eToro is probably one of the best known brands when it comes to social trading. Social Trading allows you to see what positions other traders are taking and choose to copy them. eToro allows you to copy different traders, so that when they open a new position you too also open a new position. The idea is that you can copy successful traders and make profits without having to make a trading decisions too.
Obviously all trading all involves risks and so does eToro Open Book. eToro has put in a number of different measures in order to help minimize the risks for traders using their system. For example you can only have 20% of your total capital risked with one particular trader, so if this particular trade blows up his account with a serious of disastrous trades you won’t be totally out of pocket. In theory then you could follow 5 traders and assign each trader 20% of your capital to following the actions of these traders or follow more traders giving each trader a smaller amount of capital. Making you almost a kind of fund manager rather than trader.
While eToro’s measures to protect their traders from losing all their income many have complained about the Open Book and Copy Trader system promoting high risk trade strategies. If trader gains guru status they receive commission for each of the followers and can earn very substantial income from this commission. For example an individual who has attained guru status and has over a 1000 followers can make up to $10,000 a month from commission alone.
This has attracted a breed of high risk traders to the eToro with the express purpose of opening an account with a small deposit (as little as $50) and obtaining followers thus making themselves significant commission. Due to the fact they have so little of their own money it can make sense to engage in high risk strategies (often Martingale systems) for the sole purpose of gaining followers and making commission. As the commission can vastly outstrip the money they have risked in their accounts. Many have fallen victim to following these high risk traders not understanding what kind of strategies these traders were using and ultimately losing up to 20% of their total capital.
This can often easily be avoided by only following traders who have had long term success. Many of the high risk traders will have made extraordinary returns in a very short period of time for example making 20%+ returns in a single month is something that cannot normally be maintained. Some of the best hedge funds in the world would be happy if they could make those kind of returns over the course of the year. Instead traders should look to follow those who have consistently made profits with very little draw downs.
Their is always going to be risks involved in trading and Social Trading places your money in the hands of others making what happens out your control. I am sure some people have success by being careful and following the right traders while others have been bitterly disappointed having placed their money in the hands of someone using a high risk strategy simply with the aim of making of commission off their followers.