With the amount of advertisement and self promotion on the internet trading is becoming more and more attractive for newcomers on eToro. Many of them jump in right in, hoping for a quick profit without actually learning the basics of trading beforehand, researching or practicing and end up rapidly losing their investments. There are many reasons to why that happens but here are some of the most common ones.
(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.)
Wrong choice of assets
eToro offers a great selection of assets to choose from but many of them quite volatile. It is important to make sure you are actually familiar with the assets you chose to trade and know what risks their bring into your portfolio and ensure they suit the long term goal of your trading strategy. Below are some (but not all) assets considered relatively risky by the trading community you need to research well before trading.
One of the biggest risk disclaimers is the fact that as many as 75% of investors trading using CFDs lose their money. CFDs are complex and flexible instruments that do not involve an exchange of an actual asset during the trade. Because of their flexibility and leverage offered CFD offer a potential to gain large profit, but they can likewise lead to large losses too. Most traders end up losing their capital while trading using CFDs as they do not invest sufficient time into learning and analysing how they operate.
Cryptocurrencies are virtual assets and their price depends highly on the sentiment of the market. You might recall the 2018 Bitcoin bubble: these assets are capable of dropping hundreds or thousands in value all at once. Another aspect to consider while trading cryptocurrencies is the fact that these markets are not regulated by any framework or authority like the actual physical currencies.
Derivatives are complex financial instruments that derive their value from other assets, as the name suggests. Just like CFDs, they can promise large gains for skilled traders but also huge losses for those who do not really understand how to trade them.
Lack of diversification
The stories of a trader making great returns by investing into only one or two assets they strongly believe in exist, but are extremely rare. Why so? Well, putting all of your money onto a single or very few assets is extremely risky, as markets are volatile and price trends may rapidly turn against you. You can reduce the risk of that happening by splitting your investment across several financial instruments or markets, as the saying goes, don’t put all of your eggs in one basket. This is needed to make sure that in case one of those markets faces a downfall, a different trend in other sectors will compensate that: the markets you invested into should have different or no reactions to the same events affecting them to ensure sufficient diversification. This also provides an insurance against possible effects of price bubbles forming on the markets you mostly focus on.
Certainly this type of diversification does not always guarantee you positive total returns but it is incredibly important in minimizing risks and helping long term successful performance. However, balancing a portfolio to ensure it is well diversified can be consuming in terms of time, research and process. On the other hand, overdiversifying your portfolio can also happen and you will need to spend an extra amount of time and effort monitoring the traded markets. A balance in the degree of diversification is definitely a good idea.
Mistakes in the trading process
Overtrading can happen if you are buying or selling an asset excessively beyond your optimal risks levels and beyond the levels of the initial strategy. Not only you might end up with too many open positions which are hard to monitor, you might invest wrong proportions of your capital into them. Overtrading tends to happen when a trader has previously made too many losses and they want to regain their capital as soon as possible. It is quite often for new traders on the platform to be tempted to quickly re-invest any profits they make. One of the best ways to avoid this situation is ensure you are trading with reason and not emotion, stick to your chosen risk levels and make sure your portfolio is diversified enough to cover for any potential losses.
Lack of planning
This one could not be emphasized more. Many new coming traders jump into without spending enough time learning, practicing and improving their trading strategy. Here are some of the common mistakes made in the trading process:
- No coherent strategy/ plan. Well-performing investors have a strategy for their trading, which includes the amount of capital allocated to each asset, maximum loss they are willing to take and they do not revert from it as soon as something goes against them (they might adjust it, however).
- Consequently, not knowing when to enter or exit a trade. Timing in trading is no less important aspect and you need to understand when is the appropriate time to buy or to sell a stock.
- Not knowing how to use leverage. Leverage is a two sided opportunity: it can amplify your losses as well as it can amplify your gains; that is a risk you need to understand well before using it.
- Not using the appropriate tools and indicators or not learning how to use them. eToro offers quite an impressive variety of trading tools that could greatly assist your trading, that is if you learn how to use them properly.
- Not considering the risk – reward ratio of your trades. Some assets may seem to offer great returns, but you need to consider the associated risk of trading them.
Copying wrong traders
CopyTrading is one of the most innovative and highly promoted feature on the platform. Despite the optimistic profiles of Popular Investors, you need to be careful about choosing who to invest into as there is a risk of you loosing money if you choose the wrong trader to copy.
Here are a few things you might consider while deciding who to copy:
- Historical record: one of the benefits, and frankly, downsides, any trader can become a Popular Investor as long as they satisfy several selection criteria and history of trading is not one of them. Since investor’s trading history is not considered and one needs to spend as little as 2 month on the platform before putting themselves out as a Junior Popular Investor, it may be hard to analyze their actual trustworthiness. With that short time period of time it may be hard to tell whether a trader’s success is due to a well executed strategy or rather a sheer lucky coincidence.
- Asset Selection: eToro allows you to see the composition of a Popular Investor’s portfolio which may be quite useful: you can see if the chosen assets fit your preference but also verify whether the degree of risk diversification is sufficient and if the returns are promising.
- Leverage and Risk: many times risky positions are the ones that promise highest returns but also have a risk of generating equally large losses. That is why you should consider the risk ratings of traders you want to copy and make sure they are not overexposing their and your portfolios to risks of unexpected downturns.
Psychology of Trading
That is something that is often and wrongly undermined from new coming traders. Diving into the trading process without the right mindset is one of the top reasons for why new coming traders fail at what they are doing. Why? Well simply because they are unable to prioritize adhering to a strategy over their temporary emotional swings. Psychology of trading is a very large topic but here are some of the key aspects for you to consider.
First of all, there is also something called overconfidence in trading. Often traders that close positions successfully with profit believe that is due to their ability and a good strategy rather than a favorable coincidence, whereas in case any losses happen those are attributed to bad luck and not to trader’s miscalculation. A trader needs to be able to sensibly evaluate their performance and perhaps revise strategy accordingly. The reality is that even the most successful traders in the industry lose money from time to time but the main gain comes from a long-term focus on the return.
Another situation which happens quite often is panic selling. As soon as the price of an asset begins to fall down greatly many traders are tempted to immediately close their positions and convert them into cash and end up locking in their losses instead. This short term behavior powered mostly by fear tends to undermine the long term gaining potential and there are plently of examples of panic selling in the history of financial markets.
Many traders are likewise affected by the social surroundings and the public opinion of the majority of investors, media or just friends. That might cause them to lose confidence in their own strategy that goes against common belief. For example, you may be quite certain a booming asset price is a bubble that will eventually burst, yout colleagues could pressure you to not sell by pointing out the potential gains you would forego by doing so. Trading is successful for those who are able to understand what works best for them and not give into social pressures.
Finally, one needs to be aware that emotions often overplay reasonable thinking. Sometimes a strong feeling of fear comes into play and a trader sells their asset as soon as it goes down in value only to discover later it was a momentary deviation: they are exiting too early. Likewise, greed may encourage you to hold onto an asset rising in price for too long in hope of higher profits. Or it may tilt you towards trading highly leveraged risky markets such as cryptocurrencies or CFDs while being unexperienced in them, which gives as much potential for large losses as it does for large gains.
As you hopefully realized there are quite a few factors that may endanger your successful trading. The need for patience in learning and practicing before putting your own capital at risk could not be emphasized more given all of the above. Hopefully reading this article will help you keep all of those things in mind while trading on the platform, so best of luck and enjoy!
Support us by using the eToro sign-up form down below.⬇️
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.
We are sorry that this post was not useful for you!
Let us improve this post!
Tell us how we can improve this post?