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Chapter 9. Trading Inside the 24-Hour Storm > Overleveraging and Overtrading

Overleveraging and Overtrading

The lure of high leverage in the Forex market is powerful, but traders should be very careful with their money management. Just because you can find a firm that will give you 400 to 1 does not mean you should use it. As I've said before, leverage is a double-edged sword: Although the gains can be substantial, so can the losses. Just because a trader can leverage $1,000 into a $100,000 lot doesn't mean a trader with $10,000 should invest all he has in 10 lots. The biggest problem with overleveraging is that traders are forced to exit a position prematurely.

Another common mistake is overtrading an account. A basic rule is no more than 5 percent of account value per trade. Depending on risk tolerance and time horizon, this number can be adjusted slightly. Longer-term trades should be a lower percentage, and short-term trades should be higher.


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