Daily Price Action
Shares

How to Recover From a Blown Forex Account

Shares

Empty piggy bank

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!

Step 1: Take a Break

Out of office signThere 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.

Step 2: Review Your Trading Journal

Man studying graphs and chartsOnce 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.

Time frames

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.

Trading frequency

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.

Risk

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 or No News?

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.

Risk-to-Reward Ratio

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.

Step 3: Cut Everything in Half

Cutting trading risk in halfThere’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.

Demo or Live? That is the Question

Demo account button on keyboardAt 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.

Final Words

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.

Your Turn: Ask Justin Anything

I’d love for this weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.

To do that, I need your help.

Here’s what you can do to get involved and have your question answered in next week’s post:

  1. Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
  2. Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.
  • Emuobo Agbahovbe says:

    Thanks. As a veteran of blown accounts,i appreciate this. What helped me is switching to daily charts based on your advice about 5 months ago.

    • Justin Bennett says:

      Hi Emuobo, you’re welcome. Glad to hear switching to the daily charts has helped.

  • Masood alam says:

    Great and informative post

    • Justin Bennett says:

      Cheers. Thanks for the feedback.

  • Reuben says:

    I’ve just blown my account, the advise you gave will help me a lot. Thank you

    • Justin Bennett says:

      You’re welcome. Just be sure to take some time away from the markets first. Then reduce everything (position size, trading frequency, etc.) by half or more.

  • Unair says:

    Hi Justin, it is said trend is your best friend to follow while trading however some experienced traders and authors also write about taking a contrarian view while seeing the long to short ratio of trades. My qs is that based on your experience is it good to take a contrarian view in a trending currency pair if yes then how to judge it. Thanks.

    • Justin Bennett says:

      Hi Unair, there is no right or wrong answer as it depends on your outlook for the market, anticipated holding period and style.

      This post should help:

      http://bit.ly/2B2UHf1

  • Felino Ignacio says:

    Well explained and that is the reality of trading, almost three years in trading and as Justin said all of those are a must.
    Thank you, Justin, for a very convincing, enlightenment, confirmation of what traders like me who had experienced the same scenario.

    • Justin Bennett says:

      You’re welcome. Happy to help.

  • abbass says:

    what happens to me ,, i know market direction by my sixth sense ,,, that do happen too,, even i can see in my vision what is going to be next,, i for see but many times that happen 2days after definitely ,, but i enter early ,,, but when market dont come in my favour i m upset but my position is correct 100 percent only 100 pips i see against but what happens in those days against i loose my temperament and cut trade in small loss or break even but even more profit of same position recently it happened tooo perhaps i lack patience i take entry early i feel in hurry ,, becos i see it will happen but anticipate early i m in this business from 2003 plz advice me thanks

  • df says:

    Why i am the first one to comment?
    I experience the flash crash on GP/US they put me 2000$ under. From an over a 6000$ account.
    Many trader had stop lost but dont help, they say to quick.

    • Justin Bennett says:

      The post was just published, but you also aren’t the first to comment. 🙂

  • hanif says:

    Nice Justin, I learned a lot from your post and set ups. Thanks Justin you are doing a great work. With your setups I learned wait and wait as much as I can to have best entry point. With your setups my winning percentage is 80% and its mind blowing I lose a lot but now in last 6 months I got all my money back.
    Thanks Once Again.

    • Justin Bennett says:

      You’re welcome. Thanks for sharing your results. Patience is the key ingredient.

    • Khuram says:

      Hi Hanif would u plz share ur contact email or WhatsApp number to share trades?

  • Magdalena says:

    Great and very museum information. Looking forward to receive more education in how to grow in trading forex

    • Justin Bennett says:

      Glad you enjoyed it. Thanks for commenting.

  • Projit says:

    Its a great and realistic article I have ever read! Thank you so much for rectifying my mistakes through this article. Take care and stay well Sir.

    • Justin Bennett says:

      Great to hear. Thanks for the kind words.

  • Jan says:

    Great post. I was in demo for six months, been live for 29 trading days. To some, my method may seem like snail pace, at 0.01 lots, but I’m up 10% and finished every week in profit. I won’t increase my lot size until I’ve identified and ironed out my weaknesses.

    Journalling every trade, win or lose, has helped expose my strengths, weaknesses and blind spots. It’s priceless advice that I see few take. I am so glad I learned this from pro traders. There’s a lot of expletives in the early days in my journal lol 😁

    Risk and money management is also key isn’t it. I never risk more than 2% usually 1%. This way, I’m inching forward every week.

    To me its about adopting a trading mindset, rather than a gambling mindset.

