Investing with Copy Trading
Both experienced and novice traders may benefit from social trading. Copy trading platforms help new traders gain from the wisdom of the crowd. It also allows experienced investors to share their knowledge and skills for income. It gives everyone the chance to benefit from an exceptionally wide range of trading.
16.1 Getting Started Trading
Before you start social trading, you’ll have some decisions to make. Which platform should you use? What should you trade? What is the easiest way to trade within your risk tolerance and goals?
Choosing a Trading Platform or Broker: The kinds of securities you want to trade influence your choice of trading platforms. Online stock brokers may not offer you the versatility of CFDs or trading in currencies, commodities, or cryptocurrencies all on one site. Traditional brokers can’t give you the advantage of building off the wisdom of the crowd.
Chances are you want an online trading platform that is entirely based on or accommodates CFDs. This gives you the freedom to trade assets from many countries as well as currencies and commodities, and even cryptocurrencies like Bitcoin. Additionally, you see benefits in a platform that lets you watch other traders so you can build on their knowledge. Check out how easy it is to copy the trades of others. Learn the fees each platform charges for trading.
You also want to know the ways the platform safeguards your investing. Do they easily let you set stop losses? Can you exit a trade at any time, even if it was put on by a trader you are copying? How fast are their executions of the trades? With trading, some losses are inevitable, but some trading platforms are set up to limit leverage and offer other protections to safeguard traders. You can also have more trust in a brokerage that complies with financial regulations.
Checklist for your best trading or investing platform:
- Trades the financial instruments I am interested in – currencies, commodities, stocks, cryptocurrencies, ETFs etc
- Offers a social network to chat with and learn from others
- Supports responsible trading with risk reducing factors
- Allows traders to copy other experienced traders
- Offers thematic investment funds
- Registered and compliant with national or international securities regulators
Most platforms make it easy to sign up and they are available in many countries. One notable exception is the United States. Other countries that may not permit social trading include Japan, Iran, North Korea, Myanmar, Syria, Cuba, and Sudan. eToro trades in over 160 countries. If your country prohibits trading or the platform does not offer services in your country, you’ll see a message that says something like: ‘We’re sorry, but we currently cannot accept clients from your country’.
Why not the USA? The FATCA (Foreign Account Tax Compliant Act) the USA put into place in 2014 requires all foreign financial institutions to report assets held by US citizens and entities. The paperwork is onerous and many platforms don’t want the work. Also, the Dodd-Frank Act prohibits hedging trades such as opening a buy and sell in the same pair. And it requires closing trades in the order they were opened.106 This is impossible to guarantee if you are copying other traders.
Money: Typically the platform will accept your country’s currency to begin trading. They may take PayPal, credit cards, bank wire, or other online payment forms. Check to see if they show the results of your trades in your currency or in US dollars.
Profile: Be sure to complete your profile. If you have an opportunity to enter your risk tolerance and goals, do so. It may help the platform tailor its offerings to better match your trading goals. You may be offered the choice to keep your profile private or public. This is entirely up to you.
Sharing your track record will attract friends and others who want to mirror your trading. Public profiles are selective in what is public. Check your platform to be sure what information is shared. At eToro, your trading information and statistics, name, and nation are public. But the actual cash invested and other personal information such as your address are always private.
You can also choose virtual trading or live trading. When you begin, you will likely want to practice on the virtual trading site to get a feel for the platform and to prove and perfect your trading strategies. Virtual trading mimics the timing and results of live trading exactly. But with virtual money, you don’t feel the sting of the loss, and you can’t pocket your winnings.
Finding Your Way Around: Each social trading platform has its own quirks and ways of executing trades. Take time to investigate the site and learn how it works. Watch the start-up videos until you become familiar with all the options and benefits on the site. Make sure you know how to enter and exit a trade. Learn the stop loss settings and how to use them. Some sites may have classes or courses you can take. On eToro, and any site, trading involves risk. And remember, past performance does not guarantee future results.
Begin Slowly and Build: Many of the social trading platforms are fun. They are attractive, easy to use, and it’s simple to begin trading. It’s almost like a game. You can chat with friends, follow others, and have a good time. But, once you start live trading, it’s real money: real profits and real losses. It’s great to have a good time. But be sure to use ‘good time’ money at the beginning. Use the money you can afford to lose.
One trader started with money he would otherwise have spent on a new computer. Some decide to trade with the money they would have used for a holiday. Just don’t use the money you need to pay bills. Then you can have fun. A loss won’t break the bank, and a win can feel exhilarating.
Add to your account on a regular basis. Larger amounts of money let you trade in different ways and gives you more potential for significant gains. As you build your account, your strategy may adjust. You may choose to have speculative trading money and hold long term investment money in lower risk assets. Social trading platforms are designed to allow you to do all of this.
16.2 Copy Trading Strategies
Copy trading comes with its own kinds of strategies. Here are some ways to get the most from your copy trading account.
