How much to invest in etoro?
How much to invest? Well, in one of my posts I
mentioned how I decided to only invest $10,000 with a maximum loss on Equity of
US$7,000. So I thought it would be quite interesting to write a post about
it.
As a copy-trader, we invest in the right traders, and
the purpose of copy-trading is to sleep well at night and have your money
work for you. You are not here to be glued at the screen while having dinner
with your family or rushing a work deadline.
So lets be prepared for the absolute worse, so
you can sleep at night.
Loss Aversion Theory
This is so true that there's a theory on it
and that was so popular, I remember coming across it in 2 in my MSc Finance coursework and reading it shortly after in “Charlie Munger: The complete Investor”.
I even read a statistical paper on traders about it. Its true people..
.
You don't like to take losses, this is a fact.
Statistically, psychologists say we are far more likely to take close
winners early and close losers late. I like the example from http://upfrontanalytics.com/. They say, “The most succinct example of loss aversion
theory can be seen in casinos around the world. There, fun-seekers and hardcore
gamblers alike all follow the same pattern: The first round they play–be it
blackjack or slots–is to win. And what mostly happens in the second round? It’s
to recoup losses.”
What can we learn from this? The traders we are
copying have the same tendency. Have you ever seen a trader’s stat, who was
down 98% in one month then subsequently up 300% the next? It is most likely a
last hooray before going bust. Lets put numbers to this, if you invested $1,000
and it came down 98% we would have $20 left, up 300%, $60. It happens!
P.S. one of the reasons why i believe in education, look at the number of copiers.
If you are a trader, we need to have risk management
and you will continuously hear me harp over this over and over again. It is so
important, so until I fully understand this aspect by the traders I am copying,
I would like to limit the amount we invest to be able to stomach 70% loss.
I have no intention of ever losing money though, but
it does happen. The reason why I go through the stats all the time is I
believe this is a great tool that many people can use and can make some real
money. Money was previously only accessible to the ultra rich but because
of technology is now available to everyone. But I will not do it at the
expense of people living their lives to the fullest.
So be very careful on how much we are prepared to
lose.
Stay safe people!