Copy trading is by far one of the most innovative features offered by eToro’s trading platform as it allows beginner investors to effortlessly copy the portfolios of other successful traders within the platform while giving them the chance to browse through an extensive list of candidates before choosing who they will go with.
Although this seemingly easy-going approach to investing can have a lot of benefits, picking who to copy is an important decision that can dramatically affect the performance of your investment account – especially if a significant amount of money is committed.
With that in mind, the following article provides some recommendations on how to pick the best investors to copy while it also provides a brief step-by-step guide on how to invest on eToro by using this broker’s copy trading feature.
Using eToro’s copy trading hub
The eToro copy trading hub can be accessed by clicking the “Copy People” button located on the left panel of the trading interface.
After that, a wide selection of investors will be displayed with the latest performance of their portfolio being showcased along with the risk score of their respective portfolios based on the platform’s assessment of the instruments held within their accounts.
Using the platform’s filtering options, investors can quickly narrow down the list of prospective investors to copy, using multiple criteria like their geographical location and performance-related measures such as the percentage of gains they have made over the past 12 or 24 months.
The intuitiveness and user-friendly design of this hub facilitates the task of short-listing investors, yet it does not help users in establishing a potentially successful criterion for picking the best candidates – which is the reason why this article could be helpful if you are getting started with copy trading.
How to screen the best investors within the eToro platform?
In the following sections, we will provide a list of some relevant variables that you can use to further analyze each investor’s profile so you can narrow down your list to maybe two or three soon-to-be copied.
Quick filtering tips
Among the different filtering options offered by eToro’s copy trading platform, there are four in particular that investors can use to start shortlisting prospective candidates.
- Allocation – top markets in which the investor focuses.
- Performance time frame.
- Risk score – 1 to 6.
The investor’s allocation refers to the asset classes that comprise the portfolio. In this regard, investors can focus on equities, cryptocurrencies, commodities, indexes, and other similar classes, and you should pick candidates that invest in instruments that you understand or that you would be comfortable investing in by yourself.
For example, if you don’t know much about the forex market you should probably stay away from forex traders as you won’t be able to analyze their portfolio’s composition appropriately.
As for performance, you can use this variable to establish the minimum return that your prospective candidates should have produced over a certain time frame.
In this regard, long-term horizons of 24 months or so are preferred when analyzing the performance of an investor, since short-term performance can be misleading and could be caused by temporary spikes in the price of a handful of individual securities.
Finally, eToro’s risk score indicates how risky the investor’s portfolio is based on the asset classes that comprise their basket of securities.
For this variable, you should filter out investors that are either big risk-takers (scores from 5 to 6) if you are a risk-averse individual or investors who are just too conservative for your particular goals (scores from 1 to 2).
The value of portfolio diversification
Once you have filtered your list of prospective investors by using the criteria mentioned above you can now move forward with analyzing their performance and portfolios individually.
You can do this by clicking on the investor’s profile as you will find other valuable statistics to keep evaluating their suitability as a potential copy-trading candidate.
Among the most useful information provided by the individual profile, you’ll find a monthly performance table where you can see how their investment account has done during multiple months – possibly as a way to determine if the investor’s performance is the result of a handful of successful trades or if it has been consistent over the past two or three years.
ALSO READ – Quick Guide on How to Copy Trade in eToro
Additionally, you can check how many people currently copy their portfolio, how many copied assets they currently manage, and how their risk scores have fluctuated over time.
Finally, the investor’s portfolio composition is perhaps one of the most important aspects to assess on an individual scale as you would probably prefer a widely diversified portfolio rather than one that is concentrated in just three to five instruments.
Are you ready to start copying other people’s portfolios?
Now that you know how to get started in using eToro’s copy trading platform you can do your own due diligence to narrow down your list of prospective investors based on your own criteria.
You can even create a systematic approach to this by establishing certain minimums and maximums for the different filtering variables, possibly rebalancing your portfolio on a quarterly or annual basis based on how your investors have performed during those periods.
¡Best of luck!