Check Out Skilled Traders: Take the time to find out all you can about traders you are thinking of following. You may want to virtually follow them for a while and see their long term results. Remember that their past performance does not represent what they will accomplish in the future. Check out their trading history. Are they invested in the kinds of securities you want to trade? How often do they trade? How much money have they lost? Knowing that is as important as knowing how much money they have earned.
Don’t automatically pick the highest earning trader. He or she may be taking excessive risks and will crash and burn. They may also have a number of open trades that are at a loss. Those unrealised losses won’t show up in their earnings.
You can see how many people they have following them. That can be an indication of their success, but not always. Sometimes it’s self-fulfilling. They have a run of good trades, and people hop on. Others see the increase in the number of copiers and jump on as well. This herd mentality may be the downside of social trading.
Don’t follow blindly. A trader with a string of good trades may not have a strategy built to handle all markets movements. Even those with large followings may take substantial losses. So be sure to look at factors beyond a large following.
Strong trading platforms help you manage your risk by assigning risk levels to traders. It’s most useful if it reveals the risks of individual trades and total trades put on. Match the trader’s risk score to your trade tolerance. You may find greater security in copying a trader with a 10-20% return rather than risking trades with a trader who has recently returned 50% or more.
Learn as You Go: Don’t just pick traders and trust them. Instead, learn their strategies. Study charts and fundamentals. Become the backup ‘fact checker’ for the trades you are following. See if you agree. Evaluate how the trades turned out and see if you might have predicted better… or worse if you’d done the trade on your own. If you find they’ve put on a trade you’re not comfortable with, eToro lets you drop out of that specific trade with the click of a button.
Set Stop Losses for Copy Trading: Usually you can see the drawdowns or losses the trader you are copying has taken. If it is beyond your comfort zone, this is probably not the trader for you to follow. Even when you find a trader that keeps within the safety zone you want, be sure to set a stop loss order. If the asset value they are managing falls below a specific percent or amount, the platform will close the trades automatically. Some traders may have a strategy that works great, but then fails spectacularly in a certain market. Your stop loss lets you bail out early in the fall.
Copying Current Trades: When you begin to copy a trader, you may be asked if you want to copy their current trades. Typically the answer should be no. Those trades may have already made substantial moves in a positive direction. They may fall back a bit before the trader sells it and you’ll take a loss while others profit. You might join the open trades if most of the positions are new, neutral, or in the red. Did the trader have a good set-up? Is it likely these trades will rebound giving you even better returns than the followers who started when the trade was originally placed? If you can answer yes to these questions, then copy the negative trades in the portfolio of the trader you are starting to copy.
Risky Money and Investment Money: All trades carry risk, but day trading and leveraged trading carries greater risk with a goal of a potentially greater upside. Investing in indices, ETFs and blue chip stocks without leverage reduces the risk of loss of capital while still giving some upside. You only want to day trade with leverage using money you can afford to lose. As you add more money to your account, consider having two ways of trading. Firstly, the money you want to risk for possible big gains, and secondly money for more secure trades that you want to grow for retirement or other long term goals. Then balance your copy trading to include these kinds of traders. Or take some money and invest in lower risk CopyPortfolios™ offered by the platform.
Limit the Number of Traders You Copy: eToro lets you copy up to 100 traders. But experienced copy traders choose three to seven traders to follow, at least initially. They balance their risks and assets between these traders. That way if any one trader fails, they have not lost their entire pot of money. Also, if you are only starting with a small amount of money, don’t follow many traders. You may not be placed in some trades if your investment amount on that trade doesn’t meet the minimum requirement. If you miss a trade, you will also lose out on the trader’s diversification and increase your risks of loss.
Choose Traders in Different Assets: Your asset allocation may be best served by having money divided between currency traders, stock traders, commodity traders, those who heavily leverage, and those who do not.
But it can be hard to find traders who focus on one sector. Some invest over a vast range of securities. Then you have the concern of overlap. You may have two traders you follow and both are buying USD/GBP or gold, for example. This cuts back on your diversity. When seeking out traders to copy, try to find ones that are not investing large amounts in the same securities.
The wider your asset allocation, the greater your risk protection. Leverage also plays a part in your asset allocation and risk level. You might put a percentage in with a high-risk-score trader, but adjust your risk by choosing another trader with a conservative style.
On the eToro platform, you can search for Popular Investors to follow based on where they live, what markets they invest in, how much they have gained, and how long that track record is. You can further refine the search to cover the percentage of profitable trades, risk scores, drawdowns, average trade sizes, the number of followers, and more.
High risk and high rewards don’t always go together. At times you can find a low-risk trader making great returns. It’s worth your time and research to find traders with lower risk, higher returns and a long track record. You may keep an eye out for ‘rising stars’ you can add to your copy trading. Remember that past performance is not a promise or indication of future results.
