I began trading currencies 3 years ago. I faced the harsh reality of layoffs at the engineering company I worked for at that time. I thought that I would be able to trade successfully and support my family without a job. Well, I was quite wrong.
The first 6 months of my trading enterprise were complete failure. I rushed things and after couple weeks of research I opened my first account and started trading forex. Then I lost all my money and I was about to quit.
But I couldn't. I felt if I give up maybe I am missing the chance of having my own business. So I stopped trading and went back to studying and analyzing the possibilities.
It quickly dawned on me that there are few obstacles that I had no chance to overcome:
- Financial markets are very difficult environment to succeed in. You as an individual trader compete with the best traders out there, also with the banks and big funds that use their big guns in order to extract the profits from the market. God luck to you if you think you can outsmart them.
- Trading is very time consuming. It involves a lot of time being glued to the computer screen. I had to keep my daily job to be able to provide for my family so I simply did not have the time.
- Trading involves a lot of stress. The equity swings put a lot of mental strain on the trader. It negatively clouds the vision leads to bad trades. I simply could not tolerate this aspect of trading.
My empty trading account was the concrete evidence that chances of becoming a profitable trader for me were slim. But on the other hand, online trading fascinated me because I simply knew that there are profitable traders out there who make great living out of the financial markets.
I would give my left arm if someone could teach me how to trade profitably.
That certainly did not happen as I still have both my hands. But I found the solution nonetheless. I was routinely searching the internet at work one day and I found a concept that totally blew my mind away.
Normally, trading skills and experience determine trader’s success or failure in the market. There are many variables that influence the fluctuations in market prices. They could be political decisions, economical situation, ratings, weather around the World, terror acts, inflation etc. Now, these skills can’t be learned by reading few books or by watching some videos. You would need to spend many months, even years on practicing these skills and even then, there are no guarantees that you’ll succeed.
I have learned this the hard way, losing my own money in the process.
At that point I said – So, what’s the point in doing all this?
Chances are negligible that you could become a successful trader. Sorry, that is a hard fact. But here’s the good news – There is an other way how to became profitable...
The day when I discovered eToro changed forever the way I look at trading online.
What is eToro and what is so special about it?
eToro is a social trading platform. In simple terms, it gives you an opportunity to copy the best traders and you can make profit without actually doing any trading on your part. Until today I am still amazed at this simple but genius idea.
The idea has a very simple and clear-cut reasoning – to follow the absolutely top traders available and earn money from their experience and trading skills. If these top traders cannot make me profit in the long term, there is simply no way I could do it on my own. Therefore with this approach, absolutely anyone should be able to show a long term profit. There are currently over 5 million traders in the eToro network.
Even traditional market experts now acknowledge eToro as a reputable trading platform:
I assumed that if the trader has been successful in the past year or so without a major drawdown, there is a good chance that his/her profitable trend will continue at least for some time from now on. Now, looking at my trading account, I can clearly see that my assumption was correct and I have been able to finally make money in the market.
Of course, there are some important questions that need to be clarified, such as:
- What is the best way to choose the traders to follow?
- How many traders to follow and what is the best strategy of managing them?
- How to minimize the risk?
There are all valid points and it takes some time to come up with the right answers, but it is still much easier than to become a real trader on your own.
Is it too good to be true? Yes and no.
You can create a profitable portfolio even if you do not possess enough skills to be profitable on your own. The markets are unforgivable and tremendous effort on the side of an individual trader is required to stay in the game and generate profit. Now with the ability to copy trades the knowledge of seasoned traders is available also to individual investors. You might not want to invest months or years in learning your way in the markets and also thousands of dollars in losses that are inevitable byproduct of the market education.
The downside is that you might occasionally end up copying a trader who goes bust. These things happen, some traders might not be able to replicate their past success and start trading recklessly. That will take down also the followers, who did not spread their capital between several traders with different styles and risk/profit profile. But if you do diversify, one busted trader will only make a small dent on your overall performance. The truth is, you simply must accept the losses as a part of the trading game.
There is no profit without the risk. With increase in the return on the capital, the possibility of losses increases with the same ratio. It is your objective to anticipate the risky manner of financial markets and eliminate what you could by your disciplined approach.
No strategy in the world works indefinitely
The trading strategies come and go. The ‘buy and hold’ approach from the past simply does not work anymore. There are countless strategies available today, such as breakouts, trend based, countertrends, scalping and many others. Some of them work best in trending markets, others are best when the market is ranging. As you can imagine, it is extremely difficult to stay above all the market information and to generate steady profits. This is where the main advantage of social trading is – you are able to tap into knowledge of various traders with a proven track record.
Your role as an investor is to engage, monitor and evaluate strategies. It is your call which strategies will be included in your portfolio. On the other hand, once you define your profit and risk parameters and the overall strategy, monitoring of the portfolio is not time consuming.
