As children, we’ve all heard the tale of the tortoise and the hare many times over. But as we go on in life, most of us forget that slow and steady wins the race and try to rush towards our goals as quickly as possible. Nowhere is that more dangerous than in the field of financial trading. While it may seem like a good idea to make as much profit as possible on every single market trend, we tend to overlook the fact that any market exposure is risky, and the more you expose yourself, by using very high leverage for instance, the more you risk your position being wiped out by unpredictable market swings.
There is a way to avoid the heartbreak of your account being emptied out by just one trade. It’s called responsible trading, and the eToro trading platform helps you implement its principles in your daily trading activity. There are two main factors that contribute to responsible/risky trading behavior:
Using high leverages is the most common cause of death among trading accounts. When you leverage your trade, you actually borrow money from your broker so you can increase you position. That’s all well and good if the market moves in your favor, however, if the market moves against you, your position is much more vulnerable, because it is so highly leveraged. So, for example, to buy a mini-lot of EUR/USD, you can invest $25 and use 1:400 (25×400=10,000) leverage or invest $100 and use 1:100 leverage (100×100=10,000). In the first case the market would only have to move 25 points against you to wipe out your position, a feat very easily accomplished in time of volatility. In the second case, the market would need to move 100 points against you to wipe out your position, so you have more room to absorb volatile swings. This is why, eToro’s Responsible Trading settings limit your leverage to 1:100.
2. Money Management
Good money management is the only way to ensure that your trading portfolio remains profitable in the long run. The basic premise of money management states that if you risk more than a certain percentage of your account on any one trade, it will be much more difficult to absorb the loss and make up for it later. For example, if you have a $100 account and you lose $50 on one trade, you will then need to make a 100% profit on your next trade just to recover what you’ve lost. This is why, eToro’s Responsible Trading settings limit your investment sum to 20% of your overall account worth for any one trade.
While you can easily apply these principles yourself, many traders are not fully aware of the risks involved in financial trading, and make costly mistakes that put an end to their trading careers much too soon. eToro has implemented its Responsible Trading policy to avoid just that, to create awareness of market risk and to encourage responsible trading behavior. And lo and behold, less than a year since its introduction, the responsible trading program has already shown undeniable results. We therefore sincerely urge that more parties in the financial trading industry take up the challenge and make responsible trading a priority.