Written by AtelierUK
Forex is a single investment for many on eToro. The dream of achieving huge returns is spoon fed across many social and media networks, but in reality is highly improbable. More often than not, new traders will lose significant amounts of money, only to give up trading immediately. Many will try again, only to lose again. A select few will take the long arduous road of self-education, trial and error, and sheer determination until they eventually break even or realize profit. “There’s no such thing as a free lunch” they say. And they’re right. But if you invest effectively, the risk of failure can be significantly reduced, and potential gains maximized. This article contains three ideas that I believe will benefit those new to the world of trading forex on eToro, and investing in general.
1) Don’t invest what you cannot afford to lose.
Earlier this week I read a comment from an investor who claimed that they would now struggle to pay their rent due to the losses incurred overnight from copying a particular trader. Whilst this poor chap is probably going through hell right now, the lesson learnt is clear. Do not let yourself get into a situation where if you lose 100% of your account it will affect your quality of life or lifestyle. This will significantly reduce the stress levels experienced when the market goes against you, which it invariably does.
As a rule of thumb, you should only invest 10% of your ‘investment portfolio’ in any one single investment. eToro should be considered a single investment. So if you’ve put $1,000 in your eToro account, there should be at least $9,000 in savings or investments held elsewhere. Here’s why:
Let’s say I have $1,000 in eToro, and $10,000 (for ease) in savings. If I make 5% per year in savings, then I will earn $500, guaranteed (in most cases). To earn the same amount on my eToro account, I would need to make a 50% return in my account. This is quite achievable over a 12 month timeframe, with the right approach, but the risks are significantly higher. It’s FAR more likely that you’ll lose 50% initially, and when you’re 50% down, you need to make 100% return to break even again.
This principle is so often ignored by new investors. You’ll find it printed on EVERY SINGLE page on the eToro website – it’s a disclaimer for financial institutions, but it’s also the number one rule. No one likes to lose money, but the desire for wealth can blindly lead you down a dangerous path. Be wary, and tread cautiously. Start small, learn the platform, the process, and ensure you have adequate savings to more than cover your losses – then you can increase your investment in stages, rather than going all in from the start.
2) Diversify your portfolio.
A similar rule applies to your eToro portfolio allocations. If you have opened an account to copy other traders, rather than to trade yourself, then I believe you should copy a number of different traders, rather than just one or two. Everyone gets it wrong sometimes, and when it goes wrong, it can have a significant impact – you want to avoid this. Reiterating a similar example from point 1, here’s why:
If I have $1000, and copy only one trader, and that trader loses 50%, I am left with $500. That trader would then need to make 100% return before I can break even.
If I have $1000, copying 10 traders who each use different strategies, but one trader gets it wrong (and loses 50%), I will have only lost $50. Chances are, you can use profits from the other traders you’re copying to increase your allocations and cover the losses.
Diversification reduces risk, and helps improve the longevity of your account. It can limit the returns on your investment though, but I believe it is a far more sensible approach to trading than simply putting all your hopes on one particular trader who is boasting exceptional monthly or yearly stats.
I’m not suggesting you have to copy 10 traders, but as a rule of thumb, I suggest 5-8. You may find the new Guru Finder feature helpful in your search, or you may wish to consider some of the allocations within my own portfolio.
3) Never trade blindly.
So often I see traders executing trades without a strategy or reason other than a ‘hunch’. It’s such a common mistake. Don’t be one of those people. Trading is never easy, but it’s most successful when executed using a form of technical or fundamental analysis. Google these terms and understand them. If you do not have the correct tools in order to trade, or you don’t understand how to use them, then you should NEVER place a trade. Second-guessing the market is one of the fastest ways of losing money in trading. Don’t learn this lesson the hard way. The worst case scenario is a new trader who is trading blindly, thinking they know the market because they got lucky a few times. The initial success can lead to huge losses. I repeat, do not be one of these people. If you want to learn how to trade successfully, read and study everything you can, put the hours in and test your own (or learned) strategies in a practice account. Do this for several weeks/months before opening a trade with your own money. In the meantime, copy and learn from others, and let their expertise make you money instead.
I hope these three simple guidelines serves you, the new trader, well. I want to see you make money, we all do. It’s why you’re here. You’ve taken the steps (and risk) to actively consider trading forex. But it is not easy by any means. Many of the highly successful traders and Gurus you see on eToro have got there by learning lessons the hard way, through trial and error, and a relentless drive to succeed. You can make your journey an easy one or a difficult one. It’s your choice, but please, for your own sake, ensure that you are not one of the thousands that starts this journey with high hopes, only to fail at the first hurdle.
Best wishes,
Atelier
About The Author:
I am a part-time trader from the United Kingdom with 4 years experience trading spreads, forex and equities across a range of different brokers, platforms and products. I have a preference towards intraday/swing trading and scalping using a combination of technical and fundamental analysis. More information on my trading style can be found at copy.me/atelieruk.
As an eToro Guru, I aim to provide a diversified and actively managed portfolio for new and existing investors on the eToro platform. If I can be of any assistance at all, please feel free to contact me via my trading feed.
This news item was republished from eToro Forex news website
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