    Your analysis has helped me track many potential set ups and practice patience. Not easy, but gets easier over time…

    • Justin Bennett says:

      Hey Jan, very well said. Journaling is incredibly helpful as you say. It keeps you on track in good times and is invaluable when it comes time to diagnose a declining account balance.

  • Mike says:

    Very helpful piece of information, I’m a victim of blown accounts and have taken a break for at least a month now and I’m hoping to get back to trading this month, I’ve learnt a lot of ideas that I’ll Definitely implement once I begin trading again. Thanks very much Justin, for the useful information.

    • Justin Bennett says:

      You’re welcome, Mike. Always happy to help.

      Let me know if you have questions.

  • Darren Harris says:

    Hi Justin, my question is regarding indicies/cfd’s is it better or “easier” to make a bigger profit on the mentioned or are forex pairs the better option?

    • Justin Bennett says:

      Hi Darren, it’s subjective. There is no one-size-fits-all answer. It comes down to what you enjoy the most and what fits your personality.

      That said, price action tends to work best in highly liquid markets which is one reason I chose Forex many years ago.

  • O'neil says:

    Hi Justin,
    What advice do you have for a trader holding bad trades for possible reversal

    • Justin Bennett says:

      That’s probably a good topic for a lesson. While you wait, all I can say is that if you ever find yourself hoping for a favorable outcome, you’re doing something wrong. Either the trade violates one or more of your rules, or you’re risking too much, or both.

  • janam janam says:

    well just 3 month ago..i blew up my 1000usd account it was my first account trading…i m soo down during that time..its lots of money in my country..totally broke and helpless..i stop and think i will never be back to trading again..but the passion just keep coming inside me, the ability to make money without working for someone keep hunting..so i found myself a mentor and study all the basic again..candlestick,snr and chart pattern..after that i invest 1000usd again create trading plan and stick to it..that 3 weeks ago ..n guess what i m more profitable then ever now :)..to all newbie out there if u strugling, found u self a mentor and never give up!!i always came here to find nice setup for cross pair..since i only trade major pairs :)..thank you justin

    • Justin Bennett says:

      You’re welcome. Congrats on your progress.

  • Meer Manwar Hossain says:

    Thanks my dear.

    • Justin Bennett says:

      You’re welcome.

  • Harry says:

    You are a LEGEND!

    • Justin Bennett says:

      Cheers.

      • Mapfura says:

        Hi, thanks alot Justin. You the best.
        Any recommendations(books to read)

  • Fikile Felliciah Nkosi says:

    Hi, I have blown more than 5 accounts , just started trading 7 months ago.

    I did all the mistakes you mentioned her; I wish I have found this info earlier, nonetheless , I have learned through out this short period.

    My 1st mistake , I do not take a break from trading even if I blow out my trading account.

    2nd mistake, I practice on a live account with a high money and off course high risk because I focused much on making money than learning trading.

    3rd mistake, I always want to make money in trading whereas I do have enough knowledge of ” how to make profits and how to reduce risks.

    Last mistake, I failed to identity the wrongs and by doing so , I repeat the wrongs .

    You article is very useful, thank you

    • Justin Bennett says:

      It’s all market tuition. The key is to learn from those mistakes. If you do, it was money well spent.

  • Maryanne says:

    Haha this came in right after my trading rest. Blew an account afew weeks back and now i wanted to get back to trading this coming week. Thanks for all the practical advice.

    • Justin Bennett says:

      My pleasure. Good timing, indeed. 🙂

  • Bathi says:

    Thanks for the useful information, I’ll try to take few trades on a higher timeframe.

    • Justin Bennett says:

      You’re welcome.

  • Scott says:

    Thank you!!!

    • Justin Bennett says:

      You’re welcome.

  • Khuram says:

    Dear Justin, I also lost too much and I feel lack of patience required for forex trading. I will certainly try to work on ur advices. What is difference between Forex Setups and Signals? I will use H4 or Daily chart so can we all be given daily or twice a week Signals from ur side to gain 50 pips or 400 pips on long term with ur comment/reason why to take it with Stop Loss. This way can teach many of us to gain profits and understand market.

    • Justin Bennett says:

      Don’t concern yourself with gaining pips as you say. Focus on the process and protect what you have. Do that and the money will follow.

  • Richard says:

    Top Notch-
    Your post is REALITY, WAKE-UP CALL
    HARD, At first, but so beneficial for future trading
    Thank You
    Kind Regards
    Richard

  • olufemi says:

    Enter your comment…how do I determine the appropriate entry price or when a trade is pulling back or retracing.

