5 rules for successful CopyTrading on eToro

When I first started CopyTrading on eToro I ran into a couple of pitfalls. From my personal lessons learned I derived 5 rules for successful CopyTrading on eToro in order to help you avoid the mistakes I made in the past and enjoy the benefits of social trading.


Social trading is not only a fashion, it is a great tool for Newbies and semi-pros to benefit from experienced traders. If they are doing a great job, you earn money with minimum effort. Plus it is easy to diversify your portfolio by copying different traders, especially when they trade markets you are not familiar with.

Before you start CopyTrading on eToro, you can and should read the technical details about CopyTrading on the eToro official website: https://www.etoro.com/en/social-trading-tools/copytrader/how-does-it-work/ It will give you a good start into the new adventure.

The next step is choosing traders to copy. There is no golden way of choosing traders, because the personal preferences of the investors are different. It's the same principle as for investing in stocks: You  have to ask yourself how much risk you want to take. There are traders with very low risk factors, that promise high profits with very little drawback periods. Of course there are much more aspects you might want to consider, for example the past performance, the number of followers, the traders preferred instruments, his popular investor level or his general trading style. The eToro trader gives you a lot of possibilities to find traders based on those aspects. In addition many traders give you more details about their trading in the bios. If you are looking for more ideas how to choose the best traders or diversify your portfolio here are three good resources (in my opinion):

• https://www.etoro.com/blog/markets/13012015/5-tips-diversified-copy-trading-portfolio/ 
• http://www.frustratedbillionaire.com/2016/03/06/etoro-copy-trader-review-tips/
• http://socialtradingguru.com/tips/etoro-tips/select-etoro-gurus

If you have chosen the traders you feel comfortable with for your copying, you should follow the next 5 steps for an optimal copying performance.

1. Respect the minimum copy amount

A good resource to check the past performance of a trader is his eToro chart. Unfortunately this chart is based on a starting copy amount of $10.000, which is way more than most traders will use for copying. As described on the eToro website, the minimum copying amount for a single trade is $1. That means the copy performance with less then $10.000 could be different compared to the performance displayed in the chart! The crucial aspect here are the relative trade sizes used by the trader. Let's have a look at an example that illustrates the issue:

A trader has a total portfolio size of $20.000 (which is the minimum deposit for a popular investor on the "elite" level). Let's assume he buys different stocks for $100 each, which means he uses 0,05% of his equity for each trade. Now, if you copy this trader with the necessary minimum amount of $100, the stock trades of your trader only have an absolute size of $0,50. According to eToro's rules, those trades will not be opened in your portfolio. If the trader often uses such trade sizes, you need a higher copying amount to copy his real performance.

How do you know the minimum copying amount? Well, eToro gives you information about the "average copied trade size" directly in the CopyTrading mask for the amount you want to invest. This gives you a first idea, but will not draw the complete picture. Sadly you cannot see the relative trade sizes in the portfolio history of another trader, but most traders give you some advice for copying in their bios, including the minimum copy amount. If you don't find any information there, you can check the trader's feed. Other traders might have asked about the very same information, which is still available for you due to the principle of eToro's open book. If you cannot find the recommended copy amount, you should not hesitate to ask the trader personally. This is also a good chance to test the traders communication style, which is the subject for the next step.

2. Check activity of trader

One of the traders I copied in the past was not performing well, so I asked him about his strategy by leaving a post on his feed. No reply. I asked again - with the same results. I started checking his portfolio history and realized, he hadn't opened a trade for several weeks. Of course the number of trades is not crucial for the success of a trading strategy, but in this case it left me believing I invested in dead account. I also checked the feed of the trader and realized, that he wasn't actively posting before - no information about his strategy, whether he is on vacation or actively looking for the next great trade entry.

You might think "Why should a trader write posts? It's better for me when he spends his time trading instead of writing posts to present himself." Of course there is some truth in this thought. And indeed, there are some traders out there, who use their feed to solely present themselves. And as long as the copied trader is successful and profits are constantly growing, you might not feel the need to read about his strategy improvements and how he chose his investments. But as soon as you see him loosing your money, you are looking for explanations. In the end you are not investing in a fund that is operated by a company, which pays his employees to take care of your money. No, you are investing in a single person that you probably don't know personally and that might live on the other side of the planet. If this person decides to stop trading from one day to another, you want to get a friendly notice from him, rather than loosing all your invested money. Therefore many traders give you a weekly or even daily update on their portfolio status. It is a good source for learning about their trading style and it feels good to read, how the trader reacts in bad times.

