There was a recent survey posted to the Currensee discussion board with the question "What is the worst thing that can be done to lose money?" The survey includes the following choices:
- Using large stop losses and small take profits
- Using no stop loss at all
- Take advantage of high leverage to boost your loss
- Buy the top sell the bottom
- Trade the news
I'll take a look at the available survey responses individually
The first one is basically having a Reward/Risk ratio of less than 1. The R/R level is one of those metrics which is often cited in isolation, but should never be used by itself. It's like the Win%. Neither of them, by themselves, tells you anything. They must be used together to gauge trader or system performance. As such, having an R/R less than 1 cannot be called an error without having more information.
The second possible response is not using stops. There are a lot of folks out there who pound the table saying stops must be employed at all times. The fact of the matter, though, is that some trading systems are actually hampered by using stops. I've personally tested quite a few systems of that sort over the years. They tend to be ones which are always-in and trend oriented. The bottom line is that you need to test things out before judging whether stops should be used or not.
Using too much leverage is the third option. This really falls under the category of having poor money management strategy. How much leverage one uses, by itself, doesn't necessarily mean someone is trading poorly. After all, a scalping trader who is only dealing in single-digit pip moves can employ high leverage without pushing the risk envelop, while a position trader could take way too much risk trading with relatively little leverage. It's all a question of taking the right amount of risk. Leverage is just what gets you there.
Buying tops and selling bottoms is the fourth option to the survey. I'm not exactly sure what the questioner is getting at here – whether he's talking about buying new highs looking for further upside or whether he's talking about just consistently getting in right before the market turns because they are too late seeing the move. The first one is basically a trend trading strategy choice and hard to argue against if the employed system tests out with a positive expectancy. The second, though, is reflective of bigger problems, namely emotionally driven "I don't want to miss out" trading with no real trading plan.
As for the final choice, news trading, that's definitely something I steer clear of myself. It is certainly true that trading in reaction to news headlines can be quite profitable, but it takes someone who is really locked into the market to do it well. You have to not only know what the consensus expectations are, but also understand how the market is positioned going into the news so you're not one of those folks asking "How come the market went down on the positive data?" Most folks just don't have the time or information access to be able to get news trading right on a consistent basis. For them it's little more than gambling.
The real worst way to lose money
A while back I wrote up a list of new trader pitfalls. At the top of that list was Avoid Errors in Order Entry. This has got be the most foolish of errors any trader can make. I mean all it takes is a couple of seconds to confirm your order entry to make sure no errors are made. There really is no excuse for losing money that way, but it's something which trips up traders new and old from time to time. Sometimes you get lucky and the error works in your favor. Most of the time, though, it bites you in the tail.
I hope you never make an order entry mistake of the sort that sinks your account. They do happen, however, and I would have to rate that as the worst way to lose money.
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