What is Copy Trading? How to Invest in a Copy Trading Portfolio?
In this article, we explain the ins and outs of what copy trading is, how it works, how to start copying traders, and how to get started investing in a copy trading portfolio.
Copy trading is the ideal solution if you want to actively trade online - but you have virtually no experience or knowledge of how things work.
This is because you will be able to buy and sell assets passively - as your chosen copy trader will make investment decisions on your behalf.
If this is something you are interested in - regulated platform eToro is largely considered to be the market leader in this space - not least because it is home to over 13 million traders.
In this educational guide, we walk you through the copy trading process. We explain what copy trading is and how it works, whether or not it’s profitable, and what you need to do to get started with an automated trading portfolio today.
Note: As we uncover in this guide, copy trading isn’t only suited for newbie investors. On the contrary, it’s also perfect for seasoned traders that simply don’t have the time to actively buy and sell assets.
What is Copy Trading? The Basics
Put simply, copy trading allows you to ‘copy’ the portfolio of an experienced trader like-for-like. For example, let’s suppose that you come across a trader that has been making gains in excess of 10% in each of the prior 12 months. As such, you want a piece of their secret sauce.
With copy trading platforms like eToro - this can be achieved at the click of a button. That is to say, by copying your chosen investor - you can mirror their portfolio. For example, if the trader has 10% of their portfolio in Apple stocks and 5% in gold, your portfolio will mirror this.
It is important to note that copy trading isn’t only suitable for long-term investments in stocks or funds. Instead, you can also copy an investor that is active in short-term trading. As such, if you want to engage in the day trading of forex or CFDs - the eToro copy trading feature allows you to achieve this goal in a 100% passive manner.
In other words, if your chosen trader places a buy order on GBP/USD and then exits their position a few hours later, your portfolio will do exactly the same. One of the best things of copy trading at eToro is that you can get started with just $200. As we explain shortly, your portfolio will be weighted like-for-like with your chosen trader.
How Does Copy Trading Work?
The copy trading process is actually very simple. After all, you simply need to select a trader that you like the look of and then determine how much you wish to invest. However - and much like any online investment strategy - you still need to understand how things work. This is because you will be risking your hard-earned capital - so knowledge is crucial.
With this in mind, below you will find a simple breakdown of how copy trading works in practice.
Example 1: Long-Term Investment Portfolio
In this example, we are going to look at how copy trading works in the case of an investor that likes to focus on long-term stocks and shares.
- You find an experienced stock investor on the eToro website
- You decide to invest $1,000 into the copy trader
- The trader has 50% of their portfolio in Facebook stocks
- The trader also has 25% in Netflix stocks and 25% in IBM stocks
Once you confirm the investment at eToro, your personal portfolio will look like the following:
- $500 worth of shares in Facebook (50%)
- $250 worth of shares in Netflix (25%)
- $250 worth of shares in IBM (25%)
As you can see from the above, it doesn’t matter how much capital the copy trader has invested at the platform - as your portfolio is weighted like-for-like.
Example 2: Short-Term Forex Trading Portfolio
In this example, we are going to explore how copy trading works when you elect to copy a forex day trader.
- You invest $1,000 into your chosen forex trader at eToro
- The trader enters a buy order on EUR/USD at 1.1810
- The trader risks 3% of their trading capital with leverage of 1:30
- In turn, this means that you will also place a buy order on EUR/USD at 3% of your capital - which is $30
Once the above position is entered, the outcome will be determined by the trader. That is to say, if the trader makes a profit on their EUR/USD position - as will you. Similarly, if they make a loss - you will do too.
- A few hours later, the trader closes their position on EUR/USD at 1.2046
- This translates into gains to 2%
- On your stake of $30 - you make a profit of $0.60
- Much like the copy trader, you also had leverage of 1:30 applied to the position
- This means that your total profit from the EUR/USD position amounts to $18
Crucially, the copy trading example above illustrates that you are able to actively trade forex without needing to lift a finger. The same trader might then go on to place a further 10 positions later in the day - all of which will be mirrored like-for-like in your personal eToro portfolio.
eToro Copy Trading
There are several platforms in the online space that allow you to engage with copy trading - which we will briefly cover shortly. However, it must be said that eToro dominates this space by some distance.
