Savings Strategy with copytrader on eToro | 6-Steps

Investing your savings can be a good idea, but how can we do this in the easiest way with a solid plan behind it on the eToro platform? This article should help you to answer that question.

(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings.  In fact, Around 67% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)

Putting a small percentage of your income into a savings bank account could always be an option. Unfortunately, it tends to generate only a small percentage in return quite slowly. Another option one may consider is storing their savings capital on the eToro platform. This kind of investment can help to passively generate a potentially higher return faster instead. Creating a savings strategy without placing too much risk on it has the potential of slowly but steadily generating income and growing your savings account. Remember that any investment of this kind bears risks of losses as well as possibilities of gains.

Trading actively is an option that eToro also provides but that requires constant management, monitoring and portfolio balancing, as well as a great degree of risk. In simple terms this may be an unsuitable for someone looking to simply manage their savings account in a beneficial and way. Investing into a CopyTrader an option for passively growing a part of your savings and allowing them to increase steadily (remember his assumes the chosen traders continue to generate positive returns in the long-term so do not forget about the associated capital loss risks). There are a few steps and issues you might want to consider in the process of doing so.

Below you can find a simple step-by-step guide on how to Grow your savings account over time.

Savings Accumulation Strategy with copytrader

So how could you go about managing your savings account to accumulate additional income on the platform?

Well let’s consider the process of how you could go about this using an example of a demo account for practice to begin with. This allows you to test and see if the strategy is suitable for you.

Step 1. Savings – How much can you save per month?

Firstly you need to decide how much of your income you are ready to potentially dedicate to this savings accumulating strategy. This depends on a large number of factors, including:

• the amount of your living expenses in relation to monthly income, including housing costs, necessities, food spending etc.
• savings necessary for covering for unexpected loss or reduction in your income (if, for example, you face an unexpected wage cut or job redundancy).
• savings necessary to cover for force majeure events, such as unfortunate health problems for example, and so on.

One needs to make sure that they are not placing their life savings into a trading account as trading always involves capital loss risk because markets and hence asset prices are very volatile and are constantly changing.

Let’s say after considering all of the above factors you decide to take out 8% or $ 80 of your monthly income for this strategy (bear in mind that the actual percentage is of course up to each trader). No we can consider the process of its execution on your eToro demo account to use for the savings accumulation strategy.

Step 2. Capital Allocation – What traders to copy?

After deciding on the amount of savings you need to allocate that money within your eToro demo savings portfolio. It’s important for this strategy that we have some cash on hand ( more on this in step 5). Normally this involves somewhere between 10% to 40% held in cash with the rest tied up in positions, which represents your margin that cannot be lost in trading. Creating a passive portfolio suited fully to your own preference is an option that requires a lot of time, research and monitoring. In short, this involves a a high degree of risk and not very suitable for passive savings growth. eToro facilitates this process by offering CopyTrading as an option with a transparent and easy access to portfolios of assets.

There are many ways in which you can choose which trader to invest your capital into, starting from the type of assets they trade, the strategy they use and onto their trading statistics, mainly the risk rating and the long-term performance. How to decide on where you to invest your capital into? You might consider some of the following factors:

• Financial markets you are most interested in; those could be stocks or bonds, commodities or cryptoassets etc.
• Are there are certain industries you prefer? Perhaps you believe the IT, medical or the energy industry are most suitable for a long-term investment.
• Are there are any companies who you believe will demonstrate successful performance?
• The strategy the trader is pursuing, trading statistics and their overall performance over the previous time period.

You can always filter your selection based on risk, strategy outlook, allocation and so on.

If you are looking for a longer-term investment opportunity with minimum risk you might consider traders with a lower risk rating and relatively consistent returns. The good things is that you can certainly try a variety on your demo account to discover what is most suitable for you. Do bear in mind that past performance is not a guarantee of future results and there is also risks associated with putting your capital into trading.

Step 3. Diversification – How to split your Investment?

Investing all of your capital on the demo account into a single trader, despite them having a low risk ranking or demonstrating relatively consistent results, may be a risky business. To go around this you may consider investing into several traders instead for the purpose of diversification. There are many criteria you can base your diversification on, such as the type of markets or assets the CopyTraders are focusing on, trading parameters, the end goal of their strategy and so on. These require quite a bit of research so one may consider risk diversification as a possible option. Risk rank is a statistic crafted uniquely by the eToro platform that takes into account volatility of each trader’s position, asset’s correlation and the amount of leverage used.

Because the platform allows you to copy more than one trader, there is an option to copy several traders with different risk ranking. The platform allows you to custom or filter CopyTrader according to 3 general risk catergories, low, medium and high risk, as shown on the image below. This is a convinient way for you to be able to choose trader to copy from each category as a possible way for diversification.

Given the above, how could you go about splitting the total investment into CopyTrading? Once more, let’s consider a simple real world example. Suppose you begin this strategy with $1000 in your demo account to be invested into a portfolio.

You decide to keep a certain percentage of this in cash (between 10-40%), so perhaps 25% as an average, which represents $250 in monetary terms. You could choose to diversify the risk of your investment by investing into 3 copy traders with different risk ratings in equal proportions. Of course the fraction allocated to each investor is completely up to your preference and risk tolerance. You could (as a possible option, of course, portfolio allocation should be done according to your preference and possibilities), choose to allocate your capital between copy traders within different risk categories, low, medium and high risk. Percentage allocation can be equal or different between certain risk categories depending on your risk aversion, preferences and market conditions.

