All novice traders, one way or another, ask this question. Some are puzzled by them after the fact, when the deposit is irretrievably drained, others, a little more advanced, are interested in this issue even before opening a real account. However, traders from the second category often return to it after their deposit disappears in the broker’s bottomless pocket.
A little remark is needed here. Now we are not talking about why managing traders drain the deposits of their clients (this is a topic for a separate article), but about why traders (mostly beginners) lose their money in the financial markets.
The first reason of drain deposit- High expectations of the trader
This is perhaps the main reason that pushes traders to unjustified risks, which, in turn, lead them to large financial losses. As it usually happens. A novice trader who has read on the Internet promises of fabulous profits generously distributed by all kinds of “non-brokers” and simply scammers (as a rule, their favorite subject is the stock market) cannot be content with the modest, in his opinion, profit that trading with an acceptable level of risk gives.
Expecting huge rewards, he is forced to take huge risks. The result is a completely natural result (according to elementary mathematical probability theory): a couple of really good wins, and then a series of crushing losses.
Having no idea about the real earnings of traders (that which real professional traders receive) and the ratio of risk to trading capital that they put in their trading, beginners immediately start trading using giant leverage, hoping to overclock their hundred dollars almost a million. You can read about those earnings figures that really take place here: “ How much traders really earn ”
What to do about it
Learn to set realistic goals for yourself and don’t chase the impossible. Make up for yourself an objective idea of the earnings that you can count on based on the amount of your trading capital (this article will help you a lot, the link to which was at the end of the previous paragraph).
Remember that the risk increases in proportion to the increase in profits and excess profits are associated with the same excess risk. Therefore, seemingly very profitable intraday trading, which sometimes allows you to make several percent of the deposit per day, in a fairly long time period is often inferior in its profitability to systematic long-term investments in the stock market.
The second reason of drain deposit – Lack of experience
Most newbies throw themselves into the trading abyss rather briskly. As soon as they become comfortable with the interface of the trading terminal , they immediately open real accounts and try to trade. The result of such attempts, of course, is quite predictable.
Many on this lose all interest in trading, become disillusioned and leave for other areas of activity, along the way telling everyone what kind of scam it is. Basically, the same notorious stock market is honored with such epithets (mainly due to its greater accessibility for beginners).
How could it be otherwise if we are talking about a novice trader? If yesterday he had no idea that today he would be engaged in this craft, then where did he get this very experience? Reasonable.
How to be?
And that is why I strongly recommend that all novice traders, before starting trading on real accounts, must pass a kind of credit on a demo account without fail . This offset should consist in achieving stable trading results on the demo for at least one month (if we are talking about intraday or medium-term trading).
In the case of long-term strategies, it will take even longer to test them. I assure you that this time will not be wasted, especially since during this period you can also test your trading system online!
The third reason of drain deposit- Fear of losing money
It often happens that a trader who has achieved good results on a demo account begins to drain as soon as he switches to a real account. The reason for this may be the dishonesty of the broker, who by hook or by crook wants to pocket the trader’s deposit (this, for example, is typical of all without exception ).
Other causes of drain
Above, we have listed the main reasons that beginner traders suffer devastating losses in the real markets. In addition to them, you can add several more factors that do not contribute to stable profitable trading:
- The wrong choice of investment horizons. Everyone knows that trading can be short-term, medium-term and long-term. But not all beginners realize that the longer-term your trade (the wider the investment horizon), the less risky it is. The intense rhythm of intraday trading is by no means suitable for everyone, and the resulting psychological discomfort tends to accumulate, eventually leading to mistakes and unjustified risk;
- Wrong market choice. Many novice traders, as they say, take off “right off the bat” and, having barely learned how to use a trading terminal, immediately begin to trade in such markets, where even experienced traders are sometimes afraid to work (due to the associated high risks). This mainly concerns such markets as , futures market, cryptocurrency market, etc. My advice to you, first learn to trade stocks (without using leverage), and after that, little by little try other markets, allocating no more than 5-10% of the trading capital at your disposal for their “development”.
We all once started with this, it is difficult to find a successful trader, at the beginning of his career, there were no annoying mistakes and large losses. In the end, they learn from mistakes, most of them learn from their own, and someone knows how to do it on strangers.
Actually, one of the reasons for creating this site is to share your mistakes with novice traders, show them where the rake is laid out in order to protect them from unnecessary bumps on the way of mastering this difficult (but very, very interesting) craft.