The platform is home to over 13 million traders, albeit, not all have signed up to the copy trading feature. But, there are tens of thousands of that have - meaning that you have plenty of options to choose from.
Here’s a snapshot overview of why eToro leads the way in the copy trading phenomenon.
- You can get started with a minimum investment of just $200
- The platform supports everyday payment methods such as a debit/credit card, e-wallets, and a bank transfer
- The minimum investment per copy trader is just $200
- Supported assets include forex, stocks, ETFs, cryptocurrencies and CFDs via hard metals, energies, and interest rates.
- The platform is heavily regulated, just like any well-known international broker, eToro is regulated by many regulators, including CySec in Cyprus (which means eToro is regulated throughout the EU), the FCA in the UK, ASIC in Australia and by FinCEN (Financial Crimes Enforcement Network) in the USA.
- eToro is one of few trusted brokers that has managed to gain acceptance in the USA.
- Each and every trade placed by the trader is 100% transparent
- You have heaps of metrics to look at when choosing a copy trader - such as historical and monthly ROI, risk rating, and preferred asset class.
All in all, if copy trading is something you are interested in - your best bet is to use eToro.
Other Copy Trading Platforms
If for whatever reason you don’t fancy using eToro for your copy trading endeavours - a number of other options are on the table.
- MT4/MT5: Third-party trading platforms MT4 and MT5 both offer copy trading functionalities. You will, however, also need to find an online trading platform that supports MT4/M5.
- ZuluTrade: Much like MT4/5, ZuluTrade also supports copy trading.
- AvaTrade: AvaTrade is a regulated CFD and forex trading platform that allows you to copy other traders. You will need to do this via ZuluTrade, Duplitrade, or MQL5.
- Pepperstone: Another popular online trading site that supports copy trading via third-party platforms
Who is Copy Trading Suitable for?
Copy trading is suitable for a variety of financial goals. Whether you’re a complete beginner or simply don’t have time to research the markets yourself - copy trading provides a solution for many investment barriers.
The obvious starting point is that copy trading is highly conducive if you have little to no experience of the investment world. After all, your chosen copy trader will make each and every trading decision on your behalf.
No Requirement to Learn Technical/Fundamental Analysis
Research is by far the most important skill that you need to have as a trader. At the forefront of this is technical analysis - which is the process of reading and evaluating charts. As you can imagine, it can take many, many months before you begin to get to grips with technical indicators and chart drawing tools.
Similarly, fundamental analysis is also required to trade effectively. This is the process of reading and interpreting financial news developments and how they can impact the value of an asset.
Crucially, by creating a copy trading portfolio - there is no requirement to perform an inch of research yourself - as this is taken care of by the respective investor that you back.
Leading on from the above section, copy trading is also great if you seek a passive form of income. Once again, as soon as you have elected to copy your chosen trader - there is nothing more for you to do. Instead, the trader will buy, sell, and trade financial instruments on your behalf.
Unless you are a long-term investor - actively trading the financial markets is a time-consuming process. Not only do you need to dedicate time to researching your chosen asset class - but you also need to place buy and sell positions throughout the day. As such, copy trading is suited for those of you that simply don’t have the time to trade.
Copy trading is also suitable for those of you that seek a liquid investment. By this, we mean that you will always have the option of cashing out your copy trading portfolio at the click of a button. This is ideal if you need fast access to your trading capital.
How do you Make Money From Copy Trading?
When it comes to making money - this operates much the same as any other online trading strategy. That is to say - you stand the chance of growing your capital in two ways - capital gains and dividends.
Whether you are investing in stocks and funds or trading forex and CFDs - the overarching goal remains the same - capital gains.
Put simply, this means that you will sell an asset for more than you originally paid (or visa-versa if you are shorting the asset). In the case of copy trading, capital gains are achieved when the value of your portfolio increases over time.
- Let’s suppose that you invest $2,000 into a copy trader at eToro
- The trader invests in stocks and shares
- Over the course of the next 12 months, the value of the portfolio has increased by 11%
- This means that your investment is now worth $2,220
Don’t forget, you would only be able to realise the above gains if you were to exit your copy trading position. Until then, the value of your portfolio can and will go up or down.
