Stock Trading

Should You be Afraid of Blowing up Your Trading Account?

Dan Zanger — world record holder for highest percent gains in a single year — did it. 3 times. Nicholas Darvas came close to doing it. A bunch of traders in The Market’s Wizards books did it. I’ve done it — once.

I’m talking about blowing up your trading account.  Which means, effectively, taking it to zero. It sounds like a really, really bad thing. But is it really?

I guess if it was a massive account — sure. I think Zanger got one of his early accounts up to $400,000.00 and then blew up.  Probably from margin. Darvas mortgaged his house for a trade — and lost.

From my perspective — if you want to get big — really big — then you are going to have to take some risks.  You’re also going to have to concentrate your efforts in a few positions.  And when you do that — you run the chance of getting into trouble.

From over commitment. From trading biases. And without a doubt from risk or ruin — a statistical probability that says if you trade at a certain size, at some point or other you’re going to run into a losing streak that will wipe you out.

Get that?  You WILL, with 100% certainty, run into a losing streak that WILL wipe you out.

But that’s the dance, isn’t it?  Outrunning the probabilities until your account is swelled with cash and you can return to statistically safe trading methods.

In the beginning, the risk is always going to be greatest.  So why not take you biggest risks there — when the account is small — and easily replaceable?

Does it make  sense to diversify an already small account into 10 positions which will move your equity nowhere? I don’t think so. Don’t get me wrong though. I’m not saying go for it when you know NOTHING about trading. Learn first. Then go MASSIVE.  And if you blow up, you blow up.

You can always start over.

One Response

  1. TenBagger December 15, 2016

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