44

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?

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    "Past performance is no guarantee of future results." – 0xFEE1DEAD May 7 at 13:31
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    Your real problem is using YouTube without ad blocker. – Davor May 7 at 15:12
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    Anyone who spends money to deliver to you a financial message about how to invest, is always someone who aims to profit themselves at your expense. Always. That is what pays for the message. – Harper - Reinstate Monica May 7 at 19:29
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    @FlyingThunder - all ads are shady. Google's own AdSense has been used to deliver malware multiple times. Browsing internet without an ad blocker and at least one tracker blocking addon like Privacy Badger by EFF is insanity. – Davor May 8 at 9:06
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    It seems analogous to following a player with inside information around a roulette board - but one spin of the wheel behind them. – Strawberry May 8 at 12:48

13 Answers 13

79

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.

  • 5
    This scheme reminds me of those casinos where you can place bets on the blackjack play of others and lose your money just as fast as the players themselves do when the table turns. – schadjo May 7 at 14:01
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    Another scheme. Broker or touter sends futures recommendation to 4,000 people. 1/2 the people get the winning trade. He then sends them another pick. Right again on 1/2. He now sends the 3rd rec to 1,000 people. 500 people received 3 straight winning picks to whom he pitches a $500 per month newsletter or tip sheet. If 100 people bite, that's $50k in revenue. And yes, this is illegal :->) – Bob Baerker May 7 at 15:10
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    "How do you know that they're not front running you?" I don't see how that's even in question. Seems like this should be called "back-running". You are, by definition, being front-run by the trader. The only part of the term "front-running" that doesn't apply is the connotation of being unethical, since you are making a trader front-run you. – Acccumulation May 7 at 16:46
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    @BobBaerker, is there a name for the illegal practice you describe in your comment? – Wildcard May 7 at 20:00
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    Call it "Malicious A/B testing"? 🤣 – ceejayoz May 8 at 14:28
62

Well, consider it from the other side. Why would a trader be willing to share trades? Consider the following scenario.

  1. The reference trader makes a trade in a low volume market.
  2. The trade is published so that everyone can see it.
  3. Multiple people copy the trade as best they can, but ...
  4. The price moves due to the uncommon level of demand.
  5. The reference trader closes out the position.
  6. The reference trader makes a profit due to the price move caused by the copying.
  7. Closing the position is published.
  8. Multiple people copy the trade as best they can, but ...
  9. The price moves the other direction.
  10. Except for a lucky few, most either break even or lose money. Particularly after including trading fees.
  11. The reference trader shows a profit, which is published so as to encourage more people to participate the next time.

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.

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    Yeah, this basically sounds like a modern rendition of pump-and-dump. – asgallant May 7 at 20:47
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    If people just think about it, why would a "good trade" be shared? Why not take out a mortgage and gain all the profits yourself? Oh, because doing that lands the trader in jail for pump-and-dump, that's why! – Nelson May 8 at 1:43
  • Arriving at how this is a pump-and-dump was very valuable. So I am assuming they'd do this with penny stocks usually? They won't do this on a big ticker like AAPL or FB for ex. – perennial_noob May 8 at 22:17
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    Apparently this is for Contracts For Difference, which is a derivative and much lower volume than the underlying stock. – Brythan May 9 at 0:55
12

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.

  • CFDs are not inherently more 'gambly' than other derivative products. In fact, due to their simplicity, it is a lot easier to reason about risks here. And as for derivatives trading in general - there is no real difference between buying derivatives with 10:1 leverage for 100$ and putting 900$ into bank deposit versus investing 1000$ directly in stocks. It is when you invest 1000$ into derivatives it becomes risky gambling. – Artur Biesiadowski May 8 at 8:56
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    I usually call these Complicated Financial Derivatives. The rationale for that is: if you don't understand what you are buying, you are making a bad trade BY DEFINITION. It is impossible to correctly assess the value of something you do not understand. So there is an assymetry - the seller knows what he is selling, the buyer doesn't have a clue. Seller wins, by walk-over. CFDs have inherent value to the market - it helps hedging volatile products and it assists in supporting capacity change decisions. It can be considered gambling, but not investment, for ordinary people. – Stian Yttervik May 8 at 9:31
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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,

