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Trading Education Posted by Team Topstep November 14, 2022

The World’s Greatest Recipe for Losing Money in the Financial Markets

Measuring Cups

I was recently invited to give a brief fifteen-minute talk to aspiring traders. As I contemplated the task, I considered what material would be the most time efficient and effective. But, unfortunately, there are no big secrets that can be revealed in just a matter of minutes, so rather than telling them what to do to be successful, I settled on approaching the matter by supplying the “how to” of failure.

Naturally, this title is attention-grabbing, but at first glance, it may cause readers to think that this material is not appropriate or applicable to them. Sure, for the newer, less experienced traders, this article is a wealth of valuable information. However, experienced traders might find themselves challenged as well. As with any data supply, it is up to the receiver to determine how to apply it to their unique situation.

13 Ways To Lose Money In The Financial Markets

So if you’ve ever wondered about the secrets to blowing up a trading account, then continue reading. Maybe you are already incorporating some of this recipe into your current trading habits.

No Trading Plan

Here is a quick way to lose money: start the day without any idea what you are doing. Very few things in life will be successful when you have no plan. A great sports team knows that even if it has some of the most successful athletes on the team, winning still requires preparation and planning, and it often comes down to the coach. Likewise, those who trade without a plan are, in fact, planning for failure. If you have no clear reason why you are entering or exiting trades, then you probably should stop. 

Willingness to Compromise Your Plan

The willingness to compromise or change your trading plan on the fly is another surefire way to deplete your trading account—to have a plan and then ignore or abandon it. If you have a good plan, then your rules are there for a reason. To discard those rules means you are disregarding something valuable. On the other hand, if your plan is not solid, then you are back to step 1 because a lousy plan is equivalent to no plan. 

Volatility (High or Low)

I’ll acknowledge that some traders can do exceptionally well when trading high or low volatility. However, at the same time, I recognize that both environments produce significant amounts of losses for traders. This is especially true for those who don’t have a plan or who compromise their plan. Trading exceptionally high volatility can take your money quickly and disrupt your psychological approach. Likewise, trading low volatility will often cause second-guessing and over-trading. So if you are going to trade these environments, make sure your backtested plan considers the volatility climate. 

Psychological Volatility

This type of volatility is just as dangerous as any market environment—namely, trading when you are experiencing your own mental or emotional volatility. At times, this type of volatility will directly result from your trading when losses cause a psychological disturbance. 

When we trade in a state of alarm, our results are most often going to be disappointing, to say the least. Other times psychological volatility comes from external factors; or, stated otherwise, from things that have nothing to do with the market that comes along and disrupt our emotions or distract our minds. Unfortunately, these aren’t the most viable scenarios for trading success. 


Here is another key way to lock in losses—trading too frequently. I know a trader with a small $10,000 trading account who racked up $500 in commissions and exchange fees on a single day while his numerous trades broke even. The result was an overall depletion of his account value by 5%. Trade smarter, not harder. The fact is, the frequency of your trades decreases your probability of success. 

Too Large of Size

For traders with small accounts, which relates to the vast majority of those in the retail world, it’s especially tough to trade according to their account value rather than their ambitions. If you are trading a relatively large size, you benefit during gains but suffer in times of loss. If you are trading beyond your responsible account size, you are begging for a disaster. 

What’s a good way to allocate your position size? For every trader and strategy with risk parameters, that will be different. However, I’d suggest a fair rule of thumb: you can survive five losses in a row with your normal defined risk and still not be alarmed at your losses. 

Small Gains & Great Risk

This is one that I frequently discuss, in part because I observe traders who employ a method (or lack thereof) that guarantees sustainability problems. Traders, predominantly those who lack confidence, will take very small and quick gains as soon as they have a modest profit. However, when positions go against them, they will talk themselves into holding losers for a much longer duration and price movement. 

In previous articles, I’ve demonstrated how a trader needs to earn at least a factor of 2 for every factor of 1 that they risk. When trading in reverse, risking more than you are gaining, when you go on a five or more trade losing streak, as everyone eventually will, you’ll dig yourself in a hole and likely make other compromises to dig yourself out, which can lead to disaster.

Always Having To Be Correct

Traders tend to be confident and assertive people. After all, how many of us were doubted by family and friends when we chose to pursue this career or hobby? Furthermore, we are taught not to follow the crowd but to go against the grain of sentiment. However, this is a double-edged sword. 

The result of these characteristics is that any of us (some more out of habit) are likely to believe that we know more than our peers and, worse, even more than what price action tells us. This is a surefire way to deplete your account when the market is going one way, and you try to tell the market it’s wrong, insisting on a change of direction. I’ve seen traders blow up accounts with this stubborn arrogance. 

Trade What You Don’t Know

Each market involves all kinds of nuances, and when you trade something you know little to nothing about, there’s a strong chance that you will give money away.

Take, for example, a trader who decided to engage in a specific market, not knowing how illiquid it was at certain times. As a result, they got stuck in a trade in which they had to really “pay up” outside of a normal bid/ask spread in order to exit. They took a severe loss because they were interacting with a market without understanding the nuances.

News Trading

This one piggybacks on the previous item. I believe that traders can successfully trade news-driven events when they are informed about the event and their respective markets. However, for traders who are eager, inexperienced, and uninformed, trading the news will often lead to quick losses, frustration, and a compromise of trading principles. 

Strategy Without Testing

I know a trader who would develop all kinds of systems, some of them with potential. However, he refused to backtest these methods, instead insisting on trying them out in live price action since, according to him, we only know how systems work in the real world. 

The problem is that this trader lost most of his account value trying out systems that needed tweaking. In contrast, some backtesting or simulated trading could have informed him of those imperfections. Simply put, live trading isn’t the time for experimenting. 

Failure to Use Protective Stops

Okay, I’m going to throw this out there, and you can take it however you wish. What occurs is that without a stop, you are prone to compromising your initial risk assessment. As a secondary measure, I knew a trader with a small account who was trading a single contract. Let’s say he had a $5,000 account and traded a single S&P 500 mini (ES). There was an unexpected news event, and the market went crazy, dropping more than 1% in about two minutes. 

Seriously, this move came so unexpectedly. My friend was long the market. It was a slow time of day, so he thought he didn’t need anything other than a manual stop. He lost $1,500 in a minute, or 30% of his account value. To earn that back, he needed to make about 50%. Even if you trade manually, this is something to consider: have an emergency stop. 


Last but definitely not least is the practice of “doubling down” on your market positions. From the onset, I must first make a distinction regarding this. Let’s say your normal market position is three units. If you are giving your trade appropriate room, starting with 1 unit, and adding an additional 2 units, then that can be an effective way of defending a trade.

This, however, isn’t what I’m talking about. What I’m referring to is those who employ a strategy assuming the market will revert to its “mean” within reasonable timeframes and then keep adding to a losing trade in order to cost average. This will work in some instances; however, every Martingale trader experiences a time when they are severely stuck, and this is a perfect situation for blowing up an account.

Bake At Your Own Risk

These are thirteen ingredients in the great recipe for losing money. Bake at 350F for 30 minutes, and you’ll be sure to lose money. If this is not what you want to be cooking in your account, then continue reading. 

If you find yourself practicing some of these traits, you might consider that you are on an unstable trajectory, which can lead to significant trading trouble. Now is the time to alter that trajectory and re-route your potential toward success. Over the long term, these traits will eventually bite you hard. Today is an opportunity to identify and implement plans to accommodate the goal of avoiding these trading risks. No matter how successful we are, any of us can benefit from self-analysis. Until next time, trade well!