also to those business requirements under which it will have to work.
OVERTRADE RISK
The second mistake made by a majority of newcomers can be attributed
to the overtrade risk. This problem is sometimes directly connected to insufficient
trading capital. Quite often, though, the problem does not have
any relation to this. Rather, it can be explained by the trader’s lack of
knowledge of the main principles of money management, which means insufficient
ability to control someone’s trading capital. A trader’s trading
capital is his tool designed to earn money. In the first place, the trader has
to take care to keep this tool intact, because its loss or damage will immediately
result in the inability to continue his trading operations.
YOU MUST DETERMINE THE LIMITS OF YOUR RISK
IN ADVANCE
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.
This is the minimum for a majority of the dealers. Establishing a Trading Account.
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.
Read More : OVERTRADE RISK
