Many of you may have heard of Alexander Kearns, but for those who haven't heard of him, this is a sad situation where a young man, barely 20 years old, s committed suicide on June 12, 2020 due to an error in a trading system that made him discover a debt of approximately $730,000 to a broker.
When the Covid-19 pandemic hit, Alexander Kearns decided to get into trading. He took advantage of the fact that many brokers offer their clients leverage, which is basically lending you money in order to make bigger trades than your account would otherwise be able to make. It is because of this offered leverage that this mistake has taken place. His account showed a negative balance of $730,000, which he thought he had to pay back one way or another. Due to the immense stress of the situation, Alexander unfortunately committed suicide. Of course, this was entirely avoidable. Worse still, the balance was an application error, and the account wasn't actually negative.
People in the trading world know that this kind of tragedy could have been easily avoided. Alexander came to the world of trading with very little knowledge of how trading works. If he had known that it would be extremely difficult to accumulate this kind of debt so quickly, even for the worst traders, it would have made him realize that many brokers now offer negative balance protection , preventing you from losing. an amount greater than your account balance.
It is important that we learn from this tragedy to help ensure that nothing like it happens again in the future. To do this, we can learn a few lessons that could help prevent further tragedies, so let's take a look at some of the things we learned.
Leverage is a wonderful thing because it can give you the opportunity to earn a lot of extra money. It basically increases the trading power of your account, but it also has its downsides. If it increases profits, it can also increase potential losses. Remember that you are now trading with larger amounts, so if things go wrong you will end up losing more. You need to understand how it works before you start trading. Be sure not to trade with just too much leverage. Some offshore brokers offer 1000:1 leverage, which is simply too high and very dangerous for a novice trader.
Protection against negative balances
One of the most important things for a particular trader is negative balance protection. This is simply the case when a broker does not allow you to have a negative balance. On the contrary, if things go wrong and your account amount decreases, the broker will automatically close all the trades you have opened to prevent you from having a negative balance. Of course, these trades will be closed at a loss and you will have lost the majority of the money in your account, but at least you don't owe anything more. The majority of brokers today offer this service which is mandatory in Europe, so make sure that this service is offered when you register with a broker. We hope you never have to use it, but if you do,
Understand the risks
It's not just about understanding what the risks are, but also how you can manage and possibly reduce them. There are many risks in trading, such as leverage, markets going in the wrong direction, different risk/reward ratio, lack of stop loss or take profit , and more. What we need to do is understand how to reduce them. Stop losses are a great way to prevent risk, as is using the correct lot size and trade size. When building your strategy, you also need to create a set of rules for entering and exiting trades, you also need to decide on the size of the trade and everything related to it. Having all of this pre-determined is a great way to ensure that you stick to it.
Using Stop Loss Orders
Stop Loss orders are there to protect you and prevent you from losing too much. Without them, a single transaction could cause you to lose your entire account. Instead, setting a stop loss means that your loss for each trade will be fixed, which will allow you to avoid huge losses on each trade and ultimately save your account. Make sure every trade comes with a stop loss order to protect yourself.
Invest only what you can afford to lose
It is one of the most important. You have probably seen this warning while browsing trading sites. You should only invest what you can afford to lose. If you think about the money you invest, if you were to lose that money, would it hurt you? Would that prevent you from paying rent or something like that? If the answer is yes to such a question, then you should not trade with that money. You should only trade with your disposable income and not with the funds you need.
Volatility can be a trader's best friend, but as a beginner you should try to avoid it. When big events happen or the markets go through highs and lows, you should try to avoid trading in that situation. Yes, it can increase your profit potential, but also your loss potential, which as a newbie trader is much more likely to hit you at some point. It is far better to simply avoid these situations.
Understand how trading instruments work
As a newbie trader, you need to understand how the assets you decide to trade work. Apparently, Alexander Kearns didn't understand how options trading worked , as evidenced by a Twitter note he left behind before he died:
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