Social Trading Performance and Ranking

Social Trading Performance and Ranking

This lesson will cover the following?

  • How does it work?
  • How can number lie?
  • Final words

Here’s how many people imagine copy trading when they first hear about it – you go to a Top 10 list, you choose a few traders and they start making money for you. After all, there is no other way, right? This is pure genius because those people are the best around for the moment, so they’re bound to make you money in the long run. You can just sit back and relax. Well, this is not how it works. This is not how it works at all.

How Does it Work?

sb-strategyChoosing a trader is a long and complicated process. You have to go through hundreds of profiles before you can find what you’re looking for. Creating a person-based portfolio takes a lot of time and then an equal amount of management. You need to look at risk-management, money-management strategies, experience, gains, style and more, before you decide that you want to add a certain trader to your portfolio. It’s not as simple as going to the Top 10 page and choosing the first five. This guarantees nothing. If you act based on the premise that these people are there for a reason and that they must be really good, then you’re being lazy and you will be punished for it.

Social and copy trading aren’t for lazy people and we can prove it. Use your demo account and go to eToro’s “People” section and choose to copy the top five traders (you can choose the time period you feel the most with – three months, six months or a year). Make sure that you’re using virtual money and not your actual portfolio because this will be one costly experiment. Now, copy the top give and just wait. On occasion look at how much they’re making for you. Don’t manage anything – just sit back, relax, and see what happens. After all, if you think that this is the way to make money, then you might as well try it.
What you will find is that you will lose a lot (depending on how much you’ve invested). This is simply because the rankings aren’t as reliable as you think. Even eToro, themselves, state on the top of the ranking that past accomplishments don’t guarantee future results. Most of these traders may have been profitable overall through the year, but that doesn’t mean that they’re not losing right now. In fact, you will notice that you will be at a lost the moment you copy all their currently open trades (something we’d suggest you never do unless you’ve checked them and you think they’ll be profitable). Furthermore, there is a way to manipulate the numbers.

How Can Numbers Lie?

Bull And Bear statatue sculpture market stock money economics _1.jpg5906fc8f-8c20-4ee3-a0dd-5826db1e3355LargeThe rankings take many things into account – followers, copiers, gain, etc. However, this doesn’t really mean anything. A trader with 5,000 followers can lose lots of money while one with three followers can win a lot (and vice versa). The number of followers or copiers doesn’t directly indicate that the trader is good, but that the majority of people think that he is good. The same majority that in most cases doesn’t know how to trade which means that it’s easy to think that a trader is much better than he actually is.

Furthermore, if a trader is on a winning streak, he may gain lots of followers and copiers as a result. Don’t get us wrong – we’re not saying that traders who have many followers don’t know what they’re doing but have just gotten lucky. They definitely know more than the people who follow them. But those people aren’t to always be trusted. The fact that many people think that something is good doesn’t necessarily make it so (there was a point in time when most individuals thought the Earth was flat). All we’re saying is that you should carefully analyze the trader before you decide to follow just because “5,000 people can’t be wrong”.

Take as many stats into consideration as you can. Also, it’s quite possible that a trader is inflating their gain by not closing losing trades. If you leave a losing trade, it’s not calculated because it’s not yet known if it will be a winning or a losing trade and how much the loss or profit will be. Lots of opened trades may indicate a long-term strategy or simply that the trader is trying to artificially improve his stats. Be careful. This is another reason why it’s dangerous to open all the current trades a trader has – you might unwittingly open 20-30 losing trades and end up with significant losses just because you clicked the “Copy” button.

Final Words

All we’re saying is that you should look at the picture. Don’t think that you will copy a few traders and this will be the end of it. No, it’s just the beginning. Don’t trust charts and rankings. Use the advanced filters and try to determine whether a trader is good or not for yourself. Take a look at open trades, overall portfolio – everything. Even then you can’t be sure that he will make you money, but you will at least have given it your best, which will improve your chances.