There is more than just one way to blow up a trading account. Traders can blow up mentally, emotionally, financially, through an out of control ego, or a refusal to admit when they are wrong. There are many paths of destruction that a trader can travel down, here are four of those paths to avoid.
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Of course everyone understands that a trader can blow up their trading account financially. Whether you lose your first account almost entirely through a long string of losses by using margin, leverage, futures , or options or have a 50% draw down in a larger account these are both the definition of a ‘blow up’. The lack of an understanding of the risk of ruin that leads to excessive positions sizing and not taking stop losses will eventually, inevitably lead to ruin regardless of a traders beliefs about their own abilities.
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There is also the emotional blow up, a trader can lose their faith in themselves or their system and lose the confidence needed to take entries. The entries come and go and they can no longer pull the trigger. Understanding the possible historical draw down of your system and understanding it is the market environment no you who chooses if you win or lose can save you from this fate of ruined confidence.
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You could blow up simply due to the fact that your system has no edge, you are just slowly giving your money to the house over and over with commissions and the bid/ask spread. You must understand why you have an edge and take the entries when they come and cut the losses when the trade fails. Is your edge a trend? A chart pattern? A mechanical system? A stock profile? Swing trading? Trader know thy edge or you will not know profitability.
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The ONE BIG TRADE blow up is caused when you are 100% sure of a trade and bet your whole account. I do not believe this is really a risk management problem this is an ego problem. When you shift from a 1% risk per trade that gives you 100 chances to win to a 100% risk in one trade you truly must be an egomaniac, a gambler, and doomed to eventual failure.