Overtrading and Stretching the Account

One of the biggest mistakes that can and is made by inexperienced traders is overtrading. Overtrading and stretching your trading account to bursting arises often as a result of greed, or ambitious trading targets, and while these gambles might on occasion come off, the risks they pose to your trading account are too severe to be worth consideration. While the returns on offer from the futures markets can be significant, controlling your exposure to the correlatively high risks is one of the first steps towards solidifying your account and building a profitable trading business.

Trading too heavily and identifying when you are operating in dangerous territory isn’t a science, and so there are no hard and fast rules as to when you’re trading beyond your means. However, being poised to keep you trading within acceptable limits and prevent the temptation to ramp things up too greatly will keep you in pole position and in total control of your trading destiny.

The Effects of Overtrading

Leverage is what futures trading is all about. Inherent in the makeup of each transaction, leverage has the effect of enabling futures traders to earn more money from the trades they make. With leverage, a 1% gain can easily become a 50% gain or more, and as a consequence traders tend to feel inclined to trade all of their available capital at every opportunity to maximise their earnings potential.

The difficulties lie in the downside risk posed by futures market exposure. Taking a position in the futures markets opens up your capital to corresponding leveraged downswings in price, which has the effect of sharply cutting in to your capital. It’s easy to see in these circumstances, where a 1% loss might just as easily yield a capital loss of 50%, why stretched, overblown trading accounts can quickly come a-cropper. Being too heavily exposed to leveraged risks beyond the point at which you can afford to bail your account out of trouble is a recipe for trading failure, and must be avoided at all costs.

Preventing Overtrading: Effective Capital Management

So how then can you prevent yourself from overtrading, and safeguard against the risks posed by futures market trading? The answer lies in capital management, and protecting your own resources from yourself. At an initial level, you should never be trading with more than you can afford to lose, so try to avoid pouring all your savings into futures trading. Especially as a beginner, starting off small and building up your capital portfolio is a more sustainable, less risky way to go.

Even having invested an amount you can bear to lose, you should also consider the potential for overtrading within your capital account. As a rule of thumb, you should price up worst-case scenario forecasts to make sure you can comfortably afford to finance all your positions in this worst-case outcome.

When you’ve worked out whether this is viable, you should still make sure this liability accounts for no more than an absolute maximum of 30%. In fact, many traders prefer to keep this even lower, but that’s a matter for personal choice and experience. While this may seem at first to be conservative, it’s actually essential to ensure you have enough capital to fight another day even if you’ve got it all wrong, and critical in ensuring that whatever happens, you can meet your trading liabilities.

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