eToro Tips: Money and Risk Management

Money Management is a key component to any successful trading strategy and also when you copy other traders with eToro it’s important you understand and manage the risk of your account.

Within the allocation you make to each Guru, the actual risk the Guru applies to their own account is replicated proportionally to your available allocation. I.e. if they risk 5% on a trade in their account, 5% of your allocation is risked, and if you were allocating 10% of your funds to that Guru this means 0.5% of your total balance is risked. Risk and money management is therefore totally up to the Guru(s) you copy and the only way you can manage the overall risk level of your account is by changing the amounts you allocate to each Guru. From experience, we’ve noticed the risk levels range from 1% per trade to 100% per trade. Hence it’s important you understand the risk level of each Guru you copy or plan to copy on eToro.

For some Gurus, eToro displays a basic “Risk Breakdown” on their profile screen. It gives an indication of how many of their historical trades were low, medium or high risk. This “Risk Breakdown” isn’t shown for all gurus and from the historical information currently provided for each Guru there’s no way you can calculate a “risk level” yourself.

Hence the best (and sometimes only) way to get an indication of how much a guru risks per trade is to copy them using virtual money in a demo account (click here to open free eToro demo). Looking at the “amount” and “units” columns in the “open trades” and “history” tabs in eToro Webtrader gives you an indication of how much the Guru risks on each trade. Let’s look at the example which shows 3 trades from 3 different Gurus in the history tab. All 3 Gurus were allocated $1000.


From the units we can deduce that viking1961 was risking $1.5951 per 1 pip movement on this trade (pip value calculator), while risking $638.04 of our allocation to them on this trade (the “amount value” relates to the distance of the stop level). erohal2009 was risking $0.02645 per pip and $10.58 of allocation on their trade and cemara1 $0.8883 per pip and $88.83 respectively.

From this data we can therefore deduce that of these 3 traders, erohal2009 was risking by far the least on their trade. We can also see that while cemara1 was risking about half as much per pip as viking1961 ($0.8883 vs $1.5951), they were actually proportionally using much less of their allocation on that trade ($88.33 vs $638.04). That’s also the reason why cemara1′s gain % on the trade is almost the same as viking1961, even though they only made 6 pip on that trade vs 27. I.e. they made those pips by using less capital.

So to summarise, the pip risk tells you how much you win or lose on the trade when the market moves 1 pip and is the key indicator of how much a Guru is risking on market movements.

The amount used for the trade will more depend on the strategy of the Guru. DayTrading Gurus are more likely to use stops 100 pips away while longer term strategists may use 500 pips. Obviously if the market moves 120 pips against a position, but then comes back to break-even, the first Guru would be stopped out (and lose 100 pips) while the second Guru would still be in the trade. However, the second Guru is risking and therefore locking much more of your allocation on the trade (which cannot be invested elsewhere).

Both strategies have their merits but it’s worth noting that Gurus with many followers on eToro get fresh capital in terms of their bonuses at the end of each month. Therefore, if they risk and lock away $800 of your $1000 allocation on a long term trade, you’re only left with $200 of your allocation that will be used to copy any new trades this Guru will put on. They can however use their fresh capital on any new trades they put on.

The example above should now allow create an understanding of the risk profile of a Guru. When you’ve categorised the Gurus you want to copy, you can then apply this to the overall risk profile you want to apply to your eToro account. E.g. if you can decide to invest 75% in low risk Gurus, 20% in medium risk and 5% in high risk Gurus.

Please note that it’s not within our remit to make suggestions of what overall risk profile you should take (please contact a financial advisor for this). The information we provide here is for information purposes only. Investing on eToro (and any other social trading network) is subject to investment risk, including possible loss of part or all of your initial investment.

Deciding when to invest is another part of your money management strategy and a key factor of your performance. eToro Gurus will have winning and losing streaks (just like markets can go up or down). There’s no way anyone can predict their future performance in advance and hence you cannot foresee the perfect timing to invest in them. Here some examples:

1) If you invested $1000 each in the 10 most popular eToro Gurus (most copiers) on May 1st 2012, your net position (incl. open and closed trades) would be $7,240 after 1 month and $8,334 after 2 months (30th June 2012). If however you invested $10000 in the 10 most popular Gurus on June 1st 2012, your net balance would be $11,360 after 1 month.

2) Looking over 1 year, investing $1000 each in the top 10 eToro Traders in May 2012 would have resulted in a balance of $8,726 after 1 year investment (30th April 2013) and $8,571 after 13 months. Investing in the top 10 on June 1st 2012 would have resulted in a balance of $9,237 by May 31st 2013.

3) At a Guru level there’re similar difference. If you allocated $1000 to Malsolo on May 1st 2012 your net position would have been $750 after 1 month and $1019 after 2 months. If you invested $1000 in Malsolo 1 month later (June 1st 2012), you net position would have been $1292 one month later (end of June 2012).

4) Over 1 year, $1000 invested in Malsolo on May 1st 2012 would have resulted in a net balance with him of $1,281 after 1 year and $1,302 after 13 months (end of May 2013). Investing the $1000 in Malsolo on June 1st would however resulted in a net balance $1,637 after 1 year (31st May 2013)

It would have been better to start investing at the beginning of June than at the beginning of May, but unfortunately you could only know this in hindsight. Nevertheless, one way you can reduce the risk of investing at the start of a losing run is by phasing in your investment in a Guru over a few weeks or months. I.e. spreading the risk. Even if you already have your funds in your eToro account (e.g. to benefit from their first deposit bonus) there’s no requirement to have them all allocated at once.

Copy open trades or not?

eToro introduced the option in December 2012 to copy a Guru’s existing trades when you start copying them. By default this option is now selected, as eToro believes that “this is the best way to experience the CopyTrader function”. We do however suggest you carefully consider whether you really want to copy the existing trades of a Guru and hence lock in potentially a large amount of your capital straight away in those trades. There’s normally a good reason why those trades are still open (they’re in losing positions!) and hence do you really want to open trades in that direction as well? Personally we never select this option ourselves.

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