Their aim is to make the financial markets accessible to more people and they achieve this by offering a fully integrated solution. Because eToro is both managing the social investment network and acting as a broker, investors can manage everything through the same interface (i.e. no need to sign up with a different broker). The information made available in OpenBook about the past performance of the traders you may consider copying (i.e. the “Professional Investors” previously known as Gurus) is also kept basic, making it easy for novice investors to use, though lacking the depth more serious investors may look for. I.e. past performance is mainly represented in terms of % gains over the past week, 1 month, 3 month, 6 month and 1, 2 and 3 year periods. Unfortunately the way the gain % is calculated is not transparent. The formula should ” take into account all the relevant numbers and transactions in the trader’s account”. However, because the full trader’s history is not available (a massive omission in our view), the gain % calculations cannot be replicated. Solely making investment decisions on these often very large % gain numbers may set some wrong expectations. However, eToro allows you to trade with a free fully functioning demo account (click here to try). This allows you to follow “Professional Investors” using virtual money to evaluate and review their performance in $ gain terms. This will give you a more realistic view of what you can expect when you allocated say $1000 to a certain “Professional Investor”.
The amount of ”Professional Investors” available on OpenBook is large and by joining the eToro social trading network, anyone becomes a potential ”Professional Investor” (i.e. you can follow anyone you like, even people who only follow other people can become “Professional Traders”, and likewise, so can you). As such, eToro stays true to their vision to create a completely open network where everyone can share, learn, copy, interact and compete with one another. It’s also worth noting that anyone who becomes a “Professional Investor” displays their real name and photo in their profile (verified by eToro customer services), which adds some level of trust that you’re following real people. There are a few tools in Openbook to help you find the traders/Professional Investors/Gurus you want to follow and copy. You can use the ‘People Rankings’ to list the best performing traders and for example sort them by number of copiers, which is always a good starting point since over time, profitable traders will amass a larger following on the social trading platform. In March 2014, eToro also released the ‘Discover People’ tool which allows you to filter through their traders using a wider range of parameters, such as Profit Percentage, Trading Consistency, Country and many more. This tool is certainly a significant improvement to the search capability on offer before. eToro is free to join and use (no annual fees or commissions). The only costs you incur are the broker spreads and overnight rollover fees. The eToro spreads on each trade which are arguably slightly higher than with most brokers (e.g. 3 pips for EURUSD). However, when you automatically copy trades from other traders you’ll notice (in WebTrader) that in most cases (>90%) there’s no slippage, which makes up for the higher spread. (Slippage is the difference in price the trader you copy gets and you get, and with networks that use other brokers this is normally 1-2 pips per trade.) The overnight rollover fees charged by eToro are arguably also a bit higher than with most brokers. This should be taken into consideration since most of the traders you can copy have a tendency to keep positions open for weeks or months, meaning over time these rollover fees can add up if open trades aren’t managed carefully. If you’re a novice trader there’s a wide range of training materials available to get you up to speed (targeted at any level). There are also weekly webcasts, reviews and daily news to keep you informed on current events. The eToro OpenBook social network is also very active and any questions you might have are normally answered very quickly by your fellow investors.
Can you make money with eToro? The simple answer is yes, but it’s not easy. Obviously all will depend on your risk level and targets. If you expect to double your account in 1 week, then you have to accept the risk of losing all your equity in that period as well. Our personal preference is to find low risk but profitable “Professional Investors” to copy, though these are very difficult to find. Many of them also have the tendency to leave trades open for months with wide stop levels which means your equity will fluctuate over time and you have to see this as a longer term investment opportunity. Your actual results are also unlikely to match those displayed in the eToro rankings, because the popular ”Professional Investors” can use the monthly payments they receive for each copier to offset their losses or account drawdown.
Is it as easy as ‘sit back and relax’? No, as some serious is required to select the traders you want to copy and which meet your risk reward level. Just selecting the most popular ”Professional Investors” will not be enough. Once you’ve built your ‘people based’ portfolio you’ll have to regularly monitor the progress and re-evaluate your allocations since even traders ranked in the top 10 can get you into trouble. E.g. investing $10,000 evenly across the top 10 eToro Gurus on May 1st 2012 would have left you with $8,778 by April 1st 2013. Doing the same with the top 10 eToro traders at the beginning of June would have left you with $9,367 by this date.
eToro Review: Pros
- simple interface
- integrated social trading network (OpenBook) and broker (WebTrader)
- free, fully functional demo account
- integrated risk and money management features
- can trade on currencies AND major indices AND commodities (oil, gold and silver) AND shares
- active social network and excellent training materials
- low slippage
- the “Professional Investors” you can copy all display their real and verified full name & photo
eToro Review: Cons
- unable to view the full history of all the previous trades by the “Professional Investors”
- historical gain % calculation in OpenBook is confusing and not transparent
- for every good performing trader to choose from, there are still plenty of poor ones (most are also longer term traders)
- Trader Finder/Discover People functionality can still be improved (though currently much better than what it was)
- actual results in your account will often not totally match the ones displayed for the trader you copy in the eToro interface (mainly because they often use their commission payments to add to their balance at the end of each month)
- higher overnight rollover fees than most brokers
- currently only able to manage your account in $ USD