Avoiding the Initial Account Wipe Out : Five Tips to Increase Your Chances of Avoiding Total Account Loss

Trading is definitely one of the most difficult jobs a person can have. It is a discipline which involves tremendous amounts of effort, a lot of responsibility and a many time counter-intuitive way to approach problems. To become a successful trader means to walk a road filled with land mines, both planted by yourself and by other people. One of the most common things people ask me about trading  is how to avoid the initial account wiping “baptism” demanded by the market, how can a person new to trading avoid the pitfalls that make most of his or her counterparts lose entire accounts before even coming close to the realization of what profitable trading requires? The truth is that in order to avoid this you need to do some very simple things which are tremendously hard to do, precisely because they are against what most people want to achieve in trading and how they want to achieve it.

On today’s post I will share with you five very simple tips that will make it harder for you to wipe an account. I can guarantee that from all the traders who read this post only about 1 in 1000 will ever follow this advice but those who follow it will get more in touch with the reality of trading, what can be achieved and how it can be achieved without ever wiping an account. These are the five tips you should follow if you want to avoid wiping any trading account before becoming successful :

1. Listen to profitable traders. Perhaps the most important thing new traders should do is listen to what profitable traders are doing and what they advice. Many times during my career in trading I have advised new people to do this or that only to find out that they did the total opposite, later coming to me saying “you were right”. Sadly many people have to learn things by themselves before moving on and this sadly requires them to wipe accounts. If you cannot listen to profitable traders and what they tell you then you probably will have to wipe a few accounts before you do become a profitable trader.

2. Avoid advice from people you do not know. The difference between real life and the internet is that in real life identity is determined by your physical presence (one body, one identity) while on the internet your identity is determined by information, making many identities and lying much easier to pull off. Many people will personify professional traders or lie about their profitability, track record length, etc. You should always be careful about whose advice you take since you could be taking advice from someone who doesn’t know anything about what he or she is talking about. Even though most professional traders will not care to share their track records with you (why should they care about proving anything to you?) make sure that you are learning from people who use their real identity online and have some sort of reputation around them regarding their status as professional traders. Make sure you KNOW someone before you follow any advice.

3. Avoid forums. Sadly internet trading forums do more wrong than good for new traders. Usually most traders on internet forex trading forums are just as new and unripe as yourself, building upon strategies which are unsound or techniques that will never work. The large majority don’t have any important experience or idea of what really is required to be profitable (besides clichĂ© phrases like “follow the trend” and “don’t overtrade” which fail to materialize into any concrete advice) coupled with a total lack of knowledge about how to evaluate strategies, determine if a system actually has an edge, etc. If you want to avoid wiping an account then staying away from following any advice or trading techniques developed within forums might be a great idea.

4. Follow only proved and tested methods. If you want to avoid wiping any accounts then you should only follow trading methods which have been appropriately evaluated during at least 5-10 years of trading so that you know that they have a good chance of working in the future. Trade only methods that have been showed to withstand market conditions for long periods of time, systems that have had RELIABLE simulations executed for the past 10 years which have also shown to work on live trading for at least a year or two. Stay clear of anything that falls out of this area and you will be able to only use sound trading techniques on your account.

5. Learn about the limitations of simulations. Perhaps one of the most important things a new trader can do to avoid account wipe outs is to learn a LOT about the software being used for simulations and what its limitations are. Many people wipe accounts because they use systems that show extremely good 10 year backtests which are made from the exploitation of some of the limitations inherent to the software used for simulations. For example it is VERY easy to build extremely profitable systems on the 15 or 5 minute time frames in metatrader 4, but any method developed within these time frames is inherently unreliable in backtesting due to the Bid/ask feed differences, the importance one minute interpolation takes and the dramatic differences between brokers within candles on these time frames.

Of course, for many people following the above mentioned advice will be terribly hard – not to say impossible – and they will have to learn from the market the hard way. Some people believe that Martingales can work until they wipe an account with one of these systems while others will have a similar experience with grid trading systems and systems with very bad risk to reward ratios. The truth is that many people cannot simply believe something doesn’t work until they have been showed that it doesn’t through experience so for this people having an account wiped is a must in order to advance in their pursuit of long term profitability.

Finally I would say that for all traders starting with a 100 USD cent account might be a very wise decision since account wipe outs are a very real and almost necessary condition for most traders to advance in the path towards long term profits in trading.

If you would like to learn more about my work in mechanical trading and how you too can start to build your own automated trading systems based on sound trading principles please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to automated trading in general . I hope you enjoyed this article ! :o)

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