Many traders like to use copy trading because of its simplicity. But is it really worth trying? Here are some facts to answer the question.
In the modern era that we live in today, many things that seemed impossible in the past now have become common practice. Back there, people used to picture trading and the financial market as a bunch of men huddled over their desks and phones while watching black and white screens. After a series of technological advancements and many changes later, the financial market is accessible from every trader's home and to anyone who wants to participate and learn to invest their money on the market.
Currently, the forex market has become the world's biggest financial market, with an estimated average transaction of nearly five trillion US dollars each day. Such a massive amount of money flow has attracted various traders worldwide to join the market and try to win themselves.
However, just because the market is open to everyone, doesn't mean it becomes easier to profit and offer easy money. A considerable amount of knowledge and experience is still needed to close the trade with gains. In this case, copy trading is a strategy that is often recommended for novice traders. It is considered a simple trading method that can help beginners to learn while simultaneously making money. So how does copy trading work and is it worth trying? Let's explore the facts to reveal the reality.
How Copy Trading Works
Copy trading refers to a strategy that allows traders to copy the exact trade of experts. It is basically trading with a social platform in which you can follow expert traders, see their track records, and copy their trades. Instead of having to watch tv shows about how experts do their trading, you can now join the discussion yourself, exchange ideas with your peers, and ask direct questions to the experts from the platform.
So, copy trading is not only designed for novice traders with limited knowledge and trading experience, but also enables traders with a lack of time to trade and keep up with the market trends. Since copy trading platforms typically allow traders to copy multiple trades at once, it is important to diversify the choices in order to reduce the risk of losing. In this case, you must be able to strategically pick different experts with different trading strategies to broaden your scale.
See Also: Social Trading (2): How To Choose The Best Traders To Copy
Is Copy Trading Worth It?
It's only natural for newbies to question the worthiness of copy trading. Many traders are skeptical of how copy trading can actually make money and help them learn forex trading. Here we're going to review 6 facts related to copy trading:
1. Market Potential
The following are several studies that revealed the data related to the future of copy trading:
In August 2018, a Singapore-based securities research firm called Philip Capital did an industry analysis of Ayondo Ltd (one of the top social/copy trading platform companies). It was stated in the report that according to a study conducted by the Federal Ministry of Finance, 190 million EUR was transacted on social trading platforms in Germany in 2015, a 63% rise from the previous year.
In Germany alone, there are at least 14 social trading platforms available, the top three leaders are Wikifolio, eToro, and Ayondo. Also, the market penetration of assets under management by social trading, robot-advice providers, and others was 1.36 billion EUR in 2015 and is expected to increase up to 40 billion EUR in 2020 and 68 billion EUR in 2025.
2. Growth in Users
When it comes to consumers, a survey reveals that one in four traders in the UK said that they are considering social trading in 2018. About 33% of them stated that the traditional market approach is too complex and can be simplified by automatically following top traders in social trading platforms. The model also appears to suit almost any type of investor. Meanwhile, 52% of them chose to practice a more careful approach as they always seek advice before making any decision.
3. Copy Trading from the Academic and Regulatory Perspective
From the academic perspective, there are several key comments from trusted conferences related to copy trading. An MIT computer scientist and researcher Yaniv Altshuler described social trading networks as a complex adaptive system. In his paper, he wrote that "social trading provides much better opportunities for profiting compared with individual trading". The Economist's think thank, Nouriel Roubini, even predicted that social trading is one of the newer forms of investment that will bring some of the largest growth in the industry in the upcoming years.
Moreover, top regulator UK's FCA (Financial Conduct Authority) stated:
"We classified copy trading as portfolio or investment management where no manual input is clear from the account holder. This entails standard regulatory obligations for authorized management."
Other than that, the FCA also supports the view set out in the European Securities and Market Authority's (ESMA) MiFID Questions and Answers: Investors Protection and Intermediaries as to how copy and mirror trading fit within the MiFID Directive; it considers them an automatic execution of trade signals.
4. Copy Trading Profitability
When it comes to profitability, many experts agreed that copy trading is able to improve user's returns and bring significant profit. Based on the same MIT study above, Professor Alex "Sandy" Pentland said in a Deloitte Interview that social learning on eToro's trading network can increase the user's profit up to 30% and it has been tested by millions of people in the past several years.
As stated in an MIT research on eToro that was published on the Harvard Business Review (HBR) titled "Beyond the Echo Chamber" by the same professor, there are three groups of copy traders that fall along a continuum (as shown in the picture below).
Investors in the first group like to work completely in isolation, so they only follow a few other traders before they come up with their own investment strategy. In contrast, hyper-connected traders on the other side of the spectrum follow and are followed by other traders and maximize the use of social learning in their trades.
The study suggests that the middle group is called the sweet spot as it lies in the middle of the two extremes. The results revealed that traders who can balance and diversify their trades and network had a return on investment that was 30% higher than the returns of both the isolated traders and those in the echo chamber. In other words, the best copy trading practice would be in the intermediate zone where traders can maximize the use of social learning and earn the biggest return.
Now most traders on eToro belong in the middle group; the ones that are able to socialize well and learn a lot from it but behave with a degree of independence so they can make their own choices and not just following the herd.
