Are you looking to start copy trading on a platform like eToro? I've been using copy trading as part of my investment strategy for many years now. While I think it's a great innovation, it definitely isn't a silver bullet and definitely isn't a way to get rich quick.
So before jumping in, it's important to consider the pros and cons.
Pros of Copy Trading
- Access More Complex Strategies – Trading can be pretty complicated with a lot to learn. By copying someone else, you can profit from their experience and learning. Some of the strategies used by these traders are similar to what hedge funds use. These strategies are usually out of reach of the average investor, buy Copy Trading makes it possible.
- Put a Portfolio on Autopilot – With copy trading your portfolio is essentially automated. There is very little you need to do apart from monitoring your position to make sure it matches your investment goals. Your money will be working for you while you're sleeping and hopefully generating passive income.
- It's Cheap – While some platforms charge commissions, others like eToro won't charge you for copy trading. They make money from the spread and that's it. Overall it's a pretty cost effective way to invest.
- Doesn't Require Huge Amounts of Money – To start copy trading you don't need to have thousands of dollars. You can get started with as little as $200.
- Possible Risk Reduction – If you're using a platform like Plus500 to trade CFDs with margin and you aren't an experienced investor, then there is a pretty sizeable chance you will lose money. In my opinion copy trading can be used to reduce risk for newer investors.
Cons of Copy Trading
- Past Performance doesn't equal future results – Just because a trader has been successful in the past it doesn't mean they will be profitable in the future.
- Relying on an individual – If 100% of your portfolio is invested in 1 copy trade, then you're relying heavily on one individual. Even the best traders make mistakes. It would be smarter to incorporate copy trading into a wider investment portfolio or copy multiple people.
- Not always market beating – Before I start copy trading I always check to see if a trader has actually beat the market index. If I could of achieved the same results by just investing in an ETF, then I would choose the ETF every time. I only want to copy a trader if they have beat the market. I've seen a lot of traders on eToro who have done a lot of trading that looks impressive, but really is just the result of a bull market and they pretty much just matched the broader indexes.
What to be Aware of
- Copy Trading isn't the same as a signal service – Signal services have been around for a long time. These services hook into existing trading platforms like MT4 and offers signals for making trades. Most of these services are automated signals. These just aren't complex enough to really offer anything of value. I haven't seen anyone able to make money from a signal service. Copy Trading is where allocate funds to copy the positions made by a more experienced trader. When they make a trade, your account does too.
- Forex and Crypto Copy Trading – some platforms only offer copy trading in either Forex of Crypto. I've learnt from experience that these don't offer long term profits. Most of the traders are “bots”, and once again there is no way these bots are complex enough. The hedge funds that do use “bots” have super computers and hundreds of people on staff. They aren't selling access to these investments.