There is no such thing as a free lunch
This is not a get-rich-quick scheme. You still need to do your homework and put the time in.
It takes the time and effort to find traders to copy who knows what they are doing but it is certainly highly rewarding process. You need to learn how to spot traders who do not follow solid risk management. For example, some traders prefer to sit on a number of losing positions yet in the hope the trades will bounce back. This is a dangerous approach that could lead to wiping out of their account when the losses are not cut early, before they become devastating when the market does not turn.
On the other hand, the effort you invest into managing your account pays handsome profit.
What are the requirements to become a trader-following investor
First, you need to open an account.
My choice of broker for obvious reason is eToro. I have been with them since 2013 and I never encountered any major problem. It is a fully regulated broker and it is one of the biggest players in the industry. The deposits and withdrawals (they are more important) are smooth and worry free.
You can sign up for your eToro account clicking on this link. They have a bonus campaign now - your deposit will be matched with a bonus of up to $1000. This money is a great cushion against some initial losses.
After you forward the necessary documentation to eToro you can use the practice account to try out trading under real market conditions, but using virtual money. Your practice account completely replicates the live trading experience and gives you a chance to practice investing with no risk of loss. The drawback of trading with a practice account is that the profits you make will also be in virtual money.
The minimum starting deposit is $200. It is good for testing the platform and for a couple of first trades. But I would recommend that you start with bigger amount for the following reasons:
- You are able to truly diversify across many different traders you follow
- You can focus on low risk traders and still achieve decent profits in the absolute terms
- You might treat the small deposit as ‘gambling money’ and trade recklessly, reinforcing bad trading habits from the beginning
With just 200 dollars you cannot achieve any significant profit without risking way too much. Even if you hit a winning streak right from the beginning, there is a fat chance that you will give all the profits back very soon.
It is important to mention that there are certain regulatory requirements eToro has to comply with. Therefore you have to verify your identity by uploading scans of your ID or driver’s license and a recent utility bill. This is a common practice with all brokers and banks and it is to prevent money laundering. Without the verification you will not be able to withdraw your money.
How to select traders for your portfolio
It is very straightforward to start evaluating potential traders to follow.
When you click on Copy People from the main left hand side navigation menu, you’ll be taken to a very powerful tool that allows you to go through a lot of data very quickly.
The Copy people function then allows you to search through traders, and based on your preferences, such as performance, risk profile, drawdown and other factors, add them to your portfolio.
Your results (profit or loss) will be then the exact same as the trader’s that you’re copying.
eToro describes this “social investment” and my whole strategy with eToro is based around the copy trader function.
I mean, why should you try to learn trading inside out and dedicate hundreds of hours to learning about markets, when you can simply copy other traders with a proven track record of success? And so far my results really show that there is MASSIVE potential in this “social investing” that eToro has pioneered.
Filtering profitable traders to copy
When you first click on Copy People, you are taken to a page which lists the Top Investors, Trending investors, Most Copied, Lower Risk Score, and Medium Risk Score.
This gives you an overall view over traders. Clicking on ‘ADVANCED SEARCH’ takes you to filter screen where every detail about traders performance can be specified. This is where I spend most of my time.
The basic filters are:
Time period for evaluation – I reckon 12 months is a good period to start with to see if the trader has enough track record.
Profile – Only select ’Verified traders’, the rest is not too important
Copiers – It is interesting to look at the number of copiers that the trader has. If someone is followed by hundreds, it obviously gives an indication of their profitability
Copy AUM - it tells you how much money is currently allocated to copying this trader. Higher amounts will obviously give you more confidence in trader’s skills.
The filters you use will depend on what you’re trying to achieve.
I now have a low risk/conservative outlook – I’m not looking to double my money overningt. But I still want to get much better return that I would get in a savings account.
This means that I focus on low/medium risk traders with a proven track record. Generally speaking higher risk means higher potential reward, but also higher potential losses.
So please take my filters as an inspiration to start with. ! You might want to take more risky approach in your copying – that’s perfectly fine, as long as you evaluate the traders thoroughly.
And here are my personal preferences how I evaluate the traders for my portfolio.
Return - Here you set the minimum and maximum returns that traders have achieved. My conservative goal is to make 20%-40% a year from here. So I set my minimum at 20%. I keep the maximum 100%.
For my second, speculative eToro account I work with 50% as minimum yearly return. This way I am able to keep my portfolios separate. It is handy for reporting of performance and for the allocation of capital.
Profitable Months - I place a lot of importance on this one. Even best traders have losing weeks and months, so it’s not reasonable to look for someone who makes money every single month of the year. But at the same time, I am looking for consistent traders – not someone who makes 100% in January, but then loses for the rest of the year. I want to copy who has more winning months than losing months. I set this at 60% as a minimum.
