eToro - Our review

eToro OpenBook

eToro's objective is to make the financial markets accessible to all and it achieves this by providing a simple and easy-to-use social trading platform. eToro is both a social investment network and a broker, investors can manage everything via a single interface (no need to sign-up with another broker).

The number of investors on eToro is huge because all you need to do is join the social trading network in order to become a "guru" (a provider of trading signals). eToro remains true to its vision of creating a completely open social trading network where all investors can learn, copy and interact with other members. It is also worth mentioning that the gurus are required to post their real names and pictures in their profile, thereby adding a certain level of trust.

eToro provides you with some tools to help you find the traders/gurus you want to follow or copy. For example, you can sort the gurus by how many copiers they have, which is always a good starting point since profitable traders gather more followers over time. You can also filter the list of traders using other criteria such as the consistency of their strategy, the trader's country, their maximum drawdown, the number of trades they make each week, etc.

There are no fees to join and use eToro (no annual fees or commissions). The only costs are the day to day spreads and brokerage swaps. eToro's spreads are slightly higher than those of most other forex brokers (ex: 3 pips for the EURUSD or the DAX index). However, in most cases (over 90%), there is no slippage on automatically copied trades, which partly offsets the higher spreads. The slippage is the difference between the price obtained by the trader and the price that is obtained by your follower account. In other social trading networks that use external brokers, slippage is frequently as high as 1 - 2 pips. The cost of the overnight swap fees charged by eToro is probably also a bit higher than most forex brokers. This should be taken into account, as many traders keep positions for several days.

Information on traders' prior performances are mainly represented in terms of percentage of profits over time (1 week, 1 month, 3 months, 6 months and 1, 2 or 3 years). Unfortunately, the calculation of the profit percentage is not really transparent, as the formula doesn't take into account all of the relevant transactions. The precise history of copied trades is available over a one-year period.

Making investment decisions solely on the basis of a profit percentage can lead to erroneous expectations. However, eToro allows you to test the platform and all of its features with a free demo account (click here to try it). You can therefore follow gurus using virtual money in order to assess and analyse their performance.

Can you make money with eToro ?

The basic answer is yes, but it's not easy. Obviously, it will all depend on your skill level and your risk tolerance. If you plan on doubling your account in 1 week, you must be willing to accept the risk of losing all of your capital. Our preference is to find a configuration of low-risk - yet profitable - gurus. Some of them tend to leave trades open for several days with large stop levels, this means that you should see this as a long term investment. It's unlikely that your results will match those posted by the gurus, as popular gurus can use the commissions they receive from each copier to offset their losses or their account drawdown.

Is it that simple?

No, you need to be methodical in order to select the gurus you want to copy and which meet your desired risk/reward ratio. Selecting the most popular ones isn't enough. Once you have put together your portfolio of gurus, you will still need to regularly assess their progress and reassess your allocations, because even traders that rank in the top 10 can lose money. For example, if you had invested $10,000 evenly across the top 10 gurus on 1 May 2012, the account would have dropped down to $8,778 on 1 April 2013...

eToro's benefits

  • a simple interface
  • direct integration of a social trading network and a broker (WebTrader)
  • free, fully functional demo account
  • risk and money management features
  • trade currencies, the main stock market indices and commodities (oil, gold and silver) and shares
  • it's an active social network with excellent training materials
  • reduced slippage
  • gurus' identities are verified by eToro

eToro's drawbacks

  • the calculation of profits as a percentage in eToro is confusing and not transparent
  • for every successful trader, there are lots of beginners
  • the features that enable you to identify traders to copy can still be improved
  • often, the actual performance of your account will not be identical to those displayed by the traders you copy (because they add the commissions they earn to their balance every month)
  • night swap costs and spreads are higher than most brokers
  • accounts are only available in dollars

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% 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.

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