eToro aims to reduce risk in social trading

Social investment expert eToro has today unveiled a set of changes that will affect the CopyTrading experience of its clients.

At the core of the coming changes is apparently risk-management. As the company puts it: CopyTrading is tool that diversifies investment and therefore, aims to lower risks.

The upcoming changes include:

  • Profiles with the highest risk score will no longer be available for copying;
  • The maximum copy allocation will rise to 100% of a follower’s equity;
  • A revised profile questionnaire is out to determine what kind of limitations – if any – traders might have on their CopyTrading activity.

High Risk Score

Traders whose Risk Score is 9 out of 10 or higher will no longer be available to copy.

We should probably say that the Risk Score is a measurement of the risk impact that copying a given trader can have on one’s portfolio. The Risk Score is based on a trader’s choice of instruments and leverage, the percentage of their equity that is invested on a single instrument, etc.

The Risk Score ranges from 1-10 and each level represents a percentage range, meant to help investors better understand the risk that certain investments may pose to their equity.

According to the planned changes, traders whose strategies have such Risk Score of 9 or higher, will not be able to sign up new copiers. If their risk score falls to 8 or below, they can sign up new copiers again.

This move, as eToro explains, is aimed at promoting responsible trading.

Removing the max copy limit

Back in the days eToro introduced an allocation limit of 40%, meaning that traders could not allocate more than 40% of their equity to copy a trader. That was meant to secure low-risk trading. However, users of the social investment network have ever since been asking eToro to remove the limit. As the company is now introducing a prohibition to copy high-risk traders, it deemed suitable to allow traders to copy signals of any trader with 100% of their equity.

The change will come into effect on July 5, 2015.

Revised profile questionnaire

eToro encourages users of its social investment platform to complete their profile, as this is a critical part of the verification procedure and also provides necessary information on what traders actually expect from the service.

There is a revised questionnaire that will determine whether there will be any limits on a given trader’s activity.

To find out more about the coming changes to eToro’s social investment platform, click here.

If you are curious about the future of the eToro/OpenBook brand, check out LeapRate’s article on the topic.

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