Imagine being able to put your Sunday league team under the guidance of a top-flight football manager.
Every team set-up, pitch formation and tactical tweak could be copied automatically, giving you instant access to all those years of coaching experience and the results that go with it…
In the world of investing, this idea has recently become a reality.
So-called ‘copy trading’ allows you to open an account that automatically mirrors the trades made by another investor. When the trader you follow buys a stock, your account buys it too. And when they sell, your position is automatically sold as well.
For anyone new to investing, it might sound like an appealing shortcut to success.
Instead of spending hours researching individual companies and markets, you can find and follow someone with a proven track record and let technology do much of the work.
But while copy trading may simplify the process, it doesn't remove the risks. Every investor can make bad decisions, and if the trader you follow loses money, so do you.
The key is knowing how to choose a copy trading investor that suits your approach and then manage the risks along the way.
Disclaimer: eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Terms and Conditions apply.
Key summary:
- Follow experienced investors: they buy, you buy; they sell, you sell
- Choose copy traders to suit your approach: Avoid putting all your money with a single investor.
- How much risk do you want your trader to take?: Pick a trader on a score of 1 to 10.
- Consistency is key: Why long-term track records can matter more than short-term hot streaks.
- Set a stop-loss: An automatic safety net can help protect your investment.
- Fees: what you need to know
What is copy trading?
Copy trading is a novel way to invest that lets you automatically copy the trades of another investor.
So instead of choosing investments yourself, you can pick an experienced trader on a copy trading platform. When your chosen trader buys or sells assets, the same trades are copied for your account.
You can compare traders by looking at how well they’ve performed in the past, what kinds of risk they take, and their investment style.
How does copy trading work?
Most copy trading platforms make it easy for you to browse and compare traders before deciding who to follow. Many include league tables or rankings that show metrics such as a trader’s past performance, number of followers and how long they’ve been active.
You can often filter the traders by risk level on a scale of 1 to 10 (see more on this below), as well as by the markets they invest in. Some platforms also let you search for traders by global region (e.g. Asia), asset type (e.g. stocks or ETFs), or industry sector (e.g. US technology shares, European companies, or cryptocurrencies).
Once you’ve chosen a trader, you can decide how much money to allocate to your linked account. You can invest a set amount (expect to put in a minimum of at least $100) or keep a larger balance on the platform for other investing and just put a percentage of your overall cash into your copy trading account - it’s up to you and will depend on your attitude to investing and risk. You can stop copying a trader whenever you choose.
Why you should choose copy traders carefully (and consider a team approach)
Not all football managers play the same way. Some might favour patient possession, others a high press or all-out attack.
Investors are no different - and one of the first things you'll spot on a copy trading platform is a wide variety of approaches to choose from.
Some traders may focus only on large, established companies with stocks bought and held for years. Others might target fast-moving technology stocks instead, with switchback trades in the hunt for a swift profit.
If you’re thinking of copy trading, take time to understand the style of any trader you consider. Ask yourself if their approach is likely to match your own goals.
For example, if you’re looking to invest for the long term to build wealth, you may not be comfortable following a trader who takes big risks with an eye on quick gains.
Similarly, if you’re looking to get experience of live financial markets and have a small sum you’re prepared to risk and lose, picking a cautious trader could be a mismatch.
But remember, even the best investors will go through bumpy spells. Unexpected events and global turbulence can affect their performance, sending markets into a spin and upending investor strategies.
This is why diversification remains one of the most important principles in investing.
Rather than putting your entire investment budget with one copy trader, consider spreading your money across several different investors instead.
For example, instead of placing £1,000 with one individual, you might divide it between three or four traders with different styles and specialisms.
You could think of it as building a more balanced squad rather than relying on one star striker.
So you might choose:
- One trader focused on large UK companies
- Another specialising in whizzy US technology stocks
- A third investing right across global markets
- A fourth taking a more defensive approach, perhaps via funds or dividend-paying shares
This can mean that if one part of your portfolio struggles, a different part may benefit and help offset the downside.