At eToro, you will have access to two asset classes that yield dividends - stocks and ETFs. If regular income is something you are looking to achieve on top of capital gains, then you are best off choosing a copy trader that focuses on the aforementioned assets.
In the case of stocks, you will receive your share of dividends as and when they are paid. For example, if your copy trading portfolio holds 100 shares in a company that distributes a dividend of $0.40 per stock - then you will receive a payment of $40.
However, if your copy trading portfolio contains ETFs, dividends are usually paid every three months. This is because the ETF in question is likely to hold dozens - if not hundreds of dividend-paying stocks.
How to Copy Trade Effectively
Copy trading might sound like this super amazing thing, and it truly is a very innovative concept that can help traders progress to the next level, but there are still things traders need to be careful of.
Most importantly, you should make sure that you don’t just copy other traders blindly. You really shouldn’t be too dependent on them; you need to actively be a part of your trading!
You should look at how traders are rated and look at their trading performance. All good social trading and copy trading platforms should have some kind of rating system to help you make an informed decision. How to select a copy trader will be explained in more details in the next section.
And just because they have a high return percentage doesn’t mean they are the best!
It might just be that the last few trades they pulled off were good, but if you look more closely you see that they made many losses before they made those gains, and some of those trades might have been very risky.
Always think about what the other trader is thinking and if you feel like it is a risk you can take.
Some more experienced traders will be able to risk a lot more than you! Don’t empty your trading account copying risks you can’t handle!
Ideally, you shouldn’t treat your social trading account like a managed account, you should exercise your free will. You are a trader after all, not an investor.
However, if you do just want someone to trade for you without having to think about it, it would be better for you to get a managed account as copy trading requires at least some of your involvement.
If you’re a novice trader looking to learn from other traders, eventually, as you become more experienced, you may want to control your trades more and rely less on copying. Who knows, in the future, other traders could start copying you.
How to Select a Copy Trader at eToro
Whether it's the ability to trade passively or access the financial markets without needing to have any experience - copy trading offers a plethora of benefits. However, the most challenging part is, of course, finding a trader that has the potential to make you consistent profits.
After all, just because your chosen investor has a verifiable track record of making money - there is no guarantee that this will be the case moving forward. As a result, it is important that you deviate sufficient time in researching a copy trader extensively before parting with your capital.
In the sections below, we explore some of the key research factors that you should look out for in your search for a profit-making eToro copy trader.
Seasoned investors will often specialise in a specific financial marketplace. For example, the most successful forex traders will rarely touch shares or ETFs. At the other end of the spectrum, long-term equity traders are unlikely to touch anything outside of the stock exchange scene.
With this mind, the first step should be to filter your potential copy traders down by their preferred asset class (The type of asset that the investor likes to trade such as stocks, currencies, cryptos, indices, commodities, or ETFs). In other words, if you want to actively trade forex, stick with copy traders that specialise in the currency arena.
Historical Trading Performance
It goes without saying that you should only consider copy traders that have a superb track-record on eToro. After all, you wouldn’t entrust your hard-earned capital with a trader that makes consistent losses, would you?
On the contrary, you’ll want to invest in the very best. Fortunately, eToro is 100% transparent on trading performance. That is to say, when you click on a copy trading profile, you can view a range of thought-provoking statistics.
For example, you can view the traders ROI (return on investment) since they joined eToro. Additionally, you can break this down on a month-by-month basis.
Average Trade Duration
This is a useful statistic that lets you know the average duration that the copy trader keeps a position open for. Why? Well, this will give you a clear understanding of the type of trading strategy that the investor likes to take.
- If the average trade duration is in minutes or hours, then it’s likely that the individual is a day trader. As such, your portfolio will be lively throughout the trading day.
- If the trader keeps positions open for several days or weeks at a time, then they are likely involved in swing trading.
- At the other end of the spectrum, if the copy trader has an average duration of weeks or months - then they are likely a long-term equity or fund investor.
Ultimately, the trade duration statistic ensures that you pick a trader that meets your financial goals.
In a nutshell, eToro will automatically assign a risk rating to each and every copy trader. This runs from 1 to 10 - with 10 being the highest risk. The score itself is calculated based on several factors that are linked to the trader's activity.
