Return of the daytrader: can you earn a living by copying other investors?
It promises an irresistible combination of wealth and independence. All you need is a computer and an internet connection – and then you can earn a fortune from the comfort of your home.
This is the lure of financial trading for profit. As the popular BBC programme Millions by the Minute
has shown, the dream seems to be gaining hold. It appeals to parents
who hope to be able to squeeze in some profitable trading between school
runs. And it is equally a way out for those who simply don’t want – or
don’t fit into – the corporate world of the office.
Now the world of social media has added an additional, attractive twist
to the dream of being your own boss and making a killing. With “copy
trading” – which enables you to mimic the investment moves of the
“professionals” – you can supposedly cash in even if you know nothing at
all about the markets.
Derrick
Clark, a 43-year-old businessman, was keen to trade the global currency
markets in his spare time to pull in a little extra income. He was
excited about the possibilities, but also in awe of the challenges and
pitfalls.
He knew rapid buying and
selling of shares and other financial securities was notoriously tricky
and that many beginners struggled to make a profit. Copy trading,
however, seemed to offer a solution. It seeks to bypass many of the
headaches involved in trying to become the next Warren Buffett.
Mr Clark signed up with ZuluTrade, one of a number of fast-growing copy trading – or “social trading” – platforms that allow novice traders to mimic the strategies of more experienced investors. The premise is simple: if you decide to “copy” another trader and they bet, for example, on the pound rising against the dollar, then so will you. Other providers include eToro and Currensee.
“Trading can be hard,” said Anastasios Frangos of ZuluTrade. “But with social trading there’s no need to study the markets. It’s ideal for people who don’t know how to trade – they can simply copy more experienced traders.”
ZuluTrade customers sign up with a third party broker to trade the foreign exchange (“forex”) markets and an account can be opened for a few hundred pounds. It ranks its traders by historic performance to help users decide who to copy.
Mr Clark carefully analysed the data before he risked his hard-earned cash. At first it went well and he made some money. One particular trader had an army of copiers and looked like a safe pair of hands. “I watched him for 10 months and he never lost on a trade,” Mr Clark recalled. “But then it went horribly wrong.”
The market moved sharply in the opposite direction. Mr Clark closed his position quickly but others were not so lucky. “This trader lost millions in live accounts. It was epic.”
ZuluTrade has since introduced a raft of risk protection measures that seek to safeguard its users. But Mr Clark remains unconvinced.
“It’s just not realistic to think that anyone can accurately predict any market, especially forex, the vast majority of the time,” he said. “In my experience every trader with a lot of followers will eventually crash and burn.”
The biggest social trading platform is eToro, which has more than three million users worldwide. The firm’s boss, Yoni Assia, likens its offering to social media sites such as Facebook that allow people to chat and share online. “We’re a social network,” Mr Assia said. “It’s a place where people can communicate, follow and copy each other. It allows people with less understanding of the markets to see what more experienced investors are doing.”
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Customers are allowed to risk only 20pc of their total equity copying any one trader and an account can be opened for as little as £30. eToro operates like a spread-betting platform, allowing customers to bet on major markets but without the need to stump up the full value of the transaction.
However, the “spread” – the gap between the buy and sell price – on eToro can be more expensive than with well-known spread-betting operators such as IG Index and City Index.
“We’re helping people discover the wisdom of the crowds,” Mr Assia added. “By copying other traders people gain a better understanding of the markets and our research shows that eToro users are consistently more profitable than people who just trade manually.”
Brett Cooper runs a website that reviews copy trading providers and has written a book to help novices navigate the sector. He said: “Many platforms give the impression that it’s easy to make money copy trading, but it’s not. Finding someone to copy who knows what they are doing is hard and many of the traders on these platforms are just out to make a quick buck.”
On some platforms it looks as if a particular trader has made solid gains, Mr Cooper said, but the underlying data reveals that they are sitting on a number of losing positions that they have not closed yet in the hope the trades will bounce back.
“You still need to do your homework and put the time in,” Mr Cooper said. “You still need to apply careful risk assessment methods before you copy another trader.
“It’s still risky and the majority of people are not actually making any money.”
'It’s not life-changing but it is something I really enjoy'
How do “copy trader” sites work – and if you sign up to one, who exactly are you copying? And how much does it cost?
Anyone can become a “popular investor” on eToro or a “signal provider” on ZuluTrade if they can convince enough people to copy their trades. “Signal providers” receive a commission for each trade executed by a live follower account while eToro rewards “popular investors” based on the number of copiers they rack up.
Unlike its rivals, Currensee vets the traders on its platform and customers choose from a select band of experienced traders to copy. It charges a 2pc service fee on the average capital in a user’s account.
Thomas Glaser (pictured at the top), a software developer from Berkshire, has been trading with eToro since April. Early on, one of the forex traders he was copying went bust, taking with them hundreds of copiers. “I was lucky to get out relatively unscathed,” he said. “There are a fair share of reckless traders out there.”
But he persevered, now sticking to blue-chip stocks. Over the past six months he has built up his own legion of copiers and has made a 6pc gain.
“It’s not a life-changing amount of money but it is something I really enjoy.”
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