How to do copy trading successfully

As promised in my previous post, today I'll be talking more about Etoro's social trading platform, as well as how I select master traders to copy.

I may need to remind you that like all investments, FOREX has its fair share of risks (as well as rewards). Copy trading does not necessarily mean that you will not have losses, but when done right it does give you a fair shot at reaping the same rewards that the master traders benefit from.

Etoro's social trading platform is called Openbook. To simplify things, Etoro's openbook has an almost similar platform to that of Facebook. You get to interact with other traders, like, comment and share other's status. What I also love about Openbook is that you get to see the trades done by other traders, drill down further to a trader and study his gains/losses, overall trading history, the level of risk he/she takes and even copy their trades.

This brings me to copy trading......

Copy trading has been a messiah for most traders, especially those who are not confident enough to venture into forex trading on their own. It does have its ugly side though if you do not select the right traders to copy.

As a new trader, you want to make sure that you want to follow a trader who actually knows what they are doing, and share a similar risk appetite to yours.

This brings me to the criteria I use to select traders to follow as well as point out some pitfalls that new copy traders fall into:

1. Trading History

You want to know that the trader you are about to copy has been doing FOREX trading for a while (at least for a year), while showing a steady uptrend on gains. Pay particular focus to the last 6 months of the trader's history. There is no harm if a trader has some losses but shows massive improvements along the way.

2. Risk breakdown

As a new trader, you do not want to copy a trader with high leveraged trades. Such mistakes could blow your FOREX account's bank balance. Etoro classifies the risk breakdown of a trader as LOW, MEDIUM AND HIGH. I'd recommend that you only copy a trader who does low-risk trades only, but that is not always possible. Decide on the amount of risk you want to take. I personally do not copy a trader with less than 80% of low-risk trades. I can only tolerate no more than 5% of high-risk trades.

THIS IS THE POINT WHERE MOST COPY TRADERS LOSE THEIR MONEY.

3. Copiers

Always check a trader's portfolio for “copied trades”. You are doing this because you want to copy traders who are experts in trading, and not those who simply copy others like you'll be doing. I've seen some copy traders deciding to rather copy whoever introduced them to the platform, so that they won't have to go through qualifying traders by themselves. I have mixed feelings about this approach.

4. Open trades

Always lookout for a trader's open trades. I personally do not copy a trader with open trades older than a week. This can mean that the trader opened a position hoping for a particular outcome, however the markets decided to go a different direction. The trader keeps the position open with the hopes that eventually he will be in profit. This sounds like gambling to me.

5. Recent results

Over and above the trading history of the trader, do make a point of studying a trader's recent trades, as well as the frequency of his trades. When you copy a trader, you allocate a certain amount to him/her. If the trader is not active, your allocated amount will be sitting dormant. A trader must do no less than 3 trades a week.

6. Openbook wall

I also study a trader's wall because I want to see how/if he does interact with his copiers and followers, whether he has any concern for them and whether they do explain their strategies and decision making process as well as advise their followers

It is not difficult at all to find traders who fit the above criteria. Etoro provides tools for analysing the traders and their activities. Copy trading is not a get rich quick scheme. You must review the traders at least once a week, hire and fire as you see fit and you must always lookout for new traders to copy. Never make the mistake of allocating all your balance to one trader.

MOST IMPORTANTLY... you do not need to use your own money to test out the traders you have chosen. You can choose to copy a trader using virtual money allocated to your DEMO trading account.

1. Join Etoro for free
2. Contact me should you need assistance with selecting traders to copy as well as setting up your Etoro account.