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Is the eToro CopyTrader tool too good to be true?

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If you’ve ever searched the term ‘trading’ on Google or YouTube, you’ll probably have seen eToro’s eye-catching lime-green branding popping up in your ads, alongside the honeyed tones of their new (and very expensive) brand ambassador Alec Baldwin.

Causing something of a stir in the app-based trading world, eToro have launched a trademarked CopyTrader tool that allows you to follow high-level traders, automatically copy their trades, and benefit from their wins – no trading experience needed.

What is copy trading?

Since eToro is the first consumer app to offer copy trading, it might seem like a new and radical concept. But it’s actually been around since the 2000s, in the form of mirror trading.

In the forex market of the noughties, mirror trading companies acquired successful professional traders and gave them free trading fees in exchange for access to their trading activity. Clients of these companies could then connect their accounts to the professional traders’ and replicate their activity, along with some risk-management parameters to protect them from failed trades or unforeseen market circumstances.

At the time, everything had to be done through brokers. Smartphones were in their infancy, and the apps that allow us amateurs to access the market in minutes didn’t exist. Despite the recent influx of open-access trading platforms – Trading 212, Stake, Robinhood and M1 Finance to name a few – eToro has been the first to marry this old trading tactic with what they call ‘social trading’.

How do I use the eToro CopyTrader?

In lieu of a company or broker to manage a portfolio of professional trading accounts, eToro provides social features that allow you to scope out your own stock market sage. You can follow top performers and observe their trades before you hitch your wagon to theirs. Even the work of hunting for promising traders has been taken care of – all you need to do is browse the Popular Investors section and take your pick.   

Uniquely, instead of building an asset portfolio, you can build a ‘people portfolio’. This disavows the amateur trader from having to learn financials, complete due diligence, keep an eye on the news, or even understand charts. Sounds too good to be true, right?

Does the CopyTrader offer any guarantees?

Never in the history of trading has the word ‘guarantee’ been used, and nor should it. A top-level trader might be good, but they can’t predict the future, and are susceptible to market fluctuation and the same impulses, excitement and blue-sky thinking as much less experienced traders. Although they know how to control it better, they’re not trading robots, but fallible humans.  

To maximise reward, you’ll need to ramp up the risk. Remember, if they lose, you lose. Even a trader with solid historical gains can drop their winning streak. So although copying an experienced trader will probably yield better results than going it alone, there are absolutely no guarantees you’ll make money, and always the potential that you’ll lose some.

Does the CopyTrader offer any protections?

Yes. You will only be able to allocate a maximum of 20% of your funds to another trader’s account. This prevents you from going down with the ship if they make a series of bad calls. eToro also shows the average position of a trader. Good money management dictates you should risk no more than 20% of your capital on a singular trade, so if you come across a trader regularly risking more than this, you might want to stay away. Use the handy filter to view traders risking low percentages.

You will also only trade a relative proportion of your funds – not the actual figures the top performers are trading! So if a professional trades £1000, the same action will be made with £100 from your account.

Finally, although any profile on the platform can be followed and copied, you’ll not be able to copy a trader with a risk rating of 9 or 10. That really is for your own good!

How do I get started with the eToro CopyTrader?

Once you’ve downloaded the app and created your profile, it really couldn’t be easier. However – don’t blindly follow Baldwin’s bid to ‘just click copy’. Spend some time researching your chosen investing guru. Look at their 12-month history, their stats, and their success rate. You might want to start with a risk level of 1 or 2, or even better, use the practice account before you start using real money. When you’re ready to get going, you’ll need a minimum of $200 in your account to start trading (around £155).

So, is it too good to be true?

eToro’s CopyTrader tool is truly revolutionary in the social aspect it brings to trading. It’s transparent, easy to use, and a vanguard in mitigating the 70-something percent of accounts that lose money with CFD trading. But it’s not a magic wand. Garnering a solid understanding of markets, risk and reward, max drawdowns, and trading in general is highly recommended before embarking on a copytrade. You might get lucky, but in order to make long term profits, you’ll need to actively manage your funds and ‘people portfolio’ to make sure your trading gurus are consistently performing and delivering.

All in all, it’s great fun, and it can make you money – but as with all things fiscal, proceed with caution. 

Inkmattic
Inkmattichttps://inkmattic.com/
Inkmattic Personal Finance

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