For example, this looks at the types of assets the individual typically traders, and the average drawdown over the prior four weeks. Ultimately, the higher the risk rating, the higher the returns you should expect.
Best eToro Copy Traders
If you’re looking for some inspiration as to which eToro copy trader you should invest in - below you will find a small selection to consider.
1) Yujie He (Hyjbrighter) - Up 54.50% in 2020
Yujie He - who goes by the eToro username 'Hyjbrighter', is one the most successful copy traders of the year. To date, the investor has made over 54% in 2020 alone. This consists of 10 green months out of 10 - which is nothing short of incredible.
The trader has just under 7,000 investors copying his portfolio, which translates into $5 million under management. In terms of what Hyjbrighter likes to trade, this mainly centres on stocks.
For example, he currently has holdings in Facebook, Workday Inc, Walt Disney, Salesforce, and China Mobile. What we also like about this eToro copy trader is that his risk rating is just 4/10. This converts into an average weekly drawdown of 9.20%.
2) Marco Monserrati (Abbroush) - Low Risk Equity and Fund Trader
Marco Monserrati - or ‘Abbroush’ as he is known on eToro, has a track record of making consistent, low-risk gains. In particular, this copy trader likes to focus on equities and funds.
With that being said, the trader has an average holding time of just 3 days - which illustrates that he is more of a short-term swing trader. This is further highlighted by the average number of traders that the individual places each week - which stands at just over 12.
In terms of the profitability, Marco is just under 11% in the green for the year - with no losing months in 2020 to date.
It is important to note that Marco's trading activity carries an eToro risk rating of just 2/10. This is great for those of you that wish to make use of the eToro copy trading feature - but in a risk-averse manner.
3) Fahad Alhajri (Alnayef) - Hugely Profitable Forex Trader
Fahad Alhajri is one of the most successful forex traders at eToro. This self proclaimed currency expert originally joined the platform in 2016. After a somewhat rocky start to his eToro journey, Alnayef has since provided some lucrative returns for his backers. This stood at 90% and 35% in 2017 and 2018, respectively.
2019 was also a good year for the forex trader, with gains of 18%. In the first 10 months of 2020 - Alnayef is 11% in the green. What we really like about this eToro copy trader is that he has an assigned risk rating of just 2/10.
This translates into an average yearly drawdown of just 12.99%. At the time of writing, Alnayef has just under 1,800 investors copying him. Interestingly, this forex trader is more of a swing trader - with an average asset holding time of 3.5 weeks. Similarly, the trader places an average of 3.61 traders per week.
Tip: One of the most effective ways to copy trade is to diversify as much as you can. That is to say, eToro allows you to create a diversified portfolio of copy traders. The minimum investment into each trader is $200 - meaning that a $1,000 deposit would yield a portfolio of 5 traders.
How do eToro Copy Traders Make Money?
One of the most common questions we get asked here is how eToro copy traders actually make money. After all there must be a financial incentive of some sort - taking into account that investors are not required to pay a premium when using the copy trading feature.
Put simply, copy traders will earn up to 2% annually of their assets under management. As such, a trader with $2 million worth of assets under management will stand the chance of earning $40,000 annually. There are, however, several commission tiers at eToro, so those with a small number of copiers will earn less.
The most important thing to remember is that eToro copy traders actually utilise their own capital at the platform. In fact, this is a minimum requirement to be eligible for the program. As such, you can be rest assured that your chosen trader doesn‘t attempt to access the markets in a reckless manner - as their own money will be at risk.
Is the eToro Copy Trading Feature Legit?
Put simply, the eToro copy trading feature is 100% legit. In fact, the entire platform is safe and secure to use. At the forefront of this is eToro’s regulatory standing. It holds three tier-one licenses, which includes:
- FCA (UK)
- CySEC (Cyprus)
- ASIC (Australia)
The platform has been in existence since 2007 - and is now home to over 13 million traders worldwide. Crucially, we would argue that eToro is the de-facto option if you are looking to copy trade in the safest way possible.
Not only because of its strong commitment towards regulation - but the fact that everything is 100% transparent. As we have discussed throughout our guide, each and every position that a copy trader has ever placed at the platform is publicly viewable. This means that traders cannot hide their losses.
