social-trading-network-copy-trading-how-it-works

eToro Social trading network (a.k.a Copy trading platform)

 

The secret strength of social trading

Do you know what is the most important factor for choosing the best broker that almost nobody talks about?

Commission size? Withdrawal speed? Maximum leverage?

Nope. Nope. Aaand nope.

It all comes down to how many users actually make money with the given broker.

Who cares if the withdrawal time is 2 days instead of 1 day if there is a 92% chance that you will lose your money.

The single most telling criteria for the quality of a broker is the percentage of losing accounts. If the losing percentage is higher than the average it could mean that either the broker is playing against the users, having unreasonably high fees, not providing good enough tools and resources for education and analysis, etc.

We are very lucky today. Why?

Because prior to 2018 nobody actually knew those losing numbers. Everybody was just guessing. The most popular legend was that 96% of all traders lose money.

Then came a big regulatory change and all the brokers now have to clearly display their losing/winning account percentages. (You can read more in the research of what percentage of forex traders are losing money.)

Long story short – ever since the transparency came along, eToro has been on the top with the lowest amount of losing traders. While most other brokers average up to 90% losing traders, eToro hangs around 66%. Which is quite remarkable. (These numbers obviously change from month to month).

What makes eToro stand out so much? Given the fact that eToro is geared towards beginner traders, it should be the total opposite. The newbies should be losing much more frequently. The brokers who are specialized for more experienced traders should have come on top. But, for example, FxPro has 79% and FXCM has 74% losing accounts.

Bottom line: eToro’s strength clearly comes from the Social Trading functionality of their CopyTrader™ and its community which is the biggest one around. The fact that you are not alone with a confusing chart in front of you, but can follow and copy the best traders (Popular Investors) obviously works. Numbers speak for themselves.

How social trading killed the king

Imagine that you are looking for an asset manager who would make investments and trades for you. Normally you would go to a bank or a hedge fund to find one.

Here is how it would look:

  1. You would need at least $20,000 – $100,000 for a good manager to be interested.
  2. They would charge 15% – 20% of the profits they make for you. (“if” they make it. It’s a big “if”)
  3. Plus some annual management fees even if they lose your money.
  4. You would have no clue of their actual performance statistics.
  5. They would cover you in piles of emails and documents full of non-readable legal jargon.
  6. They wouldn’t share their trading strategies with you.
  7. They certainly wouldn’t spend any time teaching you how to trade.
  8. Fund managers are the kings. In a guarded castle. They make money even if they make bad bets on your behalf. And there is nothing you can do to them (if you’re not a popular billionaire).

Not so fun, right?

Here comes eToro’s Social Trading. And flips everything around. Literally everything. With social trading, you are the king. You can screen through hundreds of traders, see their portfolios, read and discuss their strategies, ask them for help. And if you like what they are doing – copy their trades.

Money managers (Popular Investors in eToro’s case) make money only if they make money for their copiers and if they add value by teaching their followers. An important aspect in the success of eToro is that eToro has created a system where the Popular Investors are highly motivated to achieve and most importantly sustain high profitability for them and their copiers.

All the statistics and trades are totally transparent. If the investor who has thousands of followers makes a mistake, he can be sure that many of his followers will ask for explanations. If the investor fails to communicate well and makes those mistakes again then everyone simply stops following them with one click and the investor stops making money. This transparency and responsibility are what pushes the traders to continuously improve and thus the overall profits become higher and risk levels lower.

There are some problems, though

As rosy as it all sounds, there are some challenges of course. In the early days of the social trading platform, there were quite a few investors who manipulated their data to make their gains look astronomical. Mainly they did it by never closing the losing trades.

Luckily, eToro has improved the system over the years and it’s no longer possible to manipulate the statistics like that.

Still, there are other things to keep in mind and look out for:

  • Look out for investors who recommend high Stop-Losses: some investors 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.”

More on this you can read in 10 little known tips on how to find the best traders on eToro.

  • Don’t put all your eggs in one basket: Investing in people, just like investing in assets, involves risk. Therefore, it is important to diversify your people-based portfolio with several traders, who invest in different assets, and have different strategies, to spread-out your risks.

 

  • It’s not so easy to find the best investors: Some Popular Investors have a long-term strategy, which could include some losses along the way. And yet, some copiers are easily deterred by such losses, and stop copying a trader if they lose, without seeing the entire cycle through. Below you can see some of the best Popular Investors you could follow and copy:

(You must wait a little moment for the fresh data to load)

Past performance is not an indication of future results. Trading history presented is less than 5 complete years and may not suffice as a basis for an investment decision. This is not investment advice.

How much money do the popular investors make?

The compensation structure is directly linked to the quality of a Popular Investor’s decisions and performance.

Here’s what a popular investor can earn: For the sake of example, let’s take a random trader with a big amount of copiers and the Assets Under Management (AUM):

How much money do popular investors make

As we can see, Olivier has a pretty impressive AUM: $2 million – $5 million. Let’s assume that he manages $3 million of copier assets on average annualy. And let’s also assume that he has reached the ELITE level and his own account has a minimum average equity of $20,000.

In this case, Olivier would be making $72,000 per year ($6,000 per month) on top of the profits from his own trading. It would consist of:

  • Fixed payment of $1,000 per month
  • And 2% of the annual average AUM

Not too shabby, right? It seems like an awesome way to make money, but as mentioned before, it takes a lot of hard work to maintain great results and thus followers/copiers.

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This example is hypothetical. Past performance is not an indication of future results. This is not investment advice.

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If you are interested in becoming a popular investor, or simply for more info, you can have a look at the Popular Investor program.

If you are interested in learning more about forex you might enjoy Forex Hero – the free learning app full of tips and tricks for beginners.

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Disclaimer:

eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFD assets.

Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 66% 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.

Cryptoassets are volatile instruments which can fluctuate widely in a very short timeframe and therefore are not appropriate for all investors. Other than via CFDs, trading cryptoassets is unregulated and therefore is not supervised by any EU regulatory framework.

Past performance is not an indication of future results.