Trading a New Account «

Trading a New Account


Trading a new account is something that all traders have to do at some point (usually at the beginning of their trading career), so it is important to know how to trade a new account correctly, otherwise the new account may quickly become a closed account.

The Psychology of a New Account
A new trading account is difficult to trade for a variety of reasons (e.g. excitement, impatience, etc.), but a new account is primarily difficult to trade because the account has no buffer between being profitable and unprofitable (i.e. a new account is only one unprofitable trade away from having a negative balance (with respect to its starting balance)).

This places huge psychological pressure on the trader to make the first trade a profitable trade, so as to provide the aforementioned buffer against the account being unprofitable. This psychological pressure can cause a variety of responses depending upon the trader, but the most likely are either incorrect trading or lack of trading.

Incorrect trading is where the trader makes mistakes that they would not normally make, because they have modified their trading technique in order to maximise the potential for the first trade being profitable (so they think). In actuality, the trader has most likely modified their trading technique in a manner that minimises the potential for the first trade to be profitable, and therefore they make the unprofitable trade that they were trying to avoid. For example, a trader might decrease the size of the trade’s stop loss thinking that a smaller stop loss is lower risk, without realizing that the smaller stop loss is actually higher risk because the stop loss is now placed incorrectly, and is more likely to be reached.

Lack of trading is where the trader does not make any trades for the new account, because the fear of making an unprofitable trade prevents them from making a trade at all. Note that this is not always the reason for lack of trading of a new account, as there are also valid reasons, such as waiting for a suitable trade.

Trading a New Account Correctly
A new trading account should be traded in exactly the same manner as an account that is well in profit, because it is correct trading that will make the new account a profitable account. The trader should trade according to their trading technique without any modifications, and the risk management ratios and formulae should be used and adhered to correctly.

The most important risk management formulae for a new account is the 1% risk rule, which requires that no more than one percent of an account is at risk for a single trade (e.g. if a trading account has a balance of £10,000, then no more than £100 should be at risk for a single trade). For example, if a trade on the British Pound to US Dollar currency market (i.e. the GBP to USD forex market) requires a stop loss of ten ticks, then the trade can be made with a maximum tick value of £10 (£10 X 10 ticks = £100), even if the account could trade a much larger tick size (i.e. the required margin is covered five times).

Some traders only trade a new account once in their trading career, while some traders trade new accounts frequently (e.g. traders that trade clients’ accounts). The former are usually the new traders, and are most at risk of trading their new account incorrectly. The latter are usually professional traders, and are less at risk of trading the new account incorrectly. Both types of traders need to be aware of the psychology of trading a new account, and make sure that the account is traded correctly.

 

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