What are the Risks of Copy Trading?
While there are many benefits of the copy trading phenomenon, the process does not come risk-free. After all, just because your chosen trader is behind huge long-term gains since joining the platform - this isn’t to say that this will always be the case.
In particular, one bad month could end up whipping a reasonable chunk of your invested capital. This is why you are best advised to diversify across several copy traders. For example, a well-diversified copy trading portfolio might include investors from a variety of markets - such as stocks, forex, and commodities.
It’s also worth considering a ‘weighted’ diversification strategy - where your capital is allocated based on the individual’s risk rating. For example, you might have 70% of your money in copy traders with a risk rating of 3 or under, and the rest in higher risk traders.
Tips for eToro Copy Traders
Before you copy any trader, there are three things to look out for on eToro:
- What is their return percentage (this is usually measured over the last twelve months)? But don’t make the mistake of judging a trader on this alone!
- How many people are copying them (and the percentage that is increasing or decreasing)? And finally;
- What’s their risk rating? This is vital because you don’t want to lose everything in your trading account!
Risk is super important to factor in because some of these traders may be able to risk a lot more than you are able to and by copying a losing trade, you could really lose a lot of your trading account if you don’t pay attention!
Start Copy Trading Today: Step-by-Step Tutorial
So now that you know the ins and outs of the eToro copy trading feature - you might be wondering how you can get started today? If so, we are now going to walk you through the process step-by-step.
Step 1: Open an Account at eToro
If you want to use the copy trading feature at eToro - you will first need to open an account. After all, the platform is a full-fledged brokerage firm that is regulated by three licensing bodies.
To get the ball rolling, simply head over to the eToro website and look out for the ‘Join Now’ button. You will then be asked to enter some personal information - such as your:
- Full name
- Date of birth
- Home address
- Phone number
- Email address
- National tax number
You will also need to create a username and a strong password. eToro will ask you to verify your mobile number by entering the unique PIN that is sent to your phone via SMS.
Step 2: Verify Your Identity
As is the case with all online brokers that are in possession of tier-one licenses - you will need to verify your identity. The process takes just a couple of minutes with this broker, as it is able to validate your documents instantly.
The two documents that you will need to provide are:
- Government-issued ID: Passport, driver’s license, or national ID card
- Proof of residency: Utility bill or bank account statement issued within the last three months
Note: You can upload the above documents at a later date as long as you do not deposit more than $2,250. This needs to be done before you are able to make a withdrawal request - so we would advise completing the process out of straightaway to avoid any payment delays.
Step 3: Make a Deposit
You will need to fund your eToro account before you can make a deposit. This needs to be at least $200 - which is the same amount required to invest in a copy trader.
Supported payment methods include:
- Debit/credit cards
- E-wallets (Paypal, Skrill, Neteller)
- Bank transfer
As long as you are not funding your account with bank wire, the payment will be added to your account instantly.
Note: All non-USD deposits at eToro incur a 0.5% FX conversion fee.
Step 4: Choose a Copy Trader
As soon as your deposit has been credited - you can proceed to make an investment. In order to do this, you will first need to spend some time researching a copy trader that meets your long-term financial goals.
To help you along the way, you can review our section on ‘How to Select a Copy Trader at eToro’ further up on this page.
Step 5: Allocate Funds
Once you have chosen an eToro copy trader that you like the look of, you will then need to allocate some funds. All you need to do is click on the ‘Copy’ button and then enter the amount you wish to invest. Once again, this needs to be at least $200.
Additionally, you also need to decide whether you want to copy the individual’s current portfolio only, or if you also want to mirror all ongoing trades. If it’s the latter, you simply need to tick the box.
And that’s it - as soon as you confirm the investment the funds will be taken from your cash balance and allocated into your chosen trader. You can exit your position at any given time. When you do, the funds will be placed back into your eToro cash account.
eToro – Best Copy Trading Platform
Sign up for eToro and start copying top traders at no extra charge. There are no management fees or other hidden costs involved.