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    CFDs aren't even trading. They're just gambling. – stannius May 7 at 21:10
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    @stannius it depends on the amount of math you throw at it, but if the OP needs to ask on stackexchange, they do not have the maths needed. – Nelson May 8 at 1:44
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    so trading is NEVER worth it? why'd you do it then? :p – Patrice May 8 at 23:24
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    As someone who literally drives a car more expensive than most appartments and making this types of moeny with trading - it can be VERY rewarding. But it is not investing. It is actively managed. It always is. I.e. you must VERY good analyze who you copy, permanently. Invesment assumes changes in unterlying values (businesses grow, towns grow etc.). I TRADE and I INVEST - but they are totally different activities. Offloading the ative work by copying someone is just no working it. – TomTom May 9 at 9:19
6

Disclaimer:

  • I work (programming) for a company with a business model very similar to eToro. We are basically competitors.
  • Opinions are my own and not the views of my employer

As most of the answers have stated, the CFD is a dangerous finantial instrument that may not be appropiate 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 conscuences of copying a trader

Cons:

  1. You need to pay the trader in some way. I he/she does it for free I would be very suspicius.
  2. You need to control the level of risk. Some traders may change their appetite for risk depending on their mood. Some traders may lose money and try to recover their losses. In Darwinex we use come statistics process to unify the level of risk. e-Toro may be doing something similar.
  3. You need to find a good trader. How can you detect them? We only have past performance and this is not a guaranty. Traders have incentives disguise themselves as better. You can check that they really had their skin in the game with real money. Graphs and metrics about the strategy may help. As @Peter A. Schneider said very few beat the market consistently.
  4. You need to replicate the trades fast. We have spent a lot of time working with this computer problem. It can be done but it requires a lot of optimization, coding, IT infrastructure and downtime means losing money.
  5. Scalability: sometime you may earn money with 2000$ but when you try to put 1.000.000$ it does not work the same way.
  6. Even with a trader that beats the market you can lose money. This happens more that it seems. Trader X gains a lot... people invest. Has a bad moment. People remove money in the worst moment.
  7. You do not know why the trader does his/her movements.

Pros:

  1. You do no need to spend your nights looking at a screen as someone (hopefully) does it for you. But give it a look from time to time just in case.
  2. It is hard to become a good trader. Copying allows traders to work fulltime being paid for the hard work. If you do not have enought capital you won't have enough returns (or you will need too much risk) and followers is a way to get this capital
  3. Chances are that you and me are not the Warrent Buffets of CFDs. Let someone else handle it.
5

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).

4

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.

4

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.

So follow your local university's endowment

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.

3

It is a GREAT idea if

  1. the guy you are copying is consistently great.
  2. if he lets you copy him in a timely manner.

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.

1

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?

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    The key here is consistently investing for ~80 years, though, not following a specific trader. For example, this school janitor with $8M didn't have someone to crib off. – ceejayoz May 8 at 14:27
  • @ceejayoz I admit that that is a possibility. It would be interesting to see what the outcome would be ceteris paribus for an index fund. Like Mr. Read she doesn't appear to have spent much of the return but instead re-invested, getting maximum compound interest. The common theme in both cases is "hidden wealth" which translates to "didn't spend any". – Peter - Reinstate Monica May 8 at 14:36
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    There is a name for this, it's called survivorship bias. – vsz May 8 at 17:03
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    Well ... Warren Buffett is an investor and not a trader.... That's like the difference between an elephant and an elephant seal.. – sofa general May 9 at 17:53
  • @vsz: but there is another school of thought... in a forest fire, tsunami, or other natural disasters, whose who follow the survivors tend to also survive... =P which of course is a biased sample set... but if you knew AHEAD of time, who the survivors of a tsunami or a forest fire will be, it is a GREAT idea to follow them. (which is the OP question... but the trick is knowing who the survivors will be...) – sofa general May 9 at 17:55
1

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.

0

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.

-1

Have even few years of personal experience. I can bet (let me know if you want to ;-), you loose at the end.
And I feel there is some pressure to just trade and loose your money (broker is probably often your counterpart).
If even best traders do some gains, it is for a short time and then lost or their account disappear.
Do not think CFD is risky - risky could be your mind - they are sometimes even cheaper to trade then 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.
Best you can get here is you will know how to trade what they do wrong, but have no time, money or will to do trade ;-)

  • There are eToro fans, trolls or someone do not like true stories ? Probably all FX brokers are quite same as FX is a loosing game if you do not have crystal ball to predict future for sure. And copy trading is like giving your money to an "uknown" stranger - would you do that ? But there is one benefit - sometimes even after registration you got a bunch of stupid cold callers from whole world. – Tom Jun 7 at 13:21

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