Profitable Trades – I do not place too much importance on this one because I prefer the big picture that ‘Profitable months’ give me.
Risk Score - This is a number from 1-10, that shows how risky a trader is. Score of 10 is the riskiest. eToro use the industry standard VaR (Value at Risk) to calculate a trader’s risk score. I go for traders with a risk score of 1 to 6.
Daily Drawdown. Drawdown basically means the maximum amount of a trader’s overall money that was lost over the given time period. So a daily drawdown of 6% means the most the trader even lost in one single day was 6% of capital. This is very important factor, as a high daily drawdown shows the trader is very unpredictable and huge variance in the value of their portfolio can be expected. I want to be at the safe side so I set this to max 10%.
Weekly Drawdown - the same thing as above, except it’s calculated on a weekly basis. There will of course naturally be more variance over longer periods of time, so I choose a maximum of 15%.
Allocation - Here you can filter for traders based on how much of their portfolio they have allocated to the financial markets– currencies, commodities, indices, stocks, and ETFs. I leave this without changes but I put max 0% to ‘People’. This is how much money a trader has copying other traders. I am not interested in copying traders who copy others.
Average Trade Size - It tells how much the trader risks on average, on a single trade. This directly affects the drawdown stats and the lower the value here, the less erratic the trader’s results will be. I prefer to put max 10% here.
Exposure refers to how much of the trader’s account a trader is open. I leave this blank because I figured out that it does not directly correlate with returns.
Active Weeks is a filter for the number of weeks that a person is actively trading. I generally prefer this to be higher. It indicates that the trader is working full-time.
Trades - means the number of trades entered. I have no preference here so I’ll leave it blank.
Note: Remember that you need to check each trader manually to see past trades and open positions, the number of copiers, and portfolio allocation. Also graphs and trends for at least 6 months of trading results. From these graphs you can instantly spot a good trader with steady growth over time and a low number of high risk trades.
Here is an example of filtered traders. There are certainly many of them out there who are doing well and are suitable for following.
Risk management - the foundation of long-term success
My highest priority is to spread the risk across many different traders. Meaning – the total trading capital in my account is divided among 10 or so traders. It is not a rigid number, it fluctuates as I evaluate new traders or un-copy the problematic ones.
For the obvious, the more diversified your portfolio is, the less chance of big loses when individual trader’s performance goes bust. My main concern is to minimize the potential loses, even if it means lower profit in the long term. Therefore I only follow traders with low to medium risk portfolios, with proven and consistent track record of at least one year. The trading platform of eToro makes this process quite easy. You can quickly analyze each trader’s trading style, past performance and other important metrics.
A conservative risk strategy like this allows you to stay in the markets even in times of increased market volatility (market crash). You do not want to be among investors who are wiped out with ever slight correction in the overall trend. Your main goal should be preserving your capital, not maximizing the returns. I am more than happy to get modest but consistent returns on the capital instead of a roller coaster of big profits alternated with huge draw downs. During my first year of trading I had bigger tolerance for risk and I doubled my account in about 10 months. Nowadays I aim for more humble 30-50% of return per year.
While it is not totally necessary, I prefer to check the state of my account every day. The daily check takes no more than 5-10 minutes. I usually make changes every two weeks in average. My total monthly spend on eToro platform might be few hours but it doesn’t feel to me like work so I am happy with that.
I wanted to share this with you just to show what’s out there apart from working for someone else. I used to work as a structural engineer for a salary. All my effort made someone else rich in the process. When I received that wake-up call, my world was crumbled at first but I managed to find a solution for my problems.
Today I consider myself a lucky man. I manage my money myself with great returns. Now I own several profitable trading accounts - eToro, Zulutrade and one options account. They all complement each other and are based on principle of following successful traders. I would not be able to enjoy this kind of lifestyle, with lot of free time to spend with my family if I continued to work as an engineer, that’s for sure.
Open your trading account and check the possibilities out yourself.
There are few things I would like to add now:
1. Only trade with the money you can afford to lose. Never use your rent money, mortgage payment or your retirement fund for trading.
2. Never use credit card for funding your trading account.
3. Never use more than 10 percent of your capital to copy one trader. Diversify.
4. Do not consider trading as a quick way to riches. It takes the time and effort.
5. Do not gamble in the markets. Go to Vegas instead.
6. While this trading style trading works out for me, it might work out for you. There are no guarantees of future profits and all information in this article is for educational purposes only.
Best Regards and happy trading!
UPDATE: I have posted an article about my experience with the Binary Hedge Fund. I like the idea of diversification - putting my capital into several investment vehicles. Hedge fund proved itself as a very capable tool for making good returns. You can check it out here:
Hedge funds are no longer only for the richest. You too can think like a millionaire and invest in your own fund.
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