3. Set proper copy stop loss

When copying another trader, eToro will automatically set a copy stop loss of 40%. The value can be chosen between 5...95% of at least 95% - which means you keep at least 5% of your invested money. As mentioned in step 2, you normally don't know the persons you are investing in. Not only can the trader perform bad, he might also stop trading due to sickness, holiday or lost motivation. Even traders that are actively communicating on open book, can get surprised by sickness and don't get a chance to let you know. Too far-fetched? Not at all, really happened to a trader I copied. He apologized after his recovery, but could obviously not reverse what happened.

So like when you are investing in stocks, you should always use a proper copy stop loss. In the traders eToro chart and stats you can find information about their maximum drawback. Depending on whether you are looking for a long-term investment or for quick gains, you might choose the stop loss differently. Just be careful: If your stop loss is too tight, you might be stopped out too quickly or even right before the trader is recovering.

4. Copy all open trades

Just like for the minimum amount for copying a trader, many eTorians give hints in their Bio whether you should copy open trades or not. Copying all open trades means, that by starting copying a trader, his open positions will be opened at the current market rates in your account. If you don't choose this option, only new positions in the traders portfolio will be copied in your account (please refer to the
eToro website for more details).

The key question is: What is the more profitable way? The answer is: It depends. Some traders keep old and lossy trades open, hoping that they will recover. It might not be a good idea to copy such trades, but you could only know for sure about the intentions behind a trade, if the trader shares his thoughts with you.

Generally there is a big advantage to copying all open trades: Your copy account will be perfectly synchronized with the account of the trader - for the moment. If you compare the performance or chart of the trader with your copy account, chances for a good correlation will be higher if you copied all open trades. Just imagine you only copy new positions, but the trader's old ones recover and generate huge gains in his portfolio. While his performance looks good in his stats, you might not see the same results in your account.

5. Stay synchronized

If you copy another trader with all his open trades, your copy account is initially synchronized with the trader's portfolio. Unfortunately there are still some possibilities to get out of sync over time. Here are the main influences I have found so far:

• The trader adds money to his account. From time to time traders might want to increase their investment and deposit additional money. In this case your copy account is immediately our of sync. What you want to do is adding funds to your copy account, to keep the ratio of your investment and the trader's equity constant. Fortunately eToro helps you with this: In such a case you will receive a notification, telling you how much the trader deposited and how much you need to add to your copy account to stay synchronized. The message will look like this: "@trader just deposited additional 10%. Add $13.65 to the Copy for optimal results."
  If the amount you need to add is to big for you, there is another way to get synchronized again: Stop copying the trader and directly start copying him again. You will be perfectly synchronized, but will have to pay the spread for all the trades once more.
• The trader removes money from his account. Successful traders might want to take their profits out of their accounts or eToro credits are withdrawn from a trader's account (that he received for depositing money or inviting a friend). In this case you don't need to do anything! eToro does all the necessary work for you and will take just the right amount of money out of your copy account into your available equity. Again, you will receive a notification of this type: "you have just received $1.98 in Copy dividends from @trader."
• You close copied trades manually. eToro gives you the possibility to close copied trades manually. In this case you are not only getting out of sync, you also mess up the trader's trading strategy. If you copy another trader, you should trust him and let him alone handle the trades. Of course you might loose your trust into a trader who is performing poorly. But in this case you should better stop copying him instead of messing things up.
• The minimum amount for copying has changed. If you have taken step one in this post, you are copying a trader with more than the minimum copy amount. But what if the trader changes his strategy? If he starts opening smaller trade sizes, the minimum amount changes. As described earlier int this post, the only source of information about the minimum copy amount is the trader itself. This is another reason why it is important that traders are actively posting about their strategy.

I would recommend to check the correlation between your copy account and the account of the copied trader. You can do this by checking his stats or by comparing the performance in your copy account with the trader's eToro chart.

Summary

CopyTrading on eToro is an easy and convenient way to profit from the experience of other traders, learn about different trading styles and to make profit on your invested money. However, there are some rules to follow in order to get optimal results:

Those rules are derived from my personal lessons learned and shall help you get the most out of your CopyTrading experience. Don't hesitate to leave a comment if you have questions, remarks, criticism or if you have different ideas or experiences.  

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Related posts:

Portfolio Review 01.05.2017
Portfolio Review and adjustments 18.03.2017
Getting out of sync @CopyTrading pt. 2 - 13.01.2017
Rearranging my CopyTrading portfolio cw50/16
Getting out of sync @CopyTrading

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Important remark: The results presented above and throughout my blog are no recommendation for your trading! I only share my personal findings and opinions to give ideas and let my followers and copiers know what I am currently working on. I can not guarantee the correctness of my tool and my presented results. Furthermore past performance is not an indication for future results. Only trade with money you can accept to loose!