Once you find the traders you want to copy, a simple click of a button should let you start following them. Choose the amount of money or the percentage of your account you want to invest with them. The portion of the money you allocate will be used in the same percentage as the trader invests his or her money. Often a trader will recommend a minimum amount to invest with them. You need not invest that, but you must make sure the amount you are investing is large enough so that no one trade is below the platform’s minimum amount for a trade. When you enter the amount you want to copy on the eToro platform, it will tell you the average size of your trades.
16.3 Growing Your Influence
Traders who are confident in their skills and have a good track record may want to become a popular investor, or a trader others follow. Check out your trading platform to see the steps you need to take to become the trader others copy.
You can start simply by reaching out to friends and inviting them to trade with you. You can begin being copied any time after you have a public account. However, there are steps you can take to grow your following. Here are nine tips.
- Trade well. Develop a good track record.
- Complete your profile. Add a picture. People trust traders with pictures so they can see who they are.
- Keep a reasonable risk level. Make it within bounds other wants to trade in. Some platforms will not let others copy you if your risk is too high.
- Get verified. Make sure you give your platform all the information needed to be verified and increase your credibility.
- Increase personal money invested. The more money you have in the trades, the more credibility you gain with the trading platform. (No one else knows how much money you are investing.) Studies also show you can withstand more volatility with leverage if you are trading larger amounts. Some platforms require a larger investment to become a higher level copy trader.
- Comment in the chatroom or feed of the platform. Make comments about your thoughts on an asset in the news feed or chat area. You will get exposure. If your predictions come to pass, others will take note. Also, explaining the rationale behind your trades helps novices know and trust you. Answering questions helps others perceive you as an expert.
- Develop a track record. It takes time to become a leader. You need to develop that track record of trades so others can see, verify, and trust you.
- Grow copied money. The more money you have following you, the more the platform will compensate you.
- Trade well. It’s worth saying again. If you are a successful trader, others will copy you.
Most trading platforms compensate traders who have copiers. Traders can earn a rebate on the spread, eventually moving up to entirely free trades. Some platforms compensate traders based on the amount of money that copies them, others on the number of people copying them.
For example, eToro offers four levels of Popular Investors, (their name for traders you can copy).
- Cadets begin the journey as a Popular Investor with as little as $1000 in personal funds, $500 in minimum average equity, plus one copier. They receive a spread rebate of 20%.
- Rising Stars have at least $5k of their own invested, plus 50 traders with a total up to $5,000 average equity. They earn $500 a month plus a 30% rebate on trade spreads.
- Champions have a following of 250 or more and $5k in both personal funds and $5k in average equity. They earn $1000 a month plus a 50% on spreads.
- Elite status has the potential for nearly unlimited income with some making $7,000 to $10,000 or more each month. Elites have over $300,000 in money following them. They receive 100% rebate on their trade spreads plus $1000 a month and a 2% management fee for the funds invested with them (calculated annually and paid monthly).107
Of course, all these fees are in addition to any profits Popular Investors earn from their personal trading. If you bring trading skills to a social trading platform, consider the money making possibilities of becoming a trader others follow.
16.4 Professional Traders
There are many traders who have been investing on their own for years and they have skills to share. And there are professional traders who have been managing the funds of clients. Both can find a place on social trading platforms that welcome them and help them grow their clientele.
Professional traders are particularly invited to come and trade on social trading platforms. First, they can bring their clients and give them more transparency. Clients can view each trade and follow along or they can set-and-forget. Second, professional traders have a chance to pick up more clients or copy traders who want to follow them. They have much greater exposure to the thousands of other traders already on the platform and looking for someone to follow.
The platform may have a dashboard specifically for professional traders so they can track their following, their income, and their trades. Some platforms even let professionals set up their own fund for others to follow. They can pick their securities, choose the weights, and decide how often they want to rebalance. They can also back test performance data and choose active or passively managed strategies.
If the platform has a chat or feed page, they can interact with their followers quickly and effectively. This way of gaining information about investor’s experiences and feedback allows professional traders make adjustments to improve their trades, their funds, and user satisfaction. By sharing investment rationale on the feed page, professionals create trust and increase those copying their trades.
And trading platforms can offer financial benefits. First, the spread is an ultra-low trading fee. Second, the compensation for the traders can be quite attractive. Traders with a high amount of assets under management (AUM) can earn a sizable amount of profit sharing.
And there are perks to make life easier. The platform handles all the ‘paperwork’. The platform takes care of the client trades, fees, payouts, trading history, etc. Traders get to focus on what is the most enjoyable for them: making trades!
Social trading platforms offer a new choice in trading. They help new traders get started under the umbrella of skilled examples. And they let highly professional traders make a rich income sharing their years of experience with new, and not-so-new traders.
This is a marketing communication and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without having regard to any particular investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared utilizing publicly-available information.
eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
106‘Social Trading for USA Residents’, SocialTradingGuru 5 Sept, 2016 https://socialtradingguru.com/social-trading-for-us-residents
107‘Popular Investor Program’, eToro https://www.etoro.com/en/popular-investor/