opinion, anything above 3% of your account balance is asking for trouble. Most of my trades tend to stay around the 1% mark. That way even if I lose five trades in a row, I’m still only down 5%.
If you’re risking 10% per trade and lose five in a row, well, I don’t have to tell you how much of a setback that would be.
News events create volatility, and volatility produces opportunities. So why wouldn’t we want to trade the source of said volatility?
I’ll tell you why—because it’s a random outcome. Even if you guess whether the outcome is seemingly positive or negative for the currency, you have no idea how the market will interpret the data.
I can’t tell you how many times I’ve seen a positive non-farm payroll number, only to see the dollar drop. The same goes for rate hikes and just about any other scheduled market event out there.
This is where price action comes in handy. Instead of guessing at how the market will interpret the news, why not wait for a buy or sell signal instead?
A pin bar of engulfing pattern at a key level is far more reliable than betting on the news. With the former, you’re using what’s in front of you, whereas with the latter you’re simply hoping the market agrees with you.
One of the biggest mistakes I see is traders booking profits too soon. In some cases it’s by design, and others it’s out of sheer panic.
Regardless of why it happens, a negatively skewed risk-to-reward ratio is a blown account waiting to happen.
What do I mean by negatively skewed?
It’s a risk to-to-reward ratio where the risk outweighs the reward. For instance, your target is 50 pips away but your stop loss is 100 pips from your entry.
That doesn’t sound like a great bet to make, does it? It certainly isn’t one I’d want to take.
Once you’ve returned to the market, try flipping your ratio around. Instead of risking 100 pips to make 50, look for setups that allow you to make at least twice your risk.
You’ll need to be a little more patient to find these setups, but that’s a good thing.
Remember, you’re not in this business to trade, you’re in it to grow a trading account. Those are two very different things.
There’s a set of rules I’ve used over the years that work incredibly well when things aren’t going right.
When you’re trying to recover, such as after blowing a trading account, the worst thing you can do is scale up. Instead, you’ll want to scale down across the board.
For instance, let’s assume you were risking 4% of your balance per trade when you blew the account. Once you’re ready to return to the market, you’ll want to cut that risk in half.
It’s okay if you cut it by more than half to 1%, but I’d recommend reducing it by at least half.
The same goes for your trading frequency. If you were taking ten trades per week before you blew the account, try aiming for five or less.
In fact, if you’re trading the daily time frame, you will likely see even better results if you reduce your trading frequency even further, from five to one or two setups per week.
Last but certainly not least, consider funding your next account with just half the amount of the first. If you only have half of the account left, that’s okay.
What you don’t want to do is fund an account with $5,000 after you just lost $2,000.
Always remember that the money in your trading account is risk capital that you can afford to lose. Using a lower amount the second or third time around will help reduce your stress levels, which will ultimately lead to better trading results.
In summary, following a blown account, you’ll want to reduce your trading account, risk per trade and trading frequency.
At this point you have taken a break from trading, identified your mistakes and are convinced to cut your numbers in half.
Now it’s time to decide whether you should fund a new live account or go back to demo trading.
To be honest, there’s no clear-cut answer. Some people have the ability to treat demo as if it were a real account, and for others it’s much more difficult to do so.
I know because I’m someone who always had trouble staying disciplined while demo trading. It never felt real enough to me so I didn’t treat it as such.
My solution to this problem years ago was to use a small live account to practice my trading. I also kept my risk to 1% so that my mistakes didn’t cost much.
Even if I was only losing $10 on a trade back then, at least I knew it was real money. The same went for profitable trades when I’d make $20 or $30.
Because I knew it was real money, I was able to stay much more disciplined and focused than I was when using a demo account.
Of course, that was a long time ago. If you do need to practice before funding a larger account though, using a $500 or $1,000 real account makes a lot of sense in my opinion.
However, it does depend on your circumstances. If losing that amount of money makes you nervous, you’ll want to stick with a demo account.
You can also use a demo account if you’re someone who is able to take it as seriously as you would if it were real money.
It’s your call and there is no right or wrong answer. The one you choose will depend on your circumstances and personality.
Just remember to keep the account size at a minimum regardless of whether you fund a real account or open a new demo account. You don’t want to practice on a $50,000 demo account if you plan to start back up with a $500 live account eventually.
Whether it’s $500 or $5,000, blowing a Forex account is never fun. However, it is something that most traders will experience at least once before they achieve consistent profits.
But instead of beating yourself up over what was lost, try to view it as money spent on your trading education. I’ve always believed that every trader pays their dues in some fashion, it’s just the market tuition for those who seek a mentor is usually far less than those who don’t.
I can’t stress enough the importance of starting and maintaining a trading journal. Not only will it help you stay disciplined throughout your career, but it can also be a valuable resource in the event of a blown trading account.
Be sure to evaluate factors such as the time frames utilized, trading frequency, risk-to-reward ratios and the amount risked per trade following a blown account. They just may give you the clues necessary to turn your trading career around.
Once you’re back on your feet, try cutting your balance, risk per trade and even trading frequency in half. You can even cut it by more than half if you wish, but doing so will allow you to focus on the process of good trading rather than the money at stake.
Finally, you’ll need to decide whether you’re comfortable risking real money again or if it’s time to go back to demo trading. If you do opt for a live account, make sure it’s money you can afford to lose. Otherwise, your emotions will surely get the best of you.
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To do that, I need your help.
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