Overtrade most often reveals itself when the trader (hoping to receive the maximum possible profit) acquires an oversized contract, risking the larger part of his trading capital in just a single transaction. In case a market starts moving against the trader’s position, possible losses can exceed the acceptable limit. The result can be irreparable damage to the working capital, bringing the trading account to a condition unusable for further trade. The account will be unusable in a timely manner in the future, due to the impossibility of covering those losses that occurred during just one transaction. Under current conditions, many banks and dealers offer their clients margin trading terms at a leverage ranging from 20:1 to 50:1 (and even higher). The initial margin as an industry’s average is only 2 to 5 percent.
Considering the average market activity during one day, it is easy to lose half or even a larger part of the trading capital. In order to avoid this occurrence, it is desirable to use certain margin self-limitation and not to use more than 5 to 10 percent of the trading capital during one trade.
Traders should establish their individual limitation for the margin, and possibly keep this limitation not below 10 to 20 percent as compared to the size of the trade contract. In other words, for each $10,000 to $20,000 of the size of your trading capital, only one contract of $100,000 should be traded at any time.
Recommendation
From the very beginning, it is useful to remember that there is no capital so large that it is impossible to lose during speculative operations in the FOREX market. The risk of losing part of or the entire investment capital is always present where there is the possibility to earn. The currency market is not an exception to this rule. In order to earn, the trader must take the risk of loss. In risking, though, traders must determine in advance the limits of their risk. They should never risk all or the largest part of their trading capital at once. They should risk only that part whose loss they are sure will not result in catastrophic consequences for their trading accounts and the resulting inability to further participation in trading.
Considering the average market activity during one day, it is easy to lose half or even a larger part of the trading capital. In order to avoid this occurrence, it is desirable to use certain margin self-limitation and not to use more than 5 to 10 percent of the trading capital during one trade.
Traders should establish their individual limitation for the margin, and possibly keep this limitation not below 10 to 20 percent as compared to the size of the trade contract. In other words, for each $10,000 to $20,000 of the size of your trading capital, only one contract of $100,000 should be traded at any time.
Recommendation
From the very beginning, it is useful to remember that there is no capital so large that it is impossible to lose during speculative operations in the FOREX market. The risk of losing part of or the entire investment capital is always present where there is the possibility to earn. The currency market is not an exception to this rule. In order to earn, the trader must take the risk of loss. In risking, though, traders must determine in advance the limits of their risk. They should never risk all or the largest part of their trading capital at once. They should risk only that part whose loss they are sure will not result in catastrophic consequences for their trading accounts and the resulting inability to further participation in trading.
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