Reminiscences of Blown Up Accounts

[Dinerotrader 10]

I often read about a trader blowing up their account and I haven't seen a dedicated thread which could collect some experiences of this to help us all avoid it or embrace it if its occurrence is simply part of the path to success.

 

I would say blowing up an account normally means that you account lost enough value that you couldn’t trade because of insufficient funds. It also, could mean your account going to zero. I wish I had a good story to start things off but I am new enough at this that I haven't yet earned my account depletion star. My hope would be to avoid this part of the path to success however, that seems highly unlikely given how many good traders have had to pay this price for their education.

 

Please indicate if you believe your experience was necessary to progress or if you think you could have avoided it and still made the same progress. If it could have been avoided, please note how.

 

Let’s see if we can accumulate a few reminiscences of account explosions before the debate and personal theories take over. This could easily become a great “sticky” thread for new traders and experienced traders to learn from.

 

Don't hold back or be ashamed. These experiences are like Rambo’s scars, a badge of honor, the trader’s diploma……

 

When did it happen

What led to it happening

Could it have been avoided (without the 20/20 vision of hindsight through which you now see)

[brownsfan019 17]

As a daytrader, if you keep your risk parameters in check, I don't think a 'blow up' is necessary. You might bleed by a thousand cuts, but not a 'blow up'.

 

I think you'll find blow ups occur:

1) Trading w/ too much leverage

2) Trading w/ over confidence

3) Long-term trades / trades that turn into 'investments'

4) Making huge concentrated trades (bets)

From what I've read, the big blows up are some combo of those items and I can easily see it apply to the retail trader. When you can open a futures account for $5000 or less, trade with $500 margins or less, that is the recipe for a 'blow up' IF put into the wrong hands. Take that same scenario but give it to someone that understands the risks involved and how to manage those and I think the likelihood of a blow up decreases substantially.

[Dinerotrader 10]

bleed by a thousand cuts, but not a 'blow up'.

 

That counts as a "blow up" also. Please share your story.

 

I agree with your comments. The thing surprising to me is that I have heard these stories from very good traders that don't appear to be your average retail traders.

[brownsfan019 17]

That counts as a "blow up" also. Please share your story.

 

I agree with your comments. The thing surprising to me is that I have heard these stories from very good traders that don't appear to be your average retail traders.

 

Maybe you should get the party started w/ some stories that you've heard. Best way to get a thread going is to start it yourself.

[BrianNC 10]

I first started day trading the emini nasdaq in in about 2000. I only had a $1200 account and didn't know much. That was back in the .com boom and all the markets moved a lot every day.

 

I was dumb and didn't know much, and my 'wipe out' trade was one that went against me and I didn't have a stop. So as the trade went against me and was wiping out my account, I kept hoping it would turn, and finally got out when it got close to me not having any money left in the account. Of course, right after I did that it turned around and I would have ended up getting getting about half my account back.

[Soultrader 12]

First year of trading, I aimed for a homerun trade over leveraging my size up to 5 times the norm. Didnt take the quick loss as I was out trying to beat the markets with an inflated ego. Lost about 30% on one trade... couldnt get my mind straight after that and eventually blew up another 30% within the next 6 months.

 

Remaining as calm as possible once in a trade has been one of the biggest turning points. Having a plan and trading it ensures your targets and risks, making each trade comfortable. I recall being glued to the charts and this was one of the downfalls for me early on which led to overtrading. I keep it simple now, just watching for price levels with alerts to notify me in advance. No point trying to look for trades... good trades just popup in your face screaming at you. Also the more knowledge you have about the markets not just locally but on a global level... the more info you have that could help confirm your trade ideas.

[thalestrader 14]

No point trying to look for trades... good trades just pop up in your face screaming at you.

 

Great post, James.

 

Any new trader (or struggling old-timer, for that matter) would serve him or herself well by writing James's observation on an index card and taping somewhere highly visible in the trader's workspace.

 

I remember the palpable feeling of change that came over me as I evolved from "looking for a trade" to "waiting for the trade to come to me." When I do make a mistake, I can almost always attribute it to an impatience on my part to trade and thus forcing myself to take a position rather than simply waiting to hear from the market itself.

