The stories of successful traders on the eToro platform are inspiring and many new traders rush in hoping for an easy quick profit without spending sufficient time studying the basics, practicing and formulating a suitable strategy. Unfortunately, the majority end up performing way below their original expectations or even wiping out their accounts entirely in a short period of time. Certainly, there are no same mistakes made by all the traders, but here are some of the most common ones you should consider.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 67% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
A successful traders have a strategy on which they base their trades, knowing exactly what and how they will trade, how they will react to different price scenarios and so on. Here are some of the aspects to consider in your strategy.
Education and Research
The emportance of education and research could not be stressed more. Learning the basics of trading, instruments and strategies as well as researching the markets you are willing to trade, how they function, how they are traded and what factors affect prices is key in successful trading. Even after you are pretty confident about your abilities and even seem to have implemented a strategy that generates returns you need to keep being updates as the financial markets are constantly changing and you need to adjust.
A trading plan and a strategy are key for successful investing. A successful trader knows exactly what markets they will engage in and why, how and when they will trade them, how they will manage their risk, deal with losses and diversify risks. You also need to be able to set a concrete value for the maximum amount of capital you are willing to risk for each trade, determine price targets, the points to certainly exit a position or take profit and so on.
This is important for many reasons. First of all, some markets are only suitable for short term trading based on rapid price movements such as money markets and currencies, whereas others may be suitable for a longer time investments, including stocks and dividend paying stocks, ETFs and so on. Your horizon will determine the type of analysis you will be performing to determine the possible future price. Fundamental analysis is more suitable for a long-term outlook and would not be suitable for day trading which mostly focuses on short term changes in price. Technical analysis on the other hand focuses on short term price movements and may be more suitable for frequent trading aimed at exploiting short term price misalignements. It furthermore affects the amount of position monitoring, indicators used, amount of capital invested etc.
A right risk management system for an investment is one of the key components of successful performance. Deciding on how much risk you are willing to take is the first step in deciding how much loss and profit you are willing to accept.
There are several tools available for that purpose on the platform, stop-loss value being one of the most important ones. Stop-loss allows you to set a treshold for the maximum loss level on a position, which will be closed automatically as soon as that level is reached. Trading without a stop-loss level may turn small losses which could be managed into a complete wiping out of your balance.
Diversification is also important in risk management, as one needs to ensure they are not trading too many correlated assets at the same time which are negatively affected by the same factors simultaneously. Not diversifying enough may lead to making losses on multiple positions at the same time. Beware however, that you don’t need hundreds of positions for diversification as there only as many trades you can monitor at the same time.
Correct Trade Sizes
This one refers to the proportion of your total capital invested into a single trade. Many times begginer traders don’t make their allocation as according to the intially set plan but rather based on their gut feeling about how a stock will perform and end up ebarking too much or too little risk. Sometimes emotion comes into play in this choice and a trader may choose a large position for an asset they feel most confident about. There are quite a few techniques used for determining trade size based on the size of the account balance, degree of risk aversion and stop-loss levels, so you should decide which one is the most appropriate for you.
Keeping track of your trades
This is quite a basic thing to do, just like keeping track of your living expenses. Keeping a physical trading diary will help you to measure successes and losses, see paterns in your trading in a post-trading analysis and allow you to adjust accordingly. It may seem to be quite an oldfashioned thing to do and many newcomers prefer to rely on their mental ability to remember their actions, but a handy trading journal could make this much easier and precise.
Not using the correct statistics for analysis
This doesn’t only include the statistics to look at before you are deciding on what markets to invest into or how to compose your portfolio, but also trade speific statistics, mainly risk to reward ratio. Risk reward ratios express the amount of potential gain you will be making given the associated risk and assist greatly in risk management. You may also consider the ratio of profitable to losing trades and helps to determine how profitable your trading strategy is.
Mistakes in Trading
- Not using the correct indicators. Indicators are key in identifying opportunities for profitable trades as well as to determine the points of entry and exit in a position and for overall management. Indicators facilitate the processing of available data and can possible speed up your decision making process. However watching too many indicators at the same time may be too confusing and get you out of focus.
- Micromanaging each trade too much. This one comes often from the lack of preparation when you are not certain of what to anticipate from a position and also perhaps from overexposing yourself to risks. Often traders who spend too much time monitoring every single chart movement of a trade tend to overtrade as well as change their stop-loss levels too often.
- Opening too many positions at the same time. That is not necessarily a bad thing if you are opening them after seeing several profitable opportunities and taking advantage of them. Often however new traders open many positions out of hope that at least one of them will work out, making the process of monitoring nearly impossible and depleting the available margin needed for when markets move against you. This is even more dangerous if the trends in those trades are correlated, magnifying your potential losses across all of the positions.
- Too much leverage. Leverage is a double-edged sword: it can amplify your losses as much as it can amplify your gains by offering a larger market exposure if you do not know how to use it correctly.
- Timing. This refers to selling profitable positions too soon or too late, so you end up not making all the potential profit you could have or on the other hand making a loss rather than a gain at the end.
Believe it or not, having the correct mindset while trading is no less important than having the correct strategy and trading techniques.
Patience is key in trading. That applies to pretty much everything in the process, starting from learning and practicing enough, to being able cope with losses and to limit the amount of trading they are doing i.e. not to overtrade. Often newcomers strart overtrading, constantly keeping open positions and overexpose themselves to the risks of the market.
Discipline in your trading process comes in many shapes and sizes. Lack of discipline could lead to for example, move your stop-losses to avoid closure of a trade and lead to larger losses than you were prepared for. Or for instance if you strongly believe in the positive trend for a stock which is currently underperforming, you may be tempted to keep on adding funds into the position hoping for a trend reversal, amplifying your losses even more. Having a good discipline can also prevent you from making risky positions out of overconfidence that end up quickly in large losses and also go after trendy risky stocks.
Finally, most begginer traders have quite unrealistic high expectations for their performance and profits, many times fueled by the stories of success of other top traders. Certainly a positive mindset is a plus, but the goals you set should be achievable and in line with your level of education, experience and risk aversion degree.
As previously said, there is no universal recipe for what to watch out for when you begin trading, but hopefully the above aspects gave you an idea of some things you should definetely consider closely. Don’t forget that patience is key and enjoy trading! Best of luck.
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eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
Past performance is not an indication of future results.
eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro.
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