One big mistake many inexperienced traders make is placing too much money on one single trade. In this short article, I’m going to discuss why this is a potentially hazardous problem.
Other than the obvious fact that you’ll stand to lose a lot of money when you trade WITH a large principal amount, the other reason not to trade with too many lots is that you’ll begin to let your emotions take over your decision-making mechanisms.
Generally speaking, the more money you trade with, the more emotional you’ll start to feel about the trade… and this is exactly how thousands of traders wipe out their trading accounts in only a few short months! They get angry, scared and impatient when the trade starts turning sour… and this almost always leads to even worse damage control on the part of the losing trader.
Instead of cutting off his losses, the emotional trader tends to hang on to his unprofitable trade as it further erodes away his equity. Don’t make this mistake… it’s very possibly the worst thing that can happen to a trader in a single trade.
In day trading when there are many trades opened and closed, a couple of these large losses can empty your trading account very quickly. Experienced traders know not to expose their trading capital to too much risk in every trade that they make.
However, this doesn't meant that you should place tight stop-loss levels... if you do that, chances are that you’ll get stopped out pretty often and still lose money anyway. The trick is to give an appropriate stop-loss allowance... too much or too little is bad for your financial trading health.
