How to choose who to copy on eToro?

(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 68% 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.)

Trader’s Profile

Traders profile is a general introduction of what kind of a trader they are, their background and investing experience, the type of analysis they perform for the trades but also trading goals and desired performance. The profile should also give you a good idea about the kind of trading strategy, style and investment horizon a trader pursues to see if it matches your own goals. For instance some traders focus on stable minimum risk long-term returns, adopt a suitable investment strategy and choose assets with low volatility and future expected growth. Other traders may want to exploit short-term price volatilities instead and prefer day trading with relatively high risk to achieve quick results. The choice then depends on whether you want to take a bigger risk for a chance to make a fast return or invest for a long-term period with gradual increase in gains. Remember that riskier position entail higher risks of making a loss as well as a profit.

The trader below for example made an outline of their goal and investment horizon as well as the type of analysis they conduct, mentioning briefly their strategy in a  sentence.

CopyTraders also share their updates or other important information on a feed for copiers to check on their performance or stay informed on any major changes in the trading strategy which is another source of information on their trading behavior. You can also see other traders’ comments and their reactions to certain decisions.

Number of Copiers

Being a social trading platform the community many times helps each other out by signalling their opinion about investors. The number of copiers a CopyTrader has is quite indicative of how much people trust them, especially if it is a long-term relationship that persisted over time. Do remember however that just because a trader has many copiers they are necessarily a very good trader. How so?  Even if a trader is losing most of their trades (for example, being at 90% loss in total) the copiers who didn’t set a stop-loss for that CopyTrader might still be continuing to follow them. It is also possible to filter your selection based on AUM (amount of money invested into a trader) which may be a better indicator of the popularity of a trader as it shows how much money investors are ready to trust into a specific CopyTrader. This also solves the problem of copiers with no stop-loss on a losing trader as losing CopyTraders are likely to face a lower AUM rank with less monetary amount allocated to copy them.

A complete overview of copiers you might consider is the copiers graph under the “Stats” section. A stable increase in the number of copiers without many unexpected drops is a pretty good sign of consistent performance. Sudden ups and downs may be a sign of irregular trading results.

Although seeing how popular a trader is amongst copiers may be quite a good place to start it is always a good idea to analyze their actual statistics, portfolio and long-term performance. Sometimes a trader gains many copiers by demonstrating exceptional results within the latest month because of a sheer coincidence of investing into rising assets so a more thorough analysis is always a good idea.

Portfolio composition

eToro allows you to see the entire portfolio composition of a CopyTrader with each of the asset they invested into. Some assets are generally considered to be more volatile and traded for short-term profits (such as cryptocurrencies and volatile stocks) while others are used for relatively stable low-risk low-return investments, such as low volatility stocks and ETFs. Furthermore, traders with very few traders may find it difficult to diversify their risks while too many trading positions open may be hard for them to monitor, balance and spot any losses. A good balance may be something to look for. Remember that each position on your own account will be open in proportion to the trade positions of the investor you are copying.

Trade sizes or the percentage capital invested into each trade may be a good indication of their capital management skills. Opening trades which are very large in size is likely to expose you a lot to price movements of a single asset and that may be quite risky. Smaller trade sizes tend to be more flexible and spread out risks.

The types of assets an investor chooses is indicative of their trading behavior. Of course diversification is a good tool for spreading risks but they probably cannot be a specialist in every single market available on the platform. Traders specialized in a few markets may indicate that they have the knowledge and the experience trading them which positive results could confirm.  You can always filter CopyTraders based on the markets they focus on to help your selection.

You can also see the history of all the positions they opened and closed for a period of time, as well as the profit or loss they generated from them. This is a pretty good indication of how a trader is performing over time and whether there is a consistency in generating returns as well as managing losses. Looking at the past trades can also give you a pretty good idea on trader’s strategy. Riskier traders, such as the ones following a Martingales strategy, may try to recover their losing positions by adding more until the market corrects and many times this leads to losses in volatile markets. With the time of opening and closing trade positions you are also able to see the frequency of trading of an investor, whether they tend to open many positions at a time or rather gradually spread out their investment over time in a dollar-cost averaging strategy. This also allows you to compare whether the strategy they advertized in their profile actually matches their trading behavior.

Trading statistics

Performance and returns

Return is probably the most obvious statistic to consider as this is what most copiers are looking forward to. Performance chart is a visual representation of monthly returns a CopyTrader has generated so far. The formula for calculating this monthly performance is relatively simple and is based on the change in the value of equity between month beggining and end, accounting for total withdrawals and deposits made over that time period. The early performance is calculated as a geometric sum of monthly performance i.e. by multiplying all the monthly returns.

It may be a good idea to look at how a trader’s portfolio is doing in comparison to the overall market. Does the trader’s portfolio follow market pattern or is their trading strategy moving against it? Does it allow for return growth in case they are currently low? Those are some of the questions you may consider.

Risk

eToro provides and overview of monthly risk score, on a scale of 1 to 10, each trader has achieved. The risk score is a composite index and takes into account the volatility of each traded instrument, its correlation with other assets as well as the leverage traders use. Each risk rank then has a maximum total volatility a trader’s portfolio can achive. Current risk score is the average risk score of the latest 7 trading days and a monthly average risk score shows you average risks for the last year of trading.  Consistency is also something a trader may look for in CopyTraders risk ranking. Traders with a rank of 5/6 tend to engage into riskier positions while lower risk rankings indicate the opposite; lower risks rankings may indicate lower returns too. Maximum drawdown is another pretty good indicator of a trader’s ability to manage their gains and losses by showing the biggest loss trader’s equity has suffered over a certain period.

There is still something to be careful about while considering a trader’s total number of profitable trades. Every trader on the platform has the possibility to adjust their level of stop-loss to avoid closing down a losing trade and that will greatly deteriorate your performance. For example if $50 out of your capital is allocated to one of their losing trades and they decide to move their stop loss to keep the position open you would then be risking a much greater proportion of your total funds on that trade.

Additional indicators

Active Since: this shows you for how long the trader has been active on eToro. Of course new traders are not necessarily a bad idea and may have great previous experience and knowledge set to trade, but there is no way to verify that on the platform. Traders with a longer time frame of trading on the platform can be evaluated using their performance statistics and there is less chance their profitability was just a coincidence of choosing the right assets at the time.

Average Holding Time: this statistics shows you for how long, on average, a trader keeps their positions open. This is a pretty good indication of the type of trading strategy and style they pursue, as day traders close their positions within minuted or hours at most and long-term oriented investors keep them open for months. Trades per Week is another indicator of investor’s activity level and shows the number of trades, on average, they open over a week.

You can also see the most frequently traded assets on the platform and their profitability, as well as the total number of trades over the last year.