For instance, you could choose to filter the available copy traders by risk ranking categories and select a trader from each of the groups, low, medium and high, as in the example below.

In case of equal allocation for this example, $250 or 33.3% into a low-risk trader, 33.3% and same $250 into a medium risk trader and the remainder $250 into a high-risk trader. This allocation is shown in the table below. Here we have a total investment of $1000 split between precautionary cash savings and 3 copytraders of different risk categories in equal proportion.

In that way you allow yourself to profit from the relative stability of a less risky trader but also gain from potentially riskier traders who are able to seek short-term profitable opportunities. You may also choose to base your diversification on different industries, financial assets or strategies these traders choose, as already mentioned. Why do we always want to keep a certain percentage of investment as cash? Well that is needed for flexibility in the context of changing market conditions, which will be explained in more detail in Step 5.

Step 4. Continuing the process!

As the strategy’s name suggests, the process of increasing savings account is a continuous thing. So we need to regularly pursue the strategy by adding in the chosen amount of savings every month.

At the end of each consecutive month the account is topped up with the portion of savings you have decided to invest into this strategy for the account to continue growing. Let’s consider this overall process as outlined in the table below.

Initially the total investment of $ 1000 was split in equal proportion between cash holdings and 3 investors of different risk rankings, low, medium and high risk. At the end of the first month you add on your first portion of savings into the original investment according to the chosen proportion. The same happens at the end of the second and third month of the strategy, and so on for the following month, so you are essentially topping your end balance with additional savings very period. As you can see your account balance then grows organically over the time period with you adding on savings into your cash balance as well as the copy traders.

Step 5 – Buy the Dip! How do you go about market changes?

Markets are volatile and change the direction of movement all the time, which in turn affects the value of your investment and prices of financial instruments. If the market is facing a downturn you may consider increasing your investment in proportion, while if the market is rising you may want to remove a portion of an investments of a CopyTrader’s position to prevent the size from augmenting disproportionately. This helps to maintain the size of the position at a constant level despite the volatility of the market and consequent changes in asset prices. This basic process of dollar-cost averaging helps in the process of managing investor’s savings account in long-term by mitigating the effects of short-term movements.

How does this work in practice? Simple terms, buy low sell high! Let’s consider an example. In the months where the market seems to be following a downturn your cash holdings represent a financial ‘cushion’. This allows you to allocate more money onto copy traders with a smaller cash holdings balance remaining. The table below gives an example on $ 80 of savings, although the amounts in question are certainly up to your preferences as always.

The opposite scenario happens in a market upturn which should allow you to keep a greater proportion in your cash holdings and less allocated into the investors, as the copytraders are supposedly moving in the same direction as the rising market itself.

This process essentially mimics the process of dollar cost averaging strategy as the savings are likewise added in periodically, allowing to mitigate the impact of market volatility over a certain time period. Less savings are allocated into copytraders in the periods of market rising and more is allocated in downturns.

Step 6 – Your eToro account will become a Rocketship! 🚀

When you manage to make a certain profit on your account you may consider re-investing it to generate compound interest return. Once you start making a profit by copying other traders on your demo account it may be quite tempting for you to withdraw some funds and spend the money earned on your living expenses or anything else. However, if you are looking for long-term profit accumulation results for your savings strategy leaving your returns in the investment will allow to make a gain on them too. This will allow for your total account balance to growth without you adding in additional capital above the chosen level. You can always choose to reinvest only a part of your profit rather that the entire amount.

To give a short example, this process summarized in the tables below.

let’s consider our initial $1000 USD investment with $80 USD savings addition from the previous example, assuming that it generates 5% interest.

As previously assumed the savings are split proportionately between cash holdings and 3 copy traders with different risk rankings in the first month. At the end of the month then 5% interest are generated on each trader out of the original $250 plus $20 from savings (i.e. 5% of $270, which gives $13.50 in monetary terms), giving a total balance of $283.50 at the end. The same thing happens at the end of the second month, with 5% interest generated on the total of the previous month balance of $283.50 plus the additional inflow of $20 from the savings, resulting in an end balance of $318.78 and so on for the following months. See the following bellow:

DISCLAIMER: Profits on your copy traders are not guaranteed as you can also be exposed to losing copy traders with negative returns on your capital. The values provided in the table have a purely an example.

How does the compound interest work? It’s like Rocket fuel

The process of generating compound interest through continuous re-investment allows your savings account to grow exponentially rather than linearly at a greater rate. This is because of the build-up of interest on the monthly savings additions into the strategy kept on the account for the following periods.

As shown graphically on the image on the right, the effect of compounding allows savings to grow at a faster rate than a proportional incremental increase of linear growth. That is assuming the performance of the copy trader continues to generate positive results (which is of course not always the case because of market volatility and associated risks of capital losses which is always present).

You can calculate the total amount of compound interest using the ToroDemo Trading Balance Growth Calculator by setting the value of the original investment amount into a copy trader or copy traders, average returns as the interest rate and decide on the proportion of profit on the investment you would like to reinvest every month or year (does not necessarily need to be the full amount), depending on the preference for the compounding period. Note that the frequency of compounding improves the results.

As you have hopefully seen, placing a small portion of your income into an account and investing it into a copy trader or possibly several traders on eToro has a potential to generate greater returns on savings than a simple bank savings. Compounding the interest on these returns helps on top. Do bear in mind that trading always involves a risk and enjoy using the eToro platform!

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Past performance is not an indication of future results.

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