There’s a massive choice of traders (Gurus) available on the eToro social trading platform which you can copy. Unfortunately it’s not very transparent how the historical gain % statistics are calculated and the figures can certainly look inflated and hence may set wrong expectations. It’s also easy to be misled by the assumption that most traders have a 100% (or near 100%) winning ratio. This only means they never close a losing trade and hence they will carry losing trades for months and even years . So, how do you go about selecting the traders to follow?
Here’re some tips and things we look at when selecting the Gurus/Traders we copy:
- On the left hand side of the eToro people rankings (Guru Finder) you can also select “Most Copied Traders” under the “Popular Searches”. Any “copier” is copying this Guru with real money and because people can copy and ‘un-copy’ anytime, this is a pretty good starting indicator of how this Guru has performed over time. Over time, people will not keep following a Guru if they’re not making positive returns from them or display poor trading behaviour. Hence this is a decent “starting” point for finding traders to analyse further but by no means will just copying the “Most Copied Traders” be a recipe for success. There have been several past examples of traders in the ‘most copied top 10′ who lost their account balance (and hence their copiers’ allocation). However, because the gain% can be misleading (as discussed above) ordering by number of copiers (currently default in eToro search results) is still a better starting point.
- When analysing a Guru it is also useful to look at the ‘Copiers’ graph under the ‘Stats’ tab in the trader profile. A steady increase without large sudden drops is the sign of a consistent Guru. A sudden drop in ‘Copiers’ on the other hand is normally the sign of some erratic or poor trading activity.
- When looking at the rankings we normally select ‘Last Year’ in the drop-down box. This will display a small performance graph next to each Guru. We prefer to look for eToro Gurus with a consistent upward graph without sudden drops and peaks. This is normally the sign of a consistent and lower risk trader.
E.g. we prefer this performance graph to these three even though all 3 were profitable over the 1 year period.
- When looking at the performance graph, also consider the difference between the green “realized equity” line and the blue “total equity” line. Realised equite only takes into account any closed trades, while total equity includes both closed and open trades. The larger the difference between the lines, the longer the trader normally holds on to open trades (in the case of the blue line below the green line, that means holding onto losing trades, which can lead to large drawdowns). Our preference is to look for Gurus where the lines don’t show any large gaps between the lines (especially blue below green).
- If you’re looking for lower risk Gurus (or want to compare the risk between eToro Gurus) then the ‘Maximum Weekly Drawdown’ column in the rankings table is the key indicator to evaluate. The lower these numbers are, the lower the risk.
- When evaluating risk, don’t put too much value on the Advanced Filters default Risk settings. Selecting “Low Risk” even returns Gurus with > 50% weekly drawdown (extremely high risk in our opinion). Hence always look at the values in the column, so for lower risk you can look for eToro Gurus with <10% or 15% weekly drawdown.
- Look at the number of Open Trades in the eToro Guru profile. Anyone can have a 100% winning ratio (by never closing a losing trade), but if a Guru has over 10 open trades and they date back over months and years this might significantly impact your performance.
While the Guru may start with a SL (stop level) of 100 pips on a trade, they may gradually increase this to 1000 to ensure they can keep this trade open. The impact of this means that your available allocation, i.e. the amount that can be used to open new trades, will be significantly reduced.
E.g. you allocate $1000 to a Guru and they risk $50 on a EURUSD buy trade at 1.3300 with TP (Target Profit) 100 pips or 1.3400 and SL (Stop Level) 100 pips or 1.3200. If the EURUSD starts dropping and they adjust their SL to 1000 pips or 1.2300, this means that instead of $50 of your $1000 allocation, they’re now risking $500 of your allocation and only the remaining $500 can be used for any other trades the Guru makes.
I.e. open trades will significantly impact your overall performance as they reduce your available equity. For popular Gurus with many copier, the impact of leaving trades open will normally be reduced because the bonuses they receive from eToro at the end of each month automatically increases their own equity and hence can be off-set against their own open trades.
We prefer to copy traders with a limited amount (e.g. < 20%) of capital tied up in long term open trades of more than 1 month. The average exposure gives you some indication on this though unfortunately you only get a better understanding when you actually start copying the trader and see how much they risk per single trade (and then look at the number of open trades).
- Following on from the previous point, we’re very sceptical about Gurus who have a 100% winning ratio. Professional traders know when to take losses and use stop levels effective. We therefore prefer traders who cut their losses before they become a drain on the available equity. I.e. Gurus with no open trades and an 60-80% winning ratio normally perform better over time than Gurus with a 100% winning ratio and 10+ open trades.
