Lessons learned from a Blown Account

This week I experienced something all traders fear… blowing out an account. Luckily for me, I kept the account small just in case this very thing happened, but it is still a very demoralizing event. Rather than dwell in self-pity, I am choosing to take a closer look at the events leading up to the meltdown and figure out what I did wrong and what protections I can put in place to prevent reoccurrence. We are all human and we all make mistakes, but when the markets teach us a lesson, it’s up to us to get our money’s worth.

Burning it to the ground – The lead-up

External stressors in my personal life over a 3-4 week period played the biggest role. Looking back on my trading journal, the warning signs were definitely there. I found myself digging out of early holes frequently, as well as allowing more lousy trades and bad decisions to creep into my trading. I did take a couple days off when things were at their most chaotic (ER visit, family pet runaway attempt to name a couple), but nothing was really done to address the underlying causes of my stress.

Initially, I resisted the idea that this had been building over a longer period of time, but after the account was blown, it felt good. Really good… This tells me that what I had been suppressing over the past month had finally boiled over and manifested into breaking every trading rule I had worked so hard to develop over the past two years.

The second biggest contributing factor was introducing a new bracket idea without fully back-testing it. This happened a few days before the actual event, but I believe it accelerated my decline significantly. Looking back, it seems that allowing something into my trading plan that wasn’t fully developed allowed more undeveloped trade ideas to be executed and things just spiraled out of control from there.

Rising from the ashes – How to move forward

This led me to the realization that I need some sort of outlet that isn’t trading, a separate relief mechanism that I can utilize. I’ve already seen the results of what happens when use my account as the outlet, so that is goal number one. Conflicts and stressors are a part of life, and it isn’t realistic to eliminate them completely, but I do need to figure out how to cope with them.

So what options do I have? One suggestion from our Discord member, Perdue, was to incorporate some journaling time prior to beginning trading (premarket prep). The idea is to write down all the thoughts and things bothering you as a sort of mental purge. I really like this concept, as it gives me the feeling of a fresh slate when the bell rings. I think I’d like to add a second step to this concept, and disqualify myself from trading if the purged thoughts and emotions are still there after the dump. Since I will have just written them all down, it should be pretty easy to identify when it’s insufficient.

Preventing the degradation of trading discipline is goal #2. Any strategy using live money to facilitate my trading (setups, brackets, etc) needs to be fully developed and back-tested so that I can have confidence in myself and my setups. The biggest problem with these new mechanisms though, is that they rely on me to make sure they are completed. Discord member JoelMc suggested that a weekly trade review with the group would be extremely helpful. Strategy review and opinions from other traders might help eliminate some biases and keep me accountable. I did not recognize the red flags that are so obvious in hindsight until it was too late, so getting feedback from the amazing community that we’ve built is a no-brainer. Would my slipping performance have been noticed by our group had we been doing this all along? Maybe not, but I suspect it would have been positively affected. There are so many benefits to doing a group review that I definitely want to incorporate it.

Blazing ahead -What if my new methods fail?

Now that I have a plan for dealing with stress buildup, what can I do if that fails and I find myself in the same scenario? Another Discord member, RobertR, asked whether I had built circuit breakers into my plan. Honest answer? Nope. I had a general idea of when I should stop… Three consecutive losers, daily loss limits, etc., but nothing that was actually defined and put to a plan. I failed in that way, but also by not having an adjustment plan for scaling up.

The rebirth – The plan

What do I need to do before resuming trading?

  1. Update my trading plan with hard stops and loss limits, and detailing the consequences for breaking them.
  2. Develop the habit of purging my thoughts and emotions at the beginning of my premarket routine. Take my SET scores before and after so I can judge the effectiveness of letting things go.  Secondly, commit to disqualifying myself from trading if the purge does not work and I find the stressors are still present.
  3. Define and fully back-test my setups and the brackets that I will use when trading with live money. I have good data on some setups already, but no new trade ideas should be executed before they are fully fleshed out and tested. (min 50 trades, 100 preferable)
  4. Start a weekly trade review with everyone who wants to participate. Topics to be covered should include: Best/worst trades of the week, questionable trades that anyone wants to discuss, as well as any struggles we have encountered in the past week. We can and should lean on each other to keep us accountable, and take the opportunity to learn from each other by sharing ideas.

My hope is that by taking the time to analyze my mistakes, others may save themselves the pain of repeating them. The internet is full of rags-to-riches stories, but lacking stories about the trials and struggles that are part of the journey. Trading can be the most humbling occupation, but we benefit when we are open and honest with ourselves and others, and accept the lessons the market is teaching us.