 

Best Wishes,

 

Thales

[Tasker_182 10]

Good thread, thanks!

[Dinerotrader 10]

Thanks Tasker,

I am hoping we get some more stories. I have been reading the market wizard books and a couple ideas related to this thread have really stuck in my head.

 

1. Almost all of these amazing traders made some larger risky bets when they began but eventually lost on one of them and had to really put their risk management as a priority in their trading.

 

2. One of the "wizards", who name alludes me, noted that you should make sure your position sizes are small while you are new at trading because that is your trading skills are at their very worst.

 

That makes so much sense to me. When you are new, there is a huge temptation to make some bigger bets/trades because you really want more capital to trade with but such bets normally lead to large set backs instead of progress on the path to becoming a trader.

If your skills prove to be reasonable while you are new, your small bets will keep your capital increasing and you will steadily be able to increase your size.

 

A few thoughts from a new trader so get your salt shaker out.

[DugDug 10]

all good points by the other traders....

Key to any trading system is that you always must keep in mind the risk of ruin. Portfolio management and position sizing is key if you want to remain around for the long run.

There are plenty of traders who make money for years and then blow up. That in any measure is still bad, not just unlucky. I have never come close to blowing up, and hindsight tells me i wish i used more leverage/risk. But its not in my nature.

I have seen plenty of others blowup and browns fan covered pretty much the reasons for them all. Trading is meant to be boring methodical and a business. Punting is what you should do for excitement at the bookie.

 

If your account size is not big enough to successfully trade without continually risking a blow up then most people would suggest you should not be trading.

But equally so, why ruin the dream:)

[Mindset 10]

I can't say I know the answers but here's my story..

 

Was trading a signal and inadvertently hit the sell button instead of the buy.... double up to try and make it back to even, and again and again - losing 13,000 on my first week of trading for a living. Good career choice, huh?

 

Didn't trade for a year after that trying to sort out

a) a system I was comfortable with

b) learning how to control risk

c) learning to control / handle emotion

 

Lessons for newbies

 

1. Trade a simulator EXACTLY how you would your own money - ie put in a spreadsheet all your trades and your daily profit and loss. Be absolutely honest with yourself.

Until you make profits consistently do not trade with real money - some may never actually get there - this is not failure.

 

2. Preservation of capital is 100 x more important than profits - there is always another setup.

 

3. Have a plan - a complete plan of when to get in and how/why to get out - profits and LOSSES. This will take some time and is not as easy as it sounds.

 

Understand that trading is extremely simple and extremely difficult all at the same time.

[t10trader 10]

Had options account blown up by US based broker - no risk management.

 

Also wrecked TS account last year on same day as badly pranging car, overtraded badly and lost over $2k in a day on a $5k account - which led to wipeout 6 weeks later.

 

The moral of the story is simply to stay in the game kill these bad days early and come back with a fresh head or go to demo for a while.

 

Enforce daily loss limits etc

[MightyMouse 12]

In 1988 I was a broke stockbroker and bought 30 expiring month SGP 45 calls for $.25 cents. I didn't have the 800 bucks to pay for the options so I borrowed the money from my father, figuring that I could take a cash advance on my CC to pay him back if it didn't work out. The next day the options opened higher and hit $2.75 and I balied. I subsequently ran ran that account with up to $30,000 net of withdrawals over the next 18 months trading options. Over that period of time, I was rarely wrong. If I did get the direction wrong initially, I would double up and get out at BE or if I was fortunate, at a profit. The monday before the wednesday/thursday that Sadam Hussaen went into Kuwait, I took a large position in Fannie mae sept 40 calls. FNM seemed to be oscilating between like 38 and 44. I had made great money on it before and this was going to be easy. If you recall the time, no one thought that lunatic would actually go into kuwait. Well, he did, and I took a nice hit on the initial position. I added, and added and took a beating. My 30K vaporized to less than 3000 by the end of Sept. 1990. I proceeded to lose the rest over the next couple of weeks attempting a hail mary pass. Lots and lots of lessons learned. Good times

