I constantly get bombarded with an etoro commercial on youtube about a feature where you can replicate someone else's trading activity in real time. More details here. You select another trader and then you copy what he or she is doing, to get the same results.
Basically, if you don't know what you are doing you just copy someone else who is better than you, assuming you know how to figure that stuff out.
What are some pros and cons of this approach?
The first thing that pops up when you open your link is a disclaimer:
66% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
66% isn't a very reassuring number for blindly following anonymous strangers on the internet. That means that you have a fair chance of blowing out your account.
While I have no experience with such investing, some potential risk that come to mind are:
When copying someone else's trades, you're going to have time delay, perhaps leading to inferior executions.
You're learning nothing. You're gambling, not investing.
These sites exist to make a profit. The bleed off is going to be high subscriber fees or high commissions or wide spreads or something else. This isn't a charity being run for your benefit.
A trader can blow out his account and open a new one under a new name and if he then has a good run, now you're emulating someone who just lost it all. Reassuring?
You're chasing the latest hot hand. How well does that work with the best mutual or hedge fund year after year? This year's leader is often next year's embarrassment.
How do you know if the stats for the latest hot hand are even real?
Trolls may be involved in touting the success of the system.
Purveyors tend to be located offshore and not regulated which means that you have little to no recourse if it hits the fan.
There are no free lunches unless someone else is buying.
Well, consider it from the other side. Why would a trader be willing to share trades? Consider the following scenario.
Note that the reference trader is helped by having people copy the trade, as they become the customers who provide the profit. So this works even if the stock or whatever that is being bought is a turkey. All that is needed is for it to be low volume enough that the people attempting to copy the trade improve the price enough to cover fees and then some.
Contracts For Difference (CFD) are not investing. They are a form of gambling tarted up with the appearance of investing by the platforms that market them.
It is not a good idea to trade in CFDs. I haven't run any numbers, but you'd probably be better off just gambling at a casino. The house edge is probably lower (if you choose your game wisely).
Since it is not a good idea to trade in CFD's, it is a moot question whether you should copy someone else's gambling choices or not.
No, it is not.
Fundamentally because TRADING IS NOT INVESTING. So, you basically do not invest at all, you turn into a trader. As such, it can never be a good investment.
Disclaimer: I trade,
Disclaimer:
As most of the answers have stated, the CFD is a dangerous financial instrument that may not be appropriate for your needs. These risks are inherent to the CFDs, not to the idea of copying an investor, but please take your time to understand the dangers.
Let's assume that you want to use CFDs anyway. What are the consequences of copying a trader?
Cons:
Pros:
The person you're copying is getting inflated returns because of your actions happening right after his. Additionally, there may be others doing the same mirroring as you. This means that such a successful trader may only be successful because of the people mirroring him from behind (he buys the stock, and immediately other people buy it and it goes up, causing him to profit), and you may be copying someone who is no good at trading. Also, if you are mirroring from behind, and so are other people, you may be buying stocks at inflated prices due to price competition of other people trying to buy it at the same time. When they sell, you are competing with many other mirrored accounts that are also selling at the same time. Both of these things make your buy prices and sell prices unfavorable. In fact, anyone like Jim Cramer who trades stocks and then goes on a tv show to feed other people stock picks is inflating their track record, which paints a distorted picture of their stock-picking talent.
Aside related to investing without expertise:
For an investor who doesn't know anything about trading, it is easier to just buy an index-tracking fund that tracks an index like the S&P 500. It grows at the same rate as the index it is tracking, it doesn't deduct any active management fees like a hedge fund does, and it doesn't require investment skill. Here is an example of how an S&P 500 index has performed (12.0% ROI per year over the last 3 years). Here is an example of how a whole stock market index has performed (14.6% ROI per year over the last 3 years).
It is a GREAT idea if
chance of passing check point 1 is 5%
Chance of passing check point 2 is 0%.
So, yes, it is theoretically a good idea... that can never be implemented.
Disclaimer: I didn't watch the video on the site you linked (because that there was a video indicated to me that it was essentially a scam). So this answer is independent of that specific business proposal. The reason is that the specifics don't matter.
Following any trader is generally a bad idea because trading is a bad idea. There were very few traders who could in the past beat the markets over an extended period of time; their advantage may well have been pure luck. Following a trader instead of buying an index fund or investing into a broad portfolio of stock is simply a losing proposition more than 90% of the time. Buy an index fund instead.