  • Obbiettivo o says:

    Ciao Justin grazie per questo post. La mia domanda : perche nella maggior parte dei siti forex viene detto posizioni solo in sell o buy, mai lo stesso cross sia in buy e nello un stesso tempo in sell? Io trovo da quando ti ho conosciuto e ho capito per la prima volta le basi del FX…cosa sta alla base di un pin bar lo swiing ecc… che avere posizioni in sell e in buy contemporaneamente sullo stessa copia di valuta non sia cosi sbagliata. ( io quando ci sono i presupposti lo faccio) Mi piacerebbe sapere cosa ne pensi. Grazie

  • Zulfikar Ali says:

    Hi Justine

    Your advise is worth weighing in 24 karats Gold!! I myself have own set of failures but since I started reading and implementing your advises,the effects are miraculous !! In simple words you prove everytime that forex is not gambling thing but a serious business with proper discipline. Hats off to you Sir!! I take a bow…best regards..Zulfikar Ali

  • Mbhekeni says:

    Thanks, this talks to me in many ways. I blew my account mostly because of using emotions, higher lots..etc. now I’m back on demo for 2 months I have been learning a lot. I am changing my strategies.thanks once again for your tirelessly to educate

  • Rose says:

    Hi Justin, thanks for the above piece on blown accounts. I blew mine last month and have decided to take a break and trade on a demo. But like you said I am not very disciplined on the demo cause there’s always that thought that its not my money!! I think I will get back on the horse with a small amount and change to 4hr or day trading.

    Thanks for the weekly updates as well

  • Auslan says:

    Thank you so much for your explanations. I am less than four months in trading and just blew my account. I want to know, following the candle time, when is the best time to enter a trade?

  • Andre says:

    Very good info, I just blew have of my account, it’s already few times, total about 50k, kind of giving up. Will try again by your advise. I’m a member.
    Thanks a lot.

  • Andre says:

    Sorry, half of my account

  • Russel says:

    Hi Justin
    Thanks a lot for sharing, you brought this article at right time, 2 days ago i just lost $50000 in one day, my account got wiped within blink of an eye, i couldnt believe it, before this loss i had 100% track record of trades i took, i believe i was too confident, may God richly bless you i will exercise this rules definately

  • Ahmad Khairudin says:

    ..wonderful answer Mr, Justin sir. Thanks a lot.

  • Stifler says:

    Great piece of advice. Thanks a lot man.

  • Opolo Benjamin Promise says:

    Why is it important to trade using 5pm Eastern charts? My timezone is the GMT +1 or the UTC +1 so I understand that the New York close of day and resumption of another will be 10pm in my time zone. So I look out for 10pm.

  • Zulfikar Ali says:

    Further to my comments above,as advised by Justine also, the significance of Demo trading can’t be discounted. I started with zero forex knowledge and faced the consequences and then I would quit the tarding not to resume again and then would find a new technique or indicator and jump to live trading and lose again. I went through the above cycle 100s of times in first 3 years. But since I started getting JB’s weekly forecasts/ analysis Things started changing. I must say JB has significant influence over my trading style now. Can’t express my gratitude in words towards JB. God bless you !!

    • Zulfikar Ali says:

      I forgot to add that After 3 yrs of failures with wrong technique with live account, I tried Justin’s methods in demo for 6 months and after getting confidence I switched to live trading again and the results are amazing

  • Adriano says:

    Enlightned article, as always, Justin. Thank you for your support and good work.
    Adriano

  • Adenugba Adeniyi says:

    Thank you Mr Bennett I have blown one account and other is still running but I will take your advice by switching to daily chart an reduced my frequent trading. I think this is where my problem is.

  • Gilbertt says:

    Hello Justin, A long time ago I follow your recommendations about Forex. At the beginning I believed a little at you (not a hundred percent), but I persist in following your suggestions (timeframe and etc). The good news is that my profit increased not 100% but incredible 300%. It´s amazing, unbelievable. Thank you a lot to share your knowledge with us and god bless you to teaching us your own experience.

  • Taofiq says:

    Tanx Justin. I’ve blown one, was on my way to blow another. Somehow I applied the first law.
    Now that I’ve back, I’ll apply the other two laws you. Hope for a consistent trading.

  • derrick says:

    thanks alot sir

  • Roy says:

    great advice coach, especially about reducing position size once in a major drawdown.

  • Haytham says:

    Dear Juatin.
    What is the proper stop loss i think much more 5% than for day to week trader. I can wait a week or more to get target.

    Regards
    Haytham

  • Elias setelele says:

    Please assist,I have messed up my account.I got more loses than the profit.

    Iam afraid I will blow my account.

    I got minus $1102 and my balance $986.

    How can i resolve this mess

  • >
    Save 40% on a Lifetime Membership - Ends December 31st!