[thalestrader 14]

In 1988 I was a broke stockbroker and bought 30 expiring month SGP 45 calls for $.25 cents. I didn't have the 800 bucks to pay for the options so I borrowed the money from my father, figuring that I could take a cash advance on my CC to pay him back if it didn't work out. The next day the options opened higher and hit $2.75 and I balied. I subsequently ran ran that account with up to $30,000 net of withdrawals over the next 18 months trading options. Over that period of time, I was rarely wrong. If I did get the direction wrong initially, I would double up and get out at BE or if I was fortunate, at a profit. The monday before the wednesday/thursday that Sadam Hussaen went into Kuwait, I took a large position in Fannie mae sept 40 calls. FNM seemed to be oscilating between like 38 and 44. I had made great money on it before and this was going to be easy. If you recall the time, no one thought that lunatic would actually go into kuwait. Well, he did, and I took a nice hit on the initial position. I added, and added and took a beating. My 30K vaporized to less than 3000 by the end of Sept. 1990. I proceeded to lose the rest over the next couple of weeks attempting a hail mary pass. Lots and lots of lessons learned. Good times

 

Great story ... "losers average losers." Thanks for sharing.

 

Best Wishes,

 

Thales

[eric341 10]

I blew up my CFD account last October, when the markets were going crazy.

 

I remember it vividly- it was October 17-18 and the markets were tanking.

 

I loaded up on DAX contracts, shorting it. I was overleveraged and the next morning I woke up to see that I got a margin call due to a huge rally.

 

There were two key lessons I learned from this:

 

1. Use a stop loss

2. Don't overeleverage

 

Looking back at it, it doesn't cease to amaze me how naive I was in thinking I could get away with breaking the two rules above, especially in a volatile market like that.

 

Luckily for me the account wasn't too big.

 

I'm still trading and not profitable yet. I'm sure I will be soon though

[Ingot54 13]

Please indicate if you believe your experience was necessary to progress or if you think you could have avoided it and still made the same progress. If it could have been avoided, please note how.

 

Don't hold back or be ashamed. These experiences are like Rambo’s scars, a badge of honor, the trader’s diploma……

 

When did it happen

What led to it happening

Could it have been avoided (without the 20/20 vision of hindsight through which you now see)

 

In 2005 I switched from trading equities through a bank, to trading them as CFD's through a broker who offered a Guaranteed Stop Loss Order. I was still very inexperienced in the markets. I had no understanding how a GENERAL market correction could affect even "good" stocks.

 

I started with $15,000 mid August 2005 ... pretty much in the heady middle days of the bull run up to the 2007 plateau. My favourite stock was Zinifex (now merged) and I bought them as CFD's for $2.05 on 5% margin deposit. This meant that a market correction of just 5% would see my stop loss orders triggered, and because I was dealing with CFD's, I would lose only the margin.

 

With ordinary stock purchases, you just take a 5% loss, and get the remaining capital returned, less brokerage.

 

Anyway, in the next few weeks, Zinifex ran up to about $2.90 or more, and I just kept removing equity, and re-investing in more CFD's, and moving the stops higher, to maintain the minimum margin. By early October, my $15k a/c had grown to $25k ... on paper.

 

I "owned" thousands of CFD's - over 13,000 Zinifex, and about 6 other "good" stocks, in a total of 27 positions! There were limits on each position - it was not allowed to own more than 3,000 stocks in one position, but that didn't bother me.

 

I could do no wrong.

 

I had no idea what was to come - I had no idea that places like Bloomberg, or news services existed.

 

On the morning of 5th October 2005, I could see that the market was about to open well below the close of the day before. I had no idea what to do - I had never experienced a correction in any form before. Within 5 minutes of the opening, I was flattened. I had witnessed all my stock CFD's close one by one, like lights blinking off, as the stops were hit.

 

I rang the broker to close everything, but they said ... you have to give us a price you want them closed at. Of course with 27 open positions, it was an impossibility, and even to close ONE position electronically, it took about 60 seconds. The platform was jamming, and access to the broker was impossible through the platform.

 

I ended up closing about 4 positions, and the rest were gone.