- Look at how long the Guru has been trading on eToro. The longer the better as over time more people will have tried to copy them. Since anyone can open an account with $50 and take some risks, it’s certainly possible that a trader can get lucky a few months in a row. Over time though it’s more difficult to make consistent returns and that’s where professional traders distinguish themselves from gamblers. We prefer to follow and copy established traders with at least 1 year history on the social trading network (currently there’s unfortunately no way to retrieve any info > 1 year old, though you can always ask the Guru how long they’ve been trading on eToro if it’s not mentioned in their profile).
- On the charts in the Guru stats, select the longest period possible (currently 1 year) and look for any red flags on the chart. These indicate that the Guru lost their equity at the point and restarted trading with new equity. I.e. not good, well … actually very bad as it would have meant losing your allocation if you followed them at that time.
- From looking at the historical trades, try to understand the Guru’s strategy. We like to avoid trader’s who’s system or strategy involves added to losing positions in order to recover when the market makes a small correction (i.e. Martingale type trading strategies). This is a similar strategy to doubling up on one colour (i.e. red or black) on a roulette table in the casino in the hope that that colour eventually comes up (which is a system which eventually fails when you run out of cash or reach the table limit). This trading strategy works well in low volatile market conditions, but can cause serious problems when the Forex market moves 500 pips in one direction without retracing. In most cases where traders have busted their accounts this has been the cause. Because of the limited historical data provided by eToro this is not always easy or possible to determine. Try and look at the Guru’s performance graph and see if you can still find the trade history for the time period where their equity made a significant drop. Did they open multiple consecutive positions in the same position at that time or not?
- Try to anticipate whether a Guru is likely to lose their full balance (and hence your allocation). Yes, we know, this is easier said than done, though this is probably the key difference between making a profit on eToro and losing money (especially when you diversify your investments). E.g. if you had invested $1000 in each of the top 10 most popular eToro Gurus on June 1st 2012 you’d have lost $763 by May 31st 2013 (12 months later). However if you had avoided following michaelfx, who lost all of your allocation, you’d actually be in profit And there have been a few other examples of Gurus in the top 10 at their peak in terms of copiers who managed to lose their account balance (e.g. Robepu and thesizzle). Looking at the Guru’s trading strategy (as described in the previous point) and evaluating their risk & money management strategy (i.e. looking at risk per trade, historical drawdown, average exposure, …) should give you a good indication on the likeliness of their account being blown, though as always there’re no guarantees since past behaviour and performance are not always indicative of future results.
- Most professional (day) traders focus on 1 trading instrument (e.g. currencies or oil or Dow Index). Hence we’re always a little sceptic about eToro Gurus who seem to have invested in almost every instrument and currency pair (in the portfolio view).
- Look whether the Guru is copying trades from other Gurus (under “Portfolio” -> “Copied Traders”). If they are, consider whether you want to “copy” another “copier” or whether you want to keep control yourself over the traders you copy.
- Test the Gurus you consider copying using your virtual money eToro demo account. We cannot stress this more, but the best way to see and understand how a Guru would perform with $100 or $1000 of your real money, is to allocate this with your virtual money and monitor their performance. Not only does this demonstrate their performance, but you’ll also be able to see how much risk they take per trade. I.e. how much of your allocation do they risk per trade. This can be monitored by looking at the “Amount” figure in the Open Trades screen. If this amount is $500 of a $1000 allocation, this means they risk 50% of their equity.
- Be sceptical about any suggestions made by the eToro marketing e-mails or your eToro account manager and analyse them yourself first. E.g. of 10 suggestions made near the beginning of June 2012, after 3 weeks hibikitakahashi had $78 left of their $1000 allocation and Cemara1 was left with $66.4 of their $1000 allocation. 2 of the gurus who were suggested as being low risk also already had over 50% of their allocation tied up in (losing) open trades (hardly low risk). Arguably some did perform well, though do your own research and try them in your demo account first if you’re not sure (like we do).
- Read through the comments on the Guru’s live trading feed. While not all gurus actively participate on the feed, some will comment on the trades they make and the market view they have. This gives you an indicator of their trading strategy. Comments from followers and copiers can sometimes be useful too. However, please note that the feed comments are moderated by eToro and some negative comments are removed (mainly because of language abuse).