You have probably heard that trading online can help you create yet another stream of income. But how can you do so without all the knowledge and forex trading tips? Social trading networks today have made this possible through the concept of social trade. You have probably also heard of etoro as one of the pioneers amongst social trading networks. All you need to do, is with 1-click of a button, copy a professional trader on etoro copytrade website.
Is it really that simple or simply a marketing tagline? Well I can tell you that if you do not know what you are doing, you can actually get terrible returns, and worse still, lose your capital. However, if you treat etoro as a way to get a second income stream that is uncorrelated from the common stock market, then it can actually be very beneficial. In layman terms, the direction of the stock market has no relationship with the % returns of your etoro account. This is good, because as a portfolio, your volatility of your nest egg is reduced.
[eToro is currently unable to accept people from the United States in their platforms due to their country’s regulations]
A Short Review on the Pros and Cons of etoro
Before I go on to talk about my etoro experience, as well as showing you how to cherry pick the best traders to auto trade for your portfolio, I hope to let you know the pros and cons of etoro copytrade website.
Great customer service for your account
Etoro customer accounts are closely followed up every 3 to 6 months to ensure that you are getting the most of their platforms. They want you to succeed, because when you copy a professional trader, they earn the spread as well. This alignment of interest has assured me that such a business model of copytrading should last because it has resulted in a win-win situation for all parties.
Regulated in Cyprus and United Kingdom
This is a really big deal. In fact, this should be made point number 1 right? If we are going to put our money in a platform for a long time, we have to make sure that they are well regulated and have no withdrawal issues. It should also be easy to close your etoro account whenever you need to. Also, based on my research, etoro started in 2004 and has operated profitably as social trading continues to become popular.
Always evolving and maintaining the position as market leader
They are always pushing themselves to become the leader in the social trading niche, by providing better etoro charts, products as well as more detailed copytrading functions. Recently, they also introduced copy funds, which can streamline your copy process even further. I will talk about it later.
Good reputation and remuneration package to attract the best trading talents
This social trading networks cannot operate well if there are no good traders on etoro platform. By screening through the traders on etoro, I find that there are actually quite a lot of good traders around, and they are verified live accounts. Please do not follow a demo account for your portfolio. They have no incentive to trade with care.
Limited trading products
Etoro mainly limit itself to individual stocks to the US stock markets, which might not be enough for the majority of the independent traders round the world.
Huge spread for frequent trading
The spread on etoro is pretty large compared to normal trading platform such as forex.com, and therefore do not suit short term traders as this will eat into their trading profits severely.
Etoro charts are not very nice to trade on
The gold standard for FX trading is still MT4 platform, and etoro trading platform does not even come close to it. This would mean that most traders might think twice before using etoro platform to execute their trades. Therefore, if you are independent trader, you might not want to use etoro to trade for your own account.
However, if you are using etoro to build your followers and in return get paid for people following your trades, etoro is the most ideal place to begin with. With 250 copiers, an independent trader can stand to receive an additional 1000USD for his trading efforts. As a result of an aligned interest, a solid portfolio of good traders can result in amazing results!
How to select the best traders on etoro for your Portfolio?
Now, for the fun part as this determines ‘how much you can you make on etoro’ by simply copytrading.
Ok, so I did mention about the brand new way of selecting traders for your portfolio, which is by investing in copy funds. Essentially, it is like the robo advisory, where they select the traders for you through some form of backtesting. Why this may actually be a good solution for some, is because you don’t need to do the individual screening yourself. You can get the diversity you need for almost zero effect. Why I do not like this, is because this concept is brand new, and they are very focused on the last 12 months performance indicator, or thematic investments. In my opinion, the past is never a good indicator of future performance, and weighing such a huge decision is just that is not good enough to ensure that I get outstanding performance in the future.
So, what is the main indicator of ensuring good returns moving forward? It is how well a trader can preserve his/her trading capital through effective risk management, instead of one time wonders. Warren Buffet once stated that the first rule in investment is to never lose money, while the second step is to not forget Rule No.1.
Never attempt to copy traders with risk level greater than 6.
I tried copying a trader like that once, and it greatly reduced the results of my copy portfolio. Don’t be greedy!
Ok, so much can one realistically make from copying a bunch of good traders? Well, I would say anywhere from 5 to 15% a year is very possible, with small drawdown and little correlation to the broad financial markets. In fact, the latter part of this statement, about small drawdown and little correlation is important for your nest egg. I shall not go into the very deep details about the financial terms, but just note that this is very good for your own overall investment portfolio.