 

My positions remaining were worth $8k ... a loss of $17k in about 10 minutes.

 

All I could do was think about how to get back the money. I put the balance back into my "good" Zinifex positions, and thought about rebuilding. It did not occur to me that there might be TWO corrective days in a row.

 

The next morning, the scenario was repeated, but this time I was left with about $300.

 

To say I was in shock would understate my mental condition. I was unable to think, or even cry. It was unspeakable. My wife asked: "Aren't you trading?" because the computer was turned off. The hardest part was explaining that I had lost everything, and that I really didn't have a clue how it had happened.

 

It was 4 months before I had the courage to retry trading, but it was never the same. My (false) courage, acquired from the roaring days of the bull markets, never fully returned.

 

The way to avoid this crisis, would have been to maintain at least a 25% margin ... and preferably more. But it was always going to happen, because all traders need to experience all market conditions before they realise that money management is an extremely important part of trading - regardless of what you trade.

 

And I was not only hopelessly over-leveraged, I was loaded with too many positions, with no way of rapid liquidation in a crisis. 27 positions would have taken at least 30 minutes to close, under optimum conditions (with the technology in use at that time) ... entirely hopeless when platforms are jamming, or the phones are jammed with traders screaming at their brokers to sell.

 

But I doubt I would have heeded any advice before the event - I didn't appreciate that it would be impossible to close the positions in an instant ... or that the market correction would hit so savagely at the opening bell. The index was already down 2%, and by the end of the first day it had plunged about 8%, from memory. By the end of the second day, the market had corrected by around 12%.

 

I have had two other fairly major loss events, but nothing like that. I have more recently lost amounts of $3,000 through rapid spikes in price, which I believe was electronic triggering of stop-loss orders. This does not occur as frequently as it did then, but the recent "flash-crash" on May 6th 2010 was, I believe, an orchestrated electronic event.

 

The triggering of stops was designed to plunge prices, with contingent buy orders strategically placed to take advantage of the sell-off. Within ten minutes, millions of stocks had changed hands, and at the end of the day, prices were pretty much as they had been before the event.

 

Convenient. The work of predators? The work of the Government Plunge Protection team getting themselves cashed up?

 

Never!

 

This was probably a criminally driven event by a broker with deep pockets - possibly one of the bigger Investment banks or brokers. It would be interesting to track ownership of the stocks that changed hands! But of course, the public have to have confidence in the markets, and so this kind of information is never released.

 

The thing is - you have to be prepared ... there is no such thing as a white crow, is there? But could you ever see one!

 

For more reading on what can and did happen, read here ... The Truth and the Periphery: Flash Crash: Why a Raven is Like a Writing Desk

[max8ion 10]

I think it's really interesting thread, it's a pity there are not so many shared stories. But it is always nice to know other people experiences

[SIUYA 11]

my 2 cents - all those conspiracy theories are poor excuses.

you were over leveraged. end of story.

There is so much government regulation going on around the world today to protect idiots both from banks, institutions and the mums and dads of the world who borrow too much and pat themselves on the back when they make money and then complain when they loose.

Throttle back on the leverage will mean less regulations, better markets, less blowups.:helloooo:

[j0b0123 10]

Almost every blow up starts from not using stops or not adhering to stops for whatever reason.

 

This is followed by confidence in the position, and adding to a position in a loss. If traders NEVER did this, I would say 80% of them would not blow up. This does not mean they would not lose, but this alone accounts for the majority of the problem.

 

I will give you a story of my blowup.

 

I started trading full time in 1996. The prop shop I opened with had many good traders in the office. I started with about 25k in my account, which was leveraged up to 200k intra-day if I needed it.

 

I started out trading the right way, and built the account up to about 35k in about 2 weeks time, trading 300 or 500 share lots only.

 

At this point, my confidence was growing. I then asked around, and asked what the office record was for a single day of day trading, starting the day with no positions and having an account size of less than 50k. I was told the record was 11k, without being stupid (meaning going all in on a low priced stock etc).

 

I told them I would beat that record the next day.

