This is another big problem for unsuccessful traders and it is also linked to having unrealistic expectations about trading.
Traders have two common beliefs when it comes to a poor attitude towards risk management and capitalisation:
Firstly, they think they can trade large position sizes on small accounts. They think they are utilising the leverage that the broker provides. An example of this would be trading standard sized lots on a $10,000 account.
Let me make it clear how me and all other professional traders work with leverage: the leverage we use is always extremely low, for example I personally trade using 2:1 leverage or maybe sometimes 3:1 and I know other traders who trade millions in funds that use similar levels of leverage.
This is why we stay in business, nothing to do with the fact that we rarely have losses, which brings us to our second common belief that struggling traders have and that is, if they can trade well they should never experience more than maybe 2 or 3 losses in a row.
Again let me give you the reality for all professional traders: the market moves in phases and sometimes strings of losses occur, I personally sometimes go though whole weeks where all I do is lose trades and again the reason I am still a successful trader is simply because I risk only small amounts and my trades have a very big risk / reward ratio so often these strings of losses are covered by only one or two winning trades.
The plus side is that there will be strings of winners also and these will put you well ahead making any losses look irrelevant.
Having losing trades is nothing to fear and won’t affect your account as long as you adhere to the rules of good risk management.
One thing you can try in order to prove this to yourself is the following exercise:
Take a demo account, and place random trades, whenever you want… the only rule(s) is this: You can only risk 30 pips, but your profit target must be 60 pips…and you can only take one trade at a time, so you can’t place any more trades until the current one has been completed.
See how fast you can blow the demo account using that method, yes that’s right…the aim is to blow up your account, destroy it, kill it, reduce it to zero!
After doing this for a month or two you should see that it is quite difficult to lose all of your money, even though you are not using any kind of trading system! This will illustrate the power of risk management to you, and help you to implement it more seriously in your trading.
Next: Poor Discipline