On eToro you can automatically copy the trades made by more experienced traders. It’s a great way to learn about investing and could be used as part of an investment portfolio.
Here is my 2021 guide for getting the most out of eToro copy trading.
What to look for when Copying a Trader
Here are some of the things I look out for when I copy trade on eToro:
Only Copy Traders with 12+ Month Stats
I believe that anyone can be lucky trading for a month or two, but it takes real skill to be successful over the long term.
Don’t Copy Traders with massive returns
It might be tempting to copy traders who have had returns of 200%+ over the past year. But just because someone has made these returns in the past is no guarantee they will make them in the future. Huge returns can be a red flag. The trader might be taking too many risks or using most of their account capital on individual trades. They could easily wipe out their entire account in a trade or two.
It’s smarter to follow traders who have made sensible returns and are using a more sustainable strategy.
Look at what Traders are Trading
On eToro you can trade a huge range of assets including shares, forex, cryptos, commodities and more. Certain assets can be higher risk. Personally I would consider shares to be the lowest risk asset on eToro and cryptos to be the most risky. So make sure you look to see what a trader has been trading in the past.
Some traders on eToro specialise in certain assets. For example, I copied a trader who only traded the EURUSD forex pair and used a low risk hedging strategy. I find that the best traders on eToro will explain their strategy and why they are making certain trades. This is also a great way to learn about trading and investing.
Check a traders Drawdown
The drawdown is the maximum difference between the high and low values of a portfolio. eToro will show you a figure for daily, weekly and monthly drawdown. If a trader has a higher risk or more aggressive strategy, expect the drawdown to be high. If you’re looking for a lower risk trader, then a lower drawdown is better.
Copy Traders with a risk score of 4 or less
eToro gives each trader a risk score. If a trader is using a small percentage of their account capital to open trades and using low or no leverage then they will have a lower risk score. The risk score is also calculated based on the markets/assets that a trader is trading. More volatile assets will lead to a higher risk score.
I like to copy traders with a risk score of 4 or less. This has worked best for me.
Searching for Traders to Copy on eToro
You can search for traders based on the values above, using eToro’s advanced search feature.
Just navigate to the “Copy People” page. And then click the “filter” button. You can then refine based on the values above or using your own strategy.
eToro does a pretty good job of featuring traders who are performing well on the platform. And often those featured picks are good place to start looking.
How does Copy Trading Work
Here are some things you should know about copy trading on eToro and how it works:
When you copy a trader, you keep control of your funds
Copy trading is like investing with an investment fund. Your funds stay in your account and the trader you copy doesn’t have access to this money. When you copy a trader, your account will open a trade, when the copied trader opens a trade. When they close a trade your account will also close a trade.
You can set a stop loss
To protect your funds, you can set a stop loss. If the funds that you have allocated to copy a trader drops by a chosen amount, your account will automatically stop copying that trader.
Trades are Copied based on Proportions
When you copy a trader, you allocate some funds (say $200) to be used to copy each trade that is made. These trades will be copied using the same proportions as the trader you are copying. For example, if the trader makes a trade using 1% of their account balance, your account will make the same trade using 1% of the funds you have allocated. In this example, the trade would be opened with $2.
When you copy trade, you’re able to make small trades that usually would require a large amount of capital.
You can stop copying at any time
You can stop copying a trader at anytime. You aren’t locked into copying someone. It’s worth noting that the best traders usually trade over a long time frame, so if you keep pulling money in and out of a copy trade, you might not get the best returns. When you stop copying a trader, the open positions that were copied will close.
You can copy multiple people
You can build a more diversified portfolio by copying multiple people on eToro. This will spread the risk. It also means that your account could be making dozens of trades each week.
How to Practice Copy Trading
One of the best features on eToro is their virtual trading account. When you sign up to eToro, you automatically get a free virtual trading account. You can use this virtual account to practice making trades on your own, but you can also use the funds to practice copy trading. If you’d like to simulate how profitable copy trading would be you can use the virtual account.
Copy Trading Risks
I consider copy trading to be a riskier investment compared to just buying and holding a portfolio of shares. After all, you are relying on another trader to do a good job. Yes, it’s possible to find really talented traders who have a history of profitable returns on eToro. But remember that past returns aren’t indicative of future results. I wouldn’t invest just in eToro copy trading. Instead it probably works best as part of a broader investment portfolio. I use eToro alongside apps like Raiz and Spaceship (which I consider to be lower risk) and also alongside investments such as Crypto and Whisky (which I consider to be higher risk).
Let me know in the comments if you’ve had success with copy trading and what strategy you’ve been using.