 

I traded like crazy, and at the end of the day, I had amassed about a 12k profit. I was very proud of myself for doing that.

 

That was also the "peak" of that trading account.

 

I tried to come in the next day and do the same thing, but the markets would not have it. I ended up losing about $4500 that day.

 

The next day, I vowed to make it back, and lost another $2500.

 

You can see where this is headed. In addition to losses, I was racking up massive commissions from over trading the account. Instead of letting the markets show me how aggressive I should be, I was trying to "force" the markets to give me winning trades.

 

Basically 3 months later my account was near 0 and I was done. My early success had doomed me, because I had a severe case of overconfidence. Even though I knew how to pick the good trades, in real time I was somehow "avoiding" the winners and only playing the losers.

 

Years later I realized what had happened to me. Because I started losing, my brain wanted to avoid losing at all costs. So subconsciously I was filtering trades that "looked safe", and avoided ones that did not. All I ended up doing was playing stocks that did not move that much, or were near a support(long) or resistance(short) which eventually broke etc. I would cut winners early, because I did not want them to turn into losers.

 

I learned a lot from that experience, and have not repeated it since.

[laurus12 10]

Funny title of the thread :o

 

One thing I would really underline in addition to the detailed practical why's is that I strongly believe the main reason for that beginners fail is because of lack of knowledge on how the markets really work.

 

Giving people risk rules and so on without giving them the knowledge of how things acctually work is like telling kids what they should do without telling them why. I then mean like principles of life (markets) and not just telling them that they will get hurt (blow up your account).

 

The trouble is all the overload of crap on the internet where people do not know what they need to know in the first place. It's like finding a needle in a haystack that you do not even know that is there or looks like.

 

Lucky for the beginner if she or he finds Traders Laboratory. Except from some serious Gann and Fibonacci, it's all here :thumbs up:

 

Laurus

[TheRumpledOne 14]

TradeStation had a bug and my auto trade program was losing when it should have been winning.

 

I would watch trades fire off, see the P/L go green and then slowly turn red.

 

Backtest worked fine.

 

Real time, entry worked fine but the bug messed up the exits.

 

Took their quality control people a while to figure it out.

 

I had to remove some code to make the bug go away.

 

Thousands of dollars down the drain...

[kv_maligi 10]

Hi, Its nice thread for sharing & education new comers. I have been trading for last 2 years. Initially i made gains & losses......., but mostly losses, finally ended up loosing lots of money. Now i am regaining & doing intraday as per charts/TA. Following are my opinions

 

1) Gain Knowledge about market, technical analysis - by one contract/paper trading.

2) Findout good strategy,matching your personality. You must do it on your own as you are the best judge about your self.

 

3) Develop trading system, patiently wait for signals. No signals---> No trading.

4) you must decide, well in advance, when to enter, exit & position size.

Remember undertrading is as much as overtrading.

5) Stick to one instrument, preferably imdex over stock.

6) Trade on only chart set up/siganls, do not worry about blue channels ( they are paid for talking, not for their knowledge), news ( Any news is ild news)

7) You must do it for long periods till you get enough experience & confidence in the system/strategy.

 

Later on you should trade like Pro. This is the best approach & beleive me you can beat buffets, cross over gates, crush carlos & jig on Jims in creating welath.

 

Viswanath

[Avarice 10]

1999, the dotcom boom. My plan was simple: monitor penny stocks, wait for any news concerning that stock, then go full-in in the direction of the opening gap.

 

I rode the wave, baby. I had it down... I mean what could go wrong? I was more intelligent than those schmuck dentists, better informed than the housewives -- hey I saw Stone's Wall Street. Blue horseshoe, anyone?

 

Stops? You gotta be kidding me. Stops are for wimps. Real men didn't need stops back then.

Position Sizing? Sure, I did that -- my position was either 200% in -- or out.

Record keeping? I started my chimney fires with those slips.

Liquidity? Wha?!

 

Liquidity was the freight train that hit me. One of my "sure" trades turned sour only minutes after I got in, and after trying to sit it out for 10 minutes the heat got too much and I wanted out. The thing was, EVERYBODY wanted out, the market dried up. No liquidity... The wave I wanted to ride turned into a tsunami, only in the opposite direction: I remember -- as if it were yesterday -- hitting the "sell to market" button and waiting. And waiting. And waiting.