See also: How to Invest in Stocks with eToro
5. Best Platforms for Copy Trading
As for the best platforms for copy trading, the two giant leaders are eToro and Zulutrade. But there are many other trusted platforms that you can choose from, such as Ayondo and NAGA Trader. Here is the comparison table:
6. Risk Management
According to the statistics, around 67% of traders on eToro lost their trades and ended up losing money, mostly caused by common reasons such as lack of effort, lack of patience, poor risk management system, unrealistic expectations, and others. To mitigate the risk, users can diversify their portfolios and pay attention to the Risk Score of the expert traders that they copy. After all, many copy trading platforms like eToro have classified the Risk Scores so users can choose to follow conservative or aggressive traders.
See Also: 6 Things You Should Know About eToro Social Trading
We can see that based on the few crucial aspects explained above, copy trading is seen as a new system with a promising future. Its role in the industry keeps growing and customer's interest keeps growing. The number of trading platforms that support social and copy trading also keeps increasing.
For instance, eToro had seen a revenue spike from $416,000 in 2015 to $2.1 million in 2017. And that was when the company's only focus was on the European and Asian markets. In the following year, eToro started to accept traders from the US, boosting the revenue up to $8 million. It proves that the future is bright for copy trading.
eToro established in early 2007, with a mission to make trading accessible to anyone, anywhere, and reduce dependency on traditional financial institutions. The company has head offices in the United Kingdom, Cyprus, USA, and Australia.
eToro (Europe) Ltd operates as a Financial Services Company authorized and regulated by the Cyprus Securities Exchange Commission (CySEC) under license no. #109/10. Meanwhile, eToro (UK) Ltd is authorized and regulated by the Financial Conduct Authority (FCA) under the license FRN 583263.
As for eToro AUS Capital Pty Ltd, the legal standing is acknowledged by the Australian Securities and Investments Commission (ASIC) to provide financial services under Australian Financial Services License 491139.
A broker that belongs to the 4-digit type, eToro offers both short-term options for day traders and long-term options for investors, such as their innovative CopyPortfoliosTM, a fully managed thematic portfolio.
Since 2007, eToro has been at the forefront of the Fintech revolution. The most recent was launched in 2017, which is CopyPortfolios powered by Machine learning Al. Beyond developing CopyPortfolios, the company integrated Microsoft's machine learning technology into Momentum DD.
The new CopyPortfolio investment strategy uses artificial intelligence to find the steadiest traders who are most likely to generate a double-digit return and bundle traders into one fully-managed portfolio. eToro has hundreds of financial assets for trading across several categories including stocks, commodities, crypto assets, currencies, indices, and ETFs. Each asset class has characteristics and can be traded using a variety of investment strategies.
Some positions on eToro involve ownership of underlying assets, such as non-leveraged positions on stocks and cryptos. Employing CFDs will enable a variety of options, such as leveraged trades, short (sell) positions, fractional ownership, and more. For example, traders can invest as little as USD100 in gold, even if a single unit of gold cost USD1,000. Some of eToro's most popular CFD commodities include gold, oil, natural gas, silver, and platinum.
Currencies are traded on eToro only as CFDs. Also, CFDs enable Sell (short) positions and leveraged trade, even for assets that don't offer the option in traditional trading. Some of the popular currencies include EUR/USD, GBP/USD, AUD/USD, USD/JPY, and USD/CAD.
Furthermore, An Exchange-Traded Fund (ETF) is a financial instrument comprising several assets grouped to serve as one tradable fund. After opening an account in eToro, traders can invest as little as USD250 in an ETF that costs USD500. Some of the popular ETFs on eToro include SPY, VXXB, TLT, and HMMJ.
However, eToro also offers additional functions using CFD trading. All leveraged ETF positions in the UK are under FCA regulations. Meanwhile, all CFD positions executed by eToro Australia are under ASIC regulations.
The company has other advantages. In all financial assets that can be traded, eToro does not charge any deposit or trading frees other than spreads.
eToro charges a USD25 fee for withdrawals and the minimum withdrawal amount is USD50. Long (Buy), non-leveraged crypto, stock, and ETF positions are not executed as CFDs and do not incur any fees. eToro does charge overnight or weekend fees for CFDs positions, such as leveraged positions and short (sell) orders.
Fee updates always apply to open positions. Fees are subject to change at any given time and could change daily, without prior notice, depending on market conditions.
As a beginner, trader can use CopyTrading eToro. Different from the features of other brokers, traders can copy the strategies of professional traders without fee or profit-sharing. Therefore, 100% profit is fully owned by traders. For example, while trader A who is copied by trader B, produces a profit of 10% this month, then trader B also gets a profit of 10%.
The company is the world's leading social trading network. Since eToro operates in complete transparency, each trader has valuable information on their eToro profiles, so other traders that are interested to copy their trades can have assistance in creating their best portfolios.
Another feature that is unique to eToro is the personalized, social News Feed. Just like on any social media, traders can post their updates on feed, comment on other's posts, and gradually create a feed that is tailor-fitted to trader's trading and investing interests. On eToro social trading platform, traders will also get notifications when a trader writes a new post and many other important updates.
In conclusion, copy trading is indeed worth it if we know how to use it well. We should be able to manage our portfolio wisely while simultaneously maximize the use of social learning from the platform. So even if it's relatively easy compared to other trading strategies, copy trading is not without effort. We need to properly research the traders that we would like to copy, as well as diversify and balance our trades. For more precaution, it is also important to try out the demo version of copy trading on whichever platform we choose.