If the person knows a lot of money is robotically following them, they can intentionally swerve into small-cap stocks, buying low, allowing the subsequent follower demand to drive up prices, then at this higher price, sell (partly to his own followers). Great for him, not so much for his followers. Congrats, you've legitimized pump-n-dump!
This strategy only works (for the follower) with companies too large for that to have an effect.
Since you want to follow someone, call up your local university's giving office. They have an Endowment. They are soliciting funds for it, and donors want to know it's well invested, so they will cheerfully talk about how they invest it.
Endowments are tightly regulated by how they must be invested. There is a legal "Gold Standard" that Endowment managers must stick pretty close to, or they could be judged as being imprudent and face legal consequences (at the least, making up the losses; at worst, jail).
Generally they are after absolute maximum growth in the very long term, with little regard for volatility. In other words their goals align with a young person's IRA.
However, their investment strategy is pretty dull. It will no doubt bore you to tears. If your investment goals include entertainment and a sense of adventure, you'll find none here.
It surely can be a good idea if you follow the right trader. The New York Times had this stunning story about a recently deceased secretary for a law firm:
“She was a secretary in an era when they ran their boss’s lives, including their personal investments,” recalled her niece Jane Lockshin. “So when the boss would buy a stock, she would make the purchase for him, and then buy the same stock for herself, but in a smaller amount because she was on a secretary’s salary."
Since Ms. Bloom never talked about this, even to those closest to her, the fact that she had carefully cultivated more than $9 million among three brokerage houses and 11 banks, emerged only at the end of her life.
I think many people would be rich today if they had consistently followed Warren Buffett's investments, even with some time lag. But would you really have the balls to invest massively at the bleakest moment of a financial crisis?
You should read Daniel Kahneman's book, Thinking Fast And Slow or if that's too long (it's worth your time!) then his article. Some choice quotes:
Nevertheless, the evidence from more than 50 years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker.
a spreadsheet summarizing the investment outcomes of some 25 anonymous wealth advisers, for eight consecutive years. [...] I computed the correlations between the rankings of advisers in different years [...] While I was prepared to find little year-to-year consistency, I was still surprised to find that the average of the 28 correlations was .01. In other words, zero. The stability that would indicate differences in skill was not to be found. The results resembled what you would expect from a dice-rolling contest, not a game of skill.
If your trader has the same goals, same risk profile, the time/inclination to research and decide what to do in a way that supports your mutual goals, backed up with some measurable and reliable level of success then "yes".
If you think these guys fall into that category then it's probably a good bet. However, the chances of that (or even establishing if that's the case) are likely to be close to zero.
Also, I didn't read the details but in general trades are anonymous so you'd have to be limiting yourself to a broker that has a few tame traders willing to share. Even assuming they share accurately or the process is automatic, that further reduces your chances of someone compatible.
A fund will generally be more transparent and less risky, but at the end of the day it's up to you. Seems like more risk than funds or DIY though.
It is not a good idea to copy another trader, but it is an excellent idea for other traders to copy you.
If you can get others to copy you, you will get price movements in your favor. For instance, if you buy a small illiquid penny stock and have others copy you, the stock price will rise immediately due to demand and give you a paper gain. Once you get the paper gain, you can sell at a profit to those who are just starting to copy you by buying. In summary, if you have other people copying your trades:
As a bonus, you could leverage on your profitability by writing books, starting newsletters, and selling courses that "reveal the secrets" behind your "stock trading prowess".
I am not recommending that you follow the plan I showed you above. Instead, use it to understand why you should be careful when trying to copy the moves of another trader.
These traders usually have few years of personal experience. I bet (let me know if you want to ;-), that you will lose at the end.
I feel there is some pressure to just trade and lose your money (often, the broker is probably your counterparty).
If the best traders even achieve some gains, it is for a short time and then they lose money and their account disappears.
Do not think CFD is risky - risky could be your mind - they are sometimes even cheaper to trade than stock exchange (except swap fees), but you should remember how much you hold and have a limit like your available cash or money you would like to invest.
The best that you can achieve here is that you will learn how to trade from their mistakes but have no time, money or the will to do trade ;-)
Had no other option this year (aging) and 2 (of my 3) copy traders work for me like FIRE :-)
(net results after fees and before taxes)