Do not overinvest in social trading. I would only put a maximum of 10% of my nest egg in social trading networks at all time.
If you are still reading my article until this point, congratulations! I would like to give you a bonus, which is my 5-step checklist below.
Follow my 5-step checklist to select the right traders
Do not select popular investors etoro, but instead filter for traders with risk level 1 to 6
Popular investor etoro status does not mean that they are good for you to copy them. They could be on a lucky streak and attract a lot of followers. Many of this traders eventually crash and burn. For myself, I decided that my maximum risk level for any trader in my portfolio is 4. This most likely mean that the equity curve of that trader that I select is less volatile. Remember, this is not like the stock market, where in the long run, a basket of good stocks that collapse may eventually recover. Many of these traders that crash and burn do not recover. In fact, I prefer to go for traders with low risk level, with an ideal score of 1 to 4, which can result in 5 to 15% returns a year.
Filter for traders with maximum weekly drawdown of 10%
This ensures that the equity curve of that particular trader is relatively smooth, and that risk management per trade is relatively sound. I would rather a solid 10% a year, each year, than 0% one year and 20% on the next. Slow and steady wins the race, as selected good traders can always increase the base capital instead of trying to win big in this financial market game.
Make sure there are no big return suddenly in one month, over the past 12 to 24 months
Besides looking at the annual performance of the traders, you want to see consistent small returns every month or every other month. Having just 1 good month to bump up that year’s P/L is a serious red flag. The trader may not be able to repeat his or her performance again.
Ensure that the traders do not have 100% profitable trades
There are some traders in the platform that appear to qualify for all the above criteria. However, upon close inspection, you realise that they have 100% profitable trades. This is dangerous in the long run as all they need is one trade to bring down the entire portfolio down.
Ensure a maximum stop loss of 25% when copying any trader
This allows you preserve capital to find new and better traders in the long run. Think of yourself as a risk manager, instead of an investor. That is the only way you are going to get good returns on etoro! Majority of the people do not know what they are doing. If is your job to find the gems, stick with it and get your returns.
Don’t just read and not take action. Sign up a demo account with etoro at least!
3 Examples using the simple checklist above
I am also going to give you 3 examples on which I think these traders should be good for a portfolio using my above checklist. I am by no means advocating them but rather following my sound principles for risk management. I just thought that I should show some example of how I use my checklist to look out for these potential amazing traders.
Please always do your own due diligence before selecting the traders. This is NOT an investment advice.
Example 1: Trex8u247
Trex8u247 has been on etoro platform since 2015, has been very consistent with his returns every month/other month. Furthermore, he has a weekly drawdown of only 7.79%, well below the 10% criteria. Mostly importantly, he only wins 66.30% of his trades, which highly suggest that he uses stoploss. I would investigate further by looking at his open trades to see if this is done properly. He also has a risk score of 4 and can potentially return 5 to 15% returns a year with very low risk.
Example 2: 4exPirate
4exPirate has been on etoro platform since 2015, has been very consistent with his returns every month/other month. Furthermore, he has a weekly drawdown of only 2.39%, well below the 10% criteria. Mostly importantly, he only wins 70.71% of his trades, which highly suggest that he uses stoploss. I would investigate further by looking at his open trades to see if this is done properly. He also has a risk score of 3 and can potentially return 5 to 15% returns a year with very low risk.
Example 3: Fifty-five
Fifty-five has been on etoro platform since 2015, has been very consistent with his returns every month/other month. Furthermore, he has a weekly drawdown of only 6.71%, well below the 10% criteria. He does have one month in July 2016 where he lost 11.60% though, which may fail the criteria of consistent returns and poor risk management. However, he managed to recover that and continue to trade well, which is why I think he might be good to continue copying in the near future. Mostly importantly, he only wins 59.94% of his trades, which highly suggest that he uses stoploss. I would investigate further by looking at his open trades to see if this is done properly. He also has a risk score of 5 and can potentially return 5 to 15% returns a year with some risk.
Etoro social trading network can be a good place for build a small stream of second income of 5 to 15% return a year, where your effort is to sieve out the good traders for your portfolio instead of good trades in the complex financial markets. Honestly, I do think that this is considered a relatively easier task to do, than to trade the financial markets yourself. Why not give my etoro guide a try,and see if this works for you?