According to a blog post on eToro’s website, the company will be reducing the risks for copy trading followers in the coming weeks. The changes are concentrated on curtailing a set of particularly risky strategies from being followed by the social trading community at eToro.
The company has embarked on a quest to improve the odds for trade followers after identifying excessively risky behavior with some of the traders. In accordance to the new requirements those traders who have a high risk score will be removed from the list of accounts that may be followed.
traders with risky strategies will get temporary restrictions
eToro’s platform assesses the risk of a given strategy on a scale between 1 to 10. The copy trading provider has identified correctly that some followers could be exposed to unjustified risks and lose their deposits quite quickly. In order to optimize the experience which followers get the company is introducing a set of measures aimed at preventing risky behavior on the part of traders to translate onto trade followers.
With the new requirements responsible trading on the part of traders is likely to become a more widely adopted strategy.
The measures unmasked
The first step which eToro will take is to prevent the most risky traders from getting followed. The definition of extremely risky strategies is currently set at 9 or 10 with the assessment of the risk profile of the trader occurring on a weekly basis. Once the above mentioned levels are reached no new copiers will be able to follow the biggest risk takers.
Profiles with the highest risk score will no longer be available for copying. The limitations will be withdrawn only after the trader falls back below 9 points on the risk scale. While followers who are already copying the risky strategy won’t be forced to withdraw from the trader of their choosing, eToro is recommending users to carefully consider whether they should continue copying the strategy.
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Notifications about the changed risk profile of the trader will be sent out to his/her followers for them to assess their investment. Traders who are qualified as risky will have to reduce their position size, diversify their exposure or use lower amounts of leverage in order for their risk score to drop to lower levels.
prospective weekly volatility of risky portfolios is set at above 23.3 percent
The top two figures according to the risk scale used by eToro are measuring the prospective volatility of a portfolio at above 23.3 percent, which is quite an excessive move for a single week. The 8 level which is considered relatively safer is only relatively so, since with that score followers of a trader’s portfolio may experience volatility on their accounts close to 15.5 percent.
Moving on to the second measure, traders will be able to set the maximum copy allocation at 100 percent of their equity. This step has only been made possible because of the above mentioned measure of curtailing the activities of overtly risky traders.
Up until now eToro has set a limit on the exposure of followers to a single trader at 40 percent. Since the riskiest traders a curtailed from additional followers, the company has decided that the limitation is clear for removal.
Lastly, the eToro has revised its questionnaire for its users, who will now get a better assessment on what limitations (if any) they could encounter along their user experience with the social trading platform.
Recently eToro has stricken a partnership deal with British football club West Ham United. The latest move by the company to curtail risky trading is in tune with eToro’s aim to position copy trading as an investment product. With the recent launch of stock CFDs trading and the funding round from German Commerzbank, the company could be on the right track. Its success will ultimately depend on the success of the traders that are getting new followers every day.