Forex Mistake #22 – The Copy Trading Catch

Why Copy Trading Shortcuts Could Get You Broke?

Currency trading aka foreign exchange aka Forex… there’s huge profit potential in this business but the learning curve is something that frightens most people. To make money from trading Forex you need vast knowledge and countless hours of learning. It’s not like you wake up one morning and say “Today I am going to become a trader”. Well, you could say it but that doesn’t mean it will come true. A shortcut is Copy Trading but shortcuts are not always the best so in this article I am going to tell you why I believe that copying other traders is a mistake.

 

Why you can go Broke with Copy Trading. A Win-Win Situation?

First of all I think we should start by learning what Copy Trading is. It’s not a new concept anymore as it has been present for a few good years already and its name actually says it all: you copy the trades placed by others. There are several platforms that offer the possibility to see what other traders are doing and to mimic their trades manually or even automatically. Sometimes a fee must be paid and other times it’s free. If you are dealing with a signal provider then the service is definitely paid (unless they offer a free trial period) because that’s their business model: they offer their knowledge in exchange for money. Nothing wrong with that. If you are looking for free copy trading, there are a few popular platforms like eToro or Zulutrade where you can find that. You simply open an account and choose who to copy. The trader who is copied gets some sort of commission from the platform provider, depending on the volume traded by the followers. Of course before starting to copy someone you should pay attention to several factors like their past performance, risk appetite, number of trades open, etc. (these statistics are public of course).

 

The biggest advantage of copy trading is that you don’t have to learn anything. You can be a total newb and still make money profiting from the experience of others. Ok so it’s a win-win situation, right? Then why would copy trading be a mistake? I have a strong reason for that: you won’t learn anything. Sure you might say, but why do I need to learn if the other guy did all the learning and accumulated all the necessary knowledge and experience? Well first of all, finding a really good trader is very difficult. There are many guys who brag or try to hide their losing trades to make you think they are better than they really are and in fact they are just mediocre traders. If a trader is #1 on the platform he is trading doesn’t mean he is also the most profitable guy there, so don’t just think that you’ll simply copy the Number 1 trader and make truckloads of money. Others could be just as good if not better (lower risk, higher rewards) or simply more suited for your style. You have to take into consideration your own risk tolerance and to find your comfort zone; if the guy’s trading style is very aggressive you will always be worried about what happens to your money.

 

Another reason why you could go broke with copy trading is that nothing lasts forever. Think about it: how long do you think that guy is going to share his trades? Maybe in the beginning he will be happy with the commissions gained from the trading volume of his followers but if he is indeed a good trader he will make a lot more money from his own trading. At that point he won’t need to share his trades. Maybe he will keep doing it out of the goodness of his heart but let’s be honest: how may good Samaritans do you know in this business? Sooner or later he will decide it’s time to fly solo and what are you going to do then? You don’t know how to trade so probably you will have to find another trader to copy… and then another and another.

 

One of the main reasons why I started to trade Forex is the financial freedom it can bring, but if all you do is copy others, you are never actually free. You always depend on the mood of others: if the guy chooses to stop trading for a month, you will have zero money from trading that month. You see, he is financially free and can choose to take a break for a week, month or maybe a year. Or maybe he decides to change his strategy and make it more aggressive but your account cannot sustain more risk. What then? You will have to find another trader. It all comes down to searching for good traders. Many will disappoint you and most will make you lose money. A popular statistic claims that only 5% of all traders are profitable. Yea, some people say that more than 5% make money but anyway, the percentage of losers is much bigger than 50% because trading takes years of learning and most people are not willing to do it. Bottom line is: there are more losers than winners and that’s why finding a winner who is willing to let you copy his trades is difficult.

 

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  Do not trust every signal seller / guru / copy trader you see. Some of those are paid actors!

 

How to Avoid Going Broke With Copy Trading

It is very important that you understand the business model of Copy Trading: the more followers a trader has, the more money he makes because he is paid a commission which grows when the trading volume of his followers increases. It’s simple: more followers – more trades generated – bigger commission for him. That’s why many of these signal providers want you to trade as much as possible. Sure some of them are simply good traders, but the monetary side is important to almost everyone. So here are some tips on how to avoid going broke with copy trading:

  • Do not start copying the first guy you come across.
  • Carefully look at the signal provider’s trading history and decide whether his risk appetite matches yours.
  • Look at the maximal drawdown he had during the past few months. A big drawdown is very dangerous especially if your account is not very big and cannot sustain many losses.
  • Depending on the platform you are trading, you might be required to pay the commission. Make sure you understand the conditions and who pays it.
  • Look at the open trades of the guy you want to copy. Some traders choose not to close their losing trades and this means that their history will only show winning trades but the floating loss (currently open positions) might be huge.
  • Try communicating with him. Maybe you’ll learn something, maybe not but anyway it’s good to get to know the guy who will trade your money.
  • Don’t follow a trader with the entire amount you have at your disposal. Choose more than one traders, with different trading styles and allocate to each a portion of your money. Don’t put all your eggs in the same basket.
  • Never invest more than you afford to lose!!!

 

Learning Is Not Overrated. Do It!

You have to make it on your own, not to take a piggyback ride. If you want to copy trade in the begging of your Forex experience, while you learn, that’s fine, but don’t think that you will become rich by following others. I only had a brief “following” experience (I joined the trial period of a signal provider) and I quickly realized it’s not what I’m looking for. If you are serious about this business, learn it and you will reap the rewards in the long run.

 

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