Pros and Cons of Copy Trading
Here’s a snap overview of the pros and cons of copy trading:
Pros of Copy Trading
â Trade in a 100% passive manner
â No need to have any experience of online trading
â Copy trading lead you to avoid trading emotions and recklessness
â Choose a trader that meets your personal financial goals
â Copy trading is ideal for those that don’t have the time to actively trade
â Copy trading is available across most asset classes
â Ability to diversify across multiple copy traders
â Exit your position at any given time
Cons of Copy Trading
â Past performance of the copy trade is not a guaranteed indicator of future results
â You might get back less than you had originally invested
â You do not control what assets you buy or sell
Copy Trading Guide: The Verdict?
Copy trading is one of the most innovative things to reach the trading sphere. No longer do you need to have any experience of trading to make money - nor do you need to spend countless hours learning your craft. There is no requirement to perform any research either - as your chosen copy trader will determine which assets to buy and sell, and when.
All in all, if copy trading is something you would like to explore today - then we would suggest exploring the merits of eToro.
The online broker is home to over 13 million traders and is in possession of three tier-one licenses. You can easily find a trader that suits your financial goals by reviewing the individual’s key metrics - such as preferred asset, average trade duration, and shotrical ROI.
If you remember anything from Social Trading: What Is It And Why eToro Is The King Of Social Trading By Far! Make it these key points!
- Copy Trading is a variation of Social trading. Social trading works like a social media platform where traders can copy each other’s trades.
- eToro is the best broker for social trading. eToro offers the best quality copy trading platform and is an overall great broker to trade with.
- Copy trading is a really great way for beginners to learn how to trade. They can learn from the traders they are copying and ask them questions about their trades.
- Copy trading allows you to copy the portfolio of an experienced trader like-for-like.
- Copy trading is popular with traders who have no experience in some specific markets and those who have limited time to trading.
- you can earn money from Copy trading in the form of capital gains and dividends.
- Copy trading does not eliminate risk.
- Social traders should exercise caution when choosing what copy trader to follow. Look for traders with a history of long-term success and who don’t take unnecessary risks.
- If copy trading is something you are interested in - your best bet is to use eToro
- You can filter your potential traders down by their preferred asset class
What is the eToro minimum investment when copy trading?
eToro requires a minimum investment of $200 per copy trading portfolio. This is the same amount as its minimum deposit
Is copy trading profitable?
There is no one-size-fits-all answer to this - as it all depends on the copy trader that you decide to back. In other words, there are countless examples of eToro copy traders that have made consistent gains since joining the platform.
On the flip side, there is no guarantee that this will be the case indefinitely - so always consider the risks.
How much do eToro traders make?
eToro copy traders are paid a percentage of the amount of money that they have under management. This can go as high as 2% - albeit, a number of minimum requirements need to be met by the trader.
How much does eToro charge to copy trade?
eToro does not charge any additional fees to copy trade - which is great. This means that you will still benefit from the platform’s commission-free offering.
What is the best copy trading platform?
eToro isn’t the only platform in the online space that allows you to benefit from copy trading - but many argue that it is the best. This is because of the sheer number of copy traders that use the site and the fact that you can invest on a commission-free basis. Additionally, eToro is heavily regulated and all copy trading statistics are transparent.
How is copy trading different from social trading and mirror trading?
A lot of people get confused when they hear these different phrases - copy trading, mirror trading, social trading, and they think they are the same.
Well, actually, copy and mirror trading are quite similar.
The difference between the two is that with mirror trading you ‘mirror’ every trade of another trader, you don’t need to do anything. Copy trading allows you to pick and choose individual trades to copy.
What makes social trading so different is the ‘social’ angle, essentially you can communicate with other traders just like a social media platform.
Obviously, though, the majority of communication on social trading platforms is about trading. Similar to how LinkedIn is also a social media platform, but it’s focused on business and career development (not sharing cat memes like some on Facebook!).
What is the difference between copy trading and forex signals?
Copy trading allows you to trade in a 100% passive manner - as your chosen investor will place all buy and sell positions on your behalf. Forex signals, on the other hand, is ‘partially’ passive. By this, we mean that the signal provider will take care of all research and analysis tasks - but you will be responsible for acting on the trading suggestion by placing orders at your chosen broker.
Do you think that copy trading is for you? What other helpful tips can you share with us?
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