Spreading risk like this won't rule out losses - but it can help to reduce the risk of one bad decision causing a lot of damage to your portfolio.
Disclaimer: eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Terms and Conditions apply.
What’s the score? Check how much risk a trader takes
Football fans know a three-minute highlights package rarely tells the full story of a match.
The same applies to copy trading.
Take a look at the different platforms, and you’ll often find that many will showcase their top-performing traders.
You’ll see names up in lights and highlights of big gains made, but while the numbers can be eye-catching, they often only tell half the story. For example, a trader who doubled their money in just one month may have taken on enormous risks to do so.
To help you get a better idea of how aggressive a trader might be prepared to be in pursuit of profit, most well-known copy trading platforms provide a "risk score" to each trader, usually on a scale from 1 to 10 (the higher the number, the more aggressive they are).
These scores typically take into account how much a trader’s portfolio swings in value, how much leverage (borrowed money) they use, and how narrowly they might be invested in one type of asset.
If you’re a beginner finding your way in finance for the first time, it can be more prudent to pick copy traders with slightly lower returns but a moderate risk profile than a hotshot posting spectacular gains while taking extreme risks.
Form is temporary; consistency matters
In any given football season, you can find a player who - out of nowhere - suddenly seems to start scoring goals. The challenge is working out whether you're working with genuine quality or simply a lucky hot streak.
It’s a very similar scenario when you look at copy traders.
In financial markets, short-term luck can often easily be mistaken for skill. A trader might put all their money into a single speculative stock, watch it explode in value over a fortnight, and suddenly shoot to the top of the trading app's leaderboard.
In other words, sometimes markets move in a trader's favour by pure chance.
If you’re researching investors to copy, look for longer-term consistency rather than short-term success. A track record stretching back one, two or three years will generally give you a much better picture than a few impressive weeks.
It’s also vital to pay particular attention to how a trader performs during tricky and turbulent market spells.
It’s often said that anyone can look like a genius when markets are rising. The real test comes when the same markets then turn volatile or start tumbling.
A consistent trader who shows they can limit their losses during prolonged financial turbulence is likely to be a safer choice than one who scores huge gains during a boom but then panics and loses it all the moment the market drops.
Set a stop-loss as an investment safety net
You’ve done your research on copy trader platforms and apps, picked your trader, and it’s time to hand over your cash... but wait.
As a general rule, it can pay to exercise a degree of caution and not hand over all of your money.
While markets can often be wildly unpredictable, even the best traders can have a disastrous run.
To help address this concern, many copy trading platforms now offer tools that allow you to limit losses automatically. One of the most common is a ‘copy stop-loss’, a safety feature which lets you set a maximum level of ‘loss’. Reach this point, and the platform will automatically stop copying your chosen trader.
For example, say you allocate £500 to follow a trader and set a stop-loss at 20%. If the investment does badly and its value falls to £400, the platform will instantly stop copying them.
This can help prevent a single trader's poor performance from causing too much damage to your account.
Remember: while copy trading can help you learn how experienced investors make decisions, it shouldn’t replace understanding the basics of investing or building a diversified portfolio that matches your own financial goals.
Copy trading fees: need-to-knows for beginners
Copy trading can seem like an easy way to follow experienced investors, but it’s important you understand the costs.
Look out for spreads, which are the difference between buying and selling prices, as well as foreign exchange (FX) fees if the trader you copy invests in overseas assets. Some platforms may also charge withdrawal fees when you take money out of your account.
If the trader you’re copying uses leveraged products such as CFDs, you could face overnight financing charges too. Other charges to check include subscription fees for premium features, performance fees on certain managed portfolios, and inactivity fees if you leave your account unused for long periods.
Read our guide to investment fees here.
Disclaimer: eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Terms and Conditions apply.
Your capital is at risk. The value of investments can go down as well as up. Past performance is not an indicator of future results. This content is for informational purposes only and does not constitute financial advice.