Tips: Social Trading Money and Risk Management
Please note that any money you invest via a social trading networks are is subject to investment risks, including possible loss of some or all of your initial invested amount. If you need advice on whether social trading is for you and how it fits within your overall investment portfolio, please contact your financial advisor.
The way your money (and risk) is managed when you copy trades from other traders really depends on the choice of the social trading network and platform you choose to follow. The network approaches really vary from “hands on” to “hands off” money management. Here are the approaches for each of the major networks we’ve reviewed to date:
ZuluTrade Risk & Money Risk Management:
ZuluTrade is the most open social trading platform when it comes to money management. I.e. they don’t restrict how you invest or allocate your money. This does make it however a bit more difficult for the novice trader to apply the appropriate money management approach. While ZuluTrade does offer some automated guidance in your account controls, getting these settings wrong may risk your full account. Click here for the detailed guide and tips for managing your money on ZuluTrade.
eToro Risk & Money Management:
With eToro, the money management approach the trader (“Guru”) you copy takes in their own account, is proportionally replicated to the amount you allocate to the Guru. The traders however can risk from 1% to 100% of their account on a single trade. Because you can only allocate a maximum of 20% per Guru, at least that’s the maximum you can lose when following a high risk trader.
Hence with eToro you need to ensure your trader allocation matches your risk profile. I.e. allocate more or all of your money to low risk Gurus for a low risk approach and vice versa. Click here for detailed eToro money management tips.
Ayondo Risk & Money Management:
Ayondo the risk management approach is similar to eToro, in the sense that the amount you allocate to a trader will be traded proportionally to the trader’s account. If they risk 1%, then 1% of your allocation will be risked. You can however also increase leverage and for example double it. So when the trader risks 1%, 2% of your allocation is at risk. Ayondo lets you invest all of your capital in one trader if you like, though they actively seem to remove traders once their trading behaviour becomes erratic, which is one way they “try” to reduce overall risk.
Money Management Tips that apply to each network:
- Phase your investments in. Because the traders you follow can make money whether they market goes up or down you’re not driven by the market for a perfect entry point. Because they make winning and losing trades you’re driven by whether they’ll go on a winning or losing streak, and let’s be realistic, that’s not something you cannot predict. Hence to spread your risk, phase in your investment over a few weeks/months.
- Set realistic expectations. Treat social trading as a high yielding savings account instead of a casino or lottery ticket.
- Don’t let your emotions sway you and stick to your investment plan. If a trader says you should expect a 1000 pip drawdown at times, don’t panic when you notice a 100 drawdown.
- Be patient. Evaluate your performance over a period of time and not over a few days or weeks.
- If you have the bandwidth and funds, you can consider spreading your investments over two or more social trading networks.