How not to blow up a trading account

 

If you have traded LEVERAGED DERIVATIVES and blew you account, it was your fault and a combination of other factors.

Derivatives, weapons of mass destruction

If you trade derivatives, if the market moves against you then you are going to lose, period. Derivatives are exotic financial instruments that track underlying assets. Share derivatives, or contract for derivatives (CFDs) as they are widely known, track the underlying shares. So, if you trade these you do not have the luxury of keeping your valueless shares if the market moves against you. The broker will close the trade and debit the value of the shares you lost. If you buy and OWN shares, and the share price drops, you will always own your shares even though their value will have dropped. 

You can trade actual shares, if you sell lower you will just lose the difference between the buy price and sell price, the opposite of making a profit from your trades.

Are derivatives bad? Not really, if you understand them. Familiarise yourself with CFDs first before opening a CFD account, ensure that you understand how they work, and how you can protect your capital. Brokers states that over 70% of derivative traders lose their capital, do you think you can be part of the 30% that is profitable? 

Leverage

Leverage? This is what accelerate your account to blow up. Trading and investing require serious risk management; risk management on derivatives is just as simple as trading non-leveraged account, except that there's no point trading derivatives without leverage.

Leverage means amplifying your capital; the broker lends you the other half, for a 50% margin requirement. As long as you hold the position the broker charges, and debit, interest on your account on a daily basis, the interest rate is declared upfront.

If you over-leverage your account, then you'll blow up. Share CFDs have an average requirement of 20%, making them 1:5 leverage, the broker lend you the 80%. Forex can have as much as 1:1000 leverage, there it's much easy to blow up, a few pips against you, you are toast. But leverage is what makes forex trading attractive to traders who have limited capital; this allow them to place a 0.01 EURUSD trade for as little as $1 margin.

The problem of course is that the new trader will want to open many 0.01 positions, if you open ten of those why don't you just open a 0.1 lot trade? Once your free margin approaches zero, know that you've now bit more than what you can chew, and your account is about to blow up.

Solution to your problems

The assumption is that you know how to trade and you have a trading system in place, therefore your only challenges are derivatives and over-leverage.

1. Consider trading the actual asset, not the derivatives. This will eliminate any broker's effects; yes some brokers play around with the prices. With actual asset you will pay the full price, no leverage. This saves you in the event that your analysis is incorrect and you still want to hold your position a bit longer, although I don't recommend it.
2. Reduce your leverage. If you trade stocks, 1:5 is not bad but if you cannot manage with it, reduce it to 1:2; this will mean you will put in 50% of the share price to hold your position. For forex, try 1:200; this will be a challenge in the beginning but it will save your account.
3. Reduce exposure. For shares simply trade an ETF instead of individual shares, brokers like iqOption allow leveraged ETF trading, remember do not exceed 1:5 leverage!