Don’t miss the tips #7 and #9 – it will change the way you look at copy trading!
eToro has become the leading Copy Trading Platform a.k.a. Social Investment Network with a data base of more than 4.5 million social traders (previously this data base was called Openbook). That is a lot of traders to choose from, so here are the 10 best tips on how to find the best forex and stock traders to copy on eToro.
After reading this article you will know how to seperate traders who are really worth copying from those who just got a short-term luck.
1. Begin with Risk Management
All effective investments begin with risk management. The markets can be highly unpredictable, particularly when you are trading volatile assets like currencies. Wise traders seek to balance their investments with a diversified portfolio. If you are trading a wide range of assets, you will not be vulnerable to single losses, i.e., if one asset crashes, others will continue to perform and you will not lose out financially.
The old cliché about not putting all your eggs in one basket has never been truer – or more important. Aim to copy a range of Popular Investors who have diversified portfolios themselves. If you want to copy niche traders like currency or indices specialists, that’s fine. But also consider copying other people who trade commodities, stocks and ETFS. Even a small number of carefully chosen copy trades can give you exposure to the wider markets and a balanced portfolio.
2. Review each Popular Investor’s public profile and stats
Unlike other Social Investment Networks (Tradeo, Zulutrade and others), every serious eToro trader who opts for social trading has a public profile with his real name and picture that any other trader can look at. This doesn’t contain any sensitive information like personal details or account balance, but it does show their trading activity and statistics.
If you’re thinking about copying someone, it pays to check him or her out properly. This is just another aspect of risk management and is, in fact, basic common sense. Unfortunately, some traders don’t take the time to do their due diligence on somebody whose investments they are planning to copy. Copy Trading Checklist:
- Time on platform – you should avoid young accounts.
- Number of copiers – a big number of copiers is a good sign, but doesn’t provide 100% security.
- News Feed Activity – is the trader active and shares valuable info?
- Personal Portfolio – is it diversified or specialised?
- Stats – look out for old open trades that are in the red!
- Risk Level – avoid big risk numbers (6+) unless you are super sure about the trader
3. If the numbers look too good – be cautious!
Be careful with numbers that look too good as 100% perfection is not possible in trading. Even George Soros admits he has made a lot of wrong calls, including betting that UK would vote to remain the European Union in the Brexit referendum.
Losing trades are a part of the game, even for the best traders. So don’t be alarmed by separate months that are in the red. It all comes down to long-term profitability.
4. Check the Editor’s Choice
Editor’s Choice is one of eToro’s special features. It showcases a weekly selection of top Popular Investors who have caught the eye of eToro’s own trading experts. You can see a picture of each PI, complete with key info from their profiles and a summary of their trading and strategies. Editor’s Choice is a great way to check out Popular Investors who are currently highly rated and get your first insights into copy trading.
You can add people shown on Editor’s Choice straight to a Watchlist with a single click, or go straight to their full profile and talk to them directly via their News Feed. Anybody looking for a fast and simple introduction to the basics of copy trading should begin by looking at Editor’s choice.
5. Avoid “young” accounts
Many Popular Investors recommend that you do not copy anybody with less than six months on the trading platform. They reckon that half a year is the minimum amount of time to see if somebody is consistently successful and not just lucky.
Long-term results don’t lie. Any trader can hit a lucky streak or find niche market conditions that offer a string of gains. Only the truly skilled and knowledgeable can achieve good results on a consistent basis. Don’t be put off if you see some losses or poor months on a Popular Investor’s Stats. Serious traders expect some losses and are prepared to accept them and learn from them. Many good traders experienced losses during the big market downturn of January and February 2016. What you’re considering is the bigger picture and looking for a pattern of overall gains.
6. Stay informed about what the Popular investors are getting paid for!
In the first versions of the eToro copy trading platform traders were paid for the number of copiers without much quality checking of the copiers. Some traders obviously used this and manipulated their statistics by creating fake accounts with demo money in order to bulk up the amount of followers and copiers.
These tactics are still used on some other platforms so check these issues before copying!
eToro however has introduced a new and more sophisticated system for the Popular Investor (PI) Program which is quite demanding for the investors who want to make money by attracting copiers under them. This is good news for copy trading beginners. It is important to keep an eye on how the terms for PI program develop in order to understand how potential villains could try to manipulate the system.
7. Watch out from scaled-out trades
Some traders don’t close their losing trades as these would damage their profit statistics. So they simply expand the Stop-Loss and leave the losing trades open. You can look for this in their Portfolio tab and see the open dates under each individual position (See image above). If there are several losing positions with old dates that are still open with large Stops that is not a good sign.
8. Protect your funds with Copy Stop-Loss
When you open your first copy trades, it’s unlikely that you’ll be able to monitor them on a full-time basis. If you’re a mobile trader (and we strongly recommend that you should be), you can log in regularly. But even this is not always practical. A good copy trade is often a long-term investment. Some traders let copies run for months, or even years.
One very effective solution is to set a Copy Stop-Loss whenever you open a copy trade. If the Popular Investor who you are copying suddenly begins to lose money, you will be protected against unacceptable losses. The Copy Stop-Loss will automatically close the copy trade at whatever point you choose. If you have diversified your “people portfolio” and are copying a wider selection of Popular Investors, there is a chance that you will have effectively cut your losses and will continue to profit from your other copy trades.
9. Be cautious of traders who recommend to set the copy stop-loss (CSL) at the maximum level of 95%
This is a tip from Kenneth Mowat, a.k.a. Simple-Stock-Mkt. who is an Elite Popular Investor with more than 7,000 followers and 2,000 copiers at the time of writing. He has more than $300,000 of copy assets under his management and finished 2015 with +33% on his trades. To read the full exclusive article from Kenneth click here
“I see some traders ask copiers to set the copy stop-loss (CSL) at the maximum level of 95%. Of course, nobody ever expects that they will ever lose that much, but it does happen. By incurring a 95% drawdown, you will need an unlikely 1900% gain just to get back to break-even before you can even start making any money.” says Kenny Mowat.
Here is Kenny’s cheat-sheet for knowing how much gain you need for specific drawdown amounts:
Read the rest of the 7 tips from Kenneth Mowat here.
10. Ask for advice and support from the traders you trust!
The Internet is a natural home for con men, opportunists and scammers. Unlike other Social Trading platforms that are full with anonymous “pro traders” with fake names and no photos, eToro’s Popular Investors have verified accounts and 99% of them have also real photos (because you can even filter out the ones without photos in the advanced search).
Before this feature was included, finding trustworthy traders was not so easy also on eToro. With the increase of security more and more good traders came to eToro and started sharing their knowledge to their followers. Combining this with the advanced motivation of Popular Investors, the Copy trading has developed into a unique way to learn from people who actually know what they are doing. You don’t necessarily have to pay to attend courses or order expensive books from Amazon. Nor do you have to worry if your teacher really knows what he is talking about. So make sure to read the messages on the walls of the Popular Investors and also ask them questions.
If they see that you’re genuinely interested, they will often take some extra time to help you to learn more and improve your own trading.
Many of the Popular Investors have advanced on their own merits, beginning by copying other traders and learning from them, so they can speak your language and explain difficult things in an understandable manner, unlike many books and academics.
*All trading involves risk. Only risk capital you’re prepared to lose. Past performance is not an indication of future results. This is not investment advice. eToro acts as a market maker, using derivatives known as contracts for difference to provide its users with exposure to stocks. CFDs are leveraged products that allow people to bet on the movement of a stock without owning shares.