 

The liquidity freight train was loaded with trucks loaded with trains. Drawdown that day? 90%. In 30 minutes. And why?

 

1. Complacency. I thought I was smarter than anybody else, that I "had it down". I learned that, in trading, you never "have it down". Trading is a job. And just as with any other job, you have to work. Or you get the boot.

 

2. Unrealistic trading plan. This is putting it mildly. I didn't know what the feck I was doing. Today, I only trade instruments I know, using mechanics I understand.

 

3. Overleverage. It's fun watching your equity grow in multitudes if the trade goes in your direction. Well, it sucks if it's the other way around. And those margin calls -- they HURT. I don't overleverage anymore.

 

4. No risk management. I had no protective stops, the term position sizing was foreign to me. These days, ALL my positions are based on my risk parameters and every trade is protected by a stop loss order.

 

And all those trades I thought I *had* to take, because the opportunity would be gone the next day? Well guess what, this was over 10 years ago -- and the market is still there!

 

Patience. It's a virtue :p

Edited January 27, 2011 by Avarice

[MightyMouse 12]

Almost every blow up starts from not using stops or not adhering to stops for whatever reason.

 

This is followed by confidence in the position, and adding to a position in a loss. If traders NEVER did this, I would say 80% of them would not blow up. This does not mean they would not lose, but this alone accounts for the majority of the problem.

 

I will give you a story of my blowup.

 

I started trading full time in 1996. The prop shop I opened with had many good traders in the office. I started with about 25k in my account, which was leveraged up to 200k intra-day if I needed it.

 

I started out trading the right way, and built the account up to about 35k in about 2 weeks time, trading 300 or 500 share lots only.

 

At this point, my confidence was growing. I then asked around, and asked what the office record was for a single day of day trading, starting the day with no positions and having an account size of less than 50k. I was told the record was 11k, without being stupid (meaning going all in on a low priced stock etc).

 

I told them I would beat that record the next day.

 

I traded like crazy, and at the end of the day, I had amassed about a 12k profit. I was very proud of myself for doing that.

 

That was also the "peak" of that trading account.

 

I tried to come in the next day and do the same thing, but the markets would not have it. I ended up losing about $4500 that day.

 

The next day, I vowed to make it back, and lost another $2500.

 

You can see where this is headed. In addition to losses, I was racking up massive commissions from over trading the account. Instead of letting the markets show me how aggressive I should be, I was trying to "force" the markets to give me winning trades.

 

Basically 3 months later my account was near 0 and I was done. My early success had doomed me, because I had a severe case of overconfidence. Even though I knew how to pick the good trades, in real time I was somehow "avoiding" the winners and only playing the losers.

 

Years later I realized what had happened to me. Because I started losing, my brain wanted to avoid losing at all costs. So subconsciously I was filtering trades that "looked safe", and avoided ones that did not. All I ended up doing was playing stocks that did not move that much, or were near a support(long) or resistance(short) which eventually broke etc. I would cut winners early, because I did not want them to turn into losers.

 

I learned a lot from that experience, and have not repeated it since.

 

JB, I do not think it is as simple as just stops, but certainly stops are a good part of it. I Think, categorically, we can say that blow-ups are a result of positive reinforcement of doing the wrong thing over and over.

 

So, speaking from experience, having a poor strategy of adding to a loser once, twice, three times, and having it work in your favor. Eventually, if it's a poor strategy, a trade comes along that won't come back and your equity spirals to hell.

 

MM

[MightyMouse 12]

TradeStation had a bug and my auto trade program was losing when it should have been winning.

 

I would watch trades fire off, see the P/L go green and then slowly turn red.

 

Backtest worked fine.

 

Real time, entry worked fine but the bug messed up the exits.

 

Took their quality control people a while to figure it out.

 

I had to remove some code to make the bug go away.

 

Thousands of dollars down the drain...

 

Out of curiosity, how did tradestation make your trades go red when they should be green?