eToro Review: Traders to Copy

So, who are the eToro “Popular Investors”, previously called “Gurus”, (i.e. the people you can follow and copy) and how does someone become one? Well simply, eToro is a very open social network and anyone can become a Guru. The only requirement to join the “Popular Investor Program” is that you have a live verified ‘real money’ account with eToro. Obviously your past performance will dictate how prominent you will be displayed in the OpenBook “Discover People” rankings. eToro does however reserve the right to remove traders from their social investment network if they breach their T&Cs.

With eToro you can actually follow and copy anyone on their OpenBook social investment network. I.e. you’re not restricted to selecting traders who trade themselves, but you can also follow investors who only follow other traders. Because you’re only able to allocate a maximum of 40% of your equity to one trader, this means though that your relative allocation to the traders they follow will only be 16% maximum (i.e. 40% of 40%).

The reward “Popular Investors” receive depends on the career level the achieve. With 50 active live copiers they become a “rising star”, earning them $350 per month as well as a 10% spread rebate (in eToro credits). 250 copiers makes them a “champion” and earns them $1,000 per month and 50% spread rebate. And once they get $300,000 of copier’s funds following them they achieve “elite” level. At that level they receives 2% commission on all the funds under their control as well as a 100% rebate on their spreads. You can find the full eToro “Popular Investor” payout table here. While the commission isn’t tied to performance (i.e. they’re paid whether they are profitable or not each month), obviously the fact that it’s linked to their amount of copiers means the best performing traders will get more commission.

It’s worth noting that this new eToro payment structure has changes a few times over the past years. At the beginning the “Gurus” would receive the payments as bonuses to their eToro account which they could only very gradually “unlock” when they make a certain amount of live trades in their account. Only 20% could be cashed out before, where now they they receive the the full amount straight away. In our view this change certainly signified an important improvement. The problem before was that many popular “Gurus” ended up trading with massive amounts of bonus money which would be added automatically be added to their accounts at the end of each month. This not only potentially impacted their trading style, but also screwed their results in comparison to their followers since, unlike their followers, they received a massive amount of extra trading credit at the end of each month (which they could offset against any losses incurred).

Please note that if you open an account and only follow other traders (i.e. you don’t trade yourself), you can still join the Popular Investor Program as well, and other people can still follow you as well. As such you may be able to get some monthly bonuses too in addition to your trade copying profits. As in the example above, you don’t need to trade yourself for people to follow you, but if you are successful in selecting and managing a portfolio of other “Popular Investors”, people may start to follow you directly via OpenBook as well.

When you look at the list of “Popular Investors” in the OpenBook rankings (click here to view) it used to be noticeable that a large number of them have a 100% winning ratio (and the majority had a winning ratio over 95%). You don’t need to be an expert trader to know that getting your trades right 100% of the time is impossible. When you looked at the profiles of these traders you’ll notice why … they all had a fairly large number of trades open, often for many months. Many traders were using this trading strategy because until May 9th 2012 eToro ranked the “gurus” by default by maximum winning ratio (so 100% ratio at the top) and many potential followers don’t look at the open trades and get attracted by this number. More followers also meant more bonuses for the Guru and popular Gurus would just offset these monthly bonuses against their open trades. While some traders with a 100% winning ratio are still around, their prominence has massively decreased.

eToro caught on to this practise and since 2013 the winning ratio was no longer displayed in the rankings but only accessible while looking at the individual “Popular Investor” profile page. It’s actually been clear eToro are trying to improve their interface to make it more transparent and easier to find consistently good traders for you to follow. Another positive improvement came in February 2015 when they totally simplified the gain % calculation, making it more transparent and easier to understand (the previous use of the modified Dietz formula was very confusing and at times misleading).

Ranking by gain% does make more sense though as we mentioned elsewhere, the way the gain% is calculated is not transparent (and cannot be replicated) and hence we feel this reduces the value of it.

The fact that Popular Investors have to start trading with their own money is certainly a positive aspect of eToro. However they can start from as little as $50 and the actual amount they trade with isn’t displayed within their eToro profile. While it certainly isn’t always the case that people trading with $100,000 accounts are better and more risk averse than people trading with $1,000 (in the end, the value of $100 is different for everyone), normally someone would put a bit more trust in people risking significant amounts of their own money than just $100. Still, popular investors also have future income to lose because their payouts are based on the consistency of their performance.

In our view, as mentioned above, eToro’s payment mechanism has significantly improved in comparison with the previous “bonus” model. “Popular Investors” can now properly cash out their earnings at the end of the month and “elite”  traders can make some decent money, in addition to trading spread free themselves. Nevertheless we feel it would still improve transparency if eToro shared the actual real money balance their “Popular Investors” are trading with, as we believe it’s a useful piece of information for the followers to know.

 

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