Copy Trading. Pitfalls and Tips

0

Copy Trading or Mirror Trading is catching on for better and worse. Having traded and worked in the retail CFD/spread betting arena for some years I made all the mistakes starting out. Over leveraging, no idea of a target price, no capacity to cut a loser, or to hold a winner.

Then as I learned the hard way by doing and by reading I gained a footing. Some of the more useful books I think were the Market Wizard series books and looking for connections between the many varied successful trading styles I found two things. Firstly money management and secondly the desire to have a trading mentor.

Almost all traders have analysed the market to death and then perhaps made the right call on the direction and placed a large overleveraged bet thus taking a loss and being right at the same time. Annoying does not even begin to describe!

This and many other mistakes lead most traders to say if they could do it again they would love to have sat down with a mentor who could clearly trade and had the evidence to prove it. This would help them avoid some of the more costly financial and emotional mistakes.

Copy trading does on the face of it seem to provide this to everyone who wants it. Why would you pay $1000 of $5000 to a “learn to trade the markets” course when for often $20 per month you can have a professional trader remotely place the trades in your account while you watch at home? Surely this is as close as you can get to a trading mentor for most people. It also means you are not limited by geography. If the best traders in the world are in Boston, Berlin or Beijing you can choose which ones to copy and when to stop copying.

If you search the internet for Copy Trading or Signal Providers you will see a whole industry in its infancy and growing quickly, some of it regulated and much of it not. Some of these websites are also introducing brokers to the major trading platforms so as long as you open an account using the banners on their website, the copying is actually free as they collect on the spread! What difference does it make to you if the spreads are wide as long as you make some money and perhaps learn the skill?

Having worked in the industry I can safely say when your account is down 95% in the first six weeks of trading it’s not down to the spread. It’s because you don’t have a clue what you are doing. Naturally however nothing is as easy as it seems and so I have detailed some of the more obvious pitfalls and tips before you embark down this road.

Pitfalls

  1. It seems to me that many signal providers run many accounts at the same time and only publish the successful accounts as so called Master Accounts. This does not mean the statistics of the successful account are false but it is clearly not the full story either.
  2. You will find many accounts up hundreds or even thousands of percent, this also may be true but the devil is in the detail. Perhaps the majority of that was made in the first two months and the subsequent period has been lacklustre at best.
  3. Some of these accounts live fast and die young. I had a colleague who followed an account already up 80K%. Within two weeks he put my pal into a margin call. That signal provider then reduced the monthly fee from £100 per month to just £3 per month presumably to replace the followers who’s accounts he had blown up.
  4. Have the statistics for a trader stopped being updated? This is a red flag that the trader took a loss he would rather not disclose to prospective new followers.

So does Warren Buffet get to have the last laugh yet again when he declared “If someone offers you quick money, reply with a quick no”. I think yes and no. Yes this service is fraught with dangers just like trading and speculation in general. There are some charlatans out there and I suppose that is no surprise. However before we dismiss copy trading as a scam perhaps this does give some newbie traders a fighting chance. For those guys the following basic rules should be considered.

Tips

  1. Picking a signal provider who has been around a while is surely a good start. Making 80K% is three months is inherently risky (it had to be) and will surely end badly. Making 20-50% per year over more than one year is perhaps a better long term plan.
  2. Pick a provider that provides constant updates meaning once per day as an absolute minimum but some providers update their stats every five minutes.
  3. Some platforms will allow you to leverage the results of a trader…..don’t. Often the trader is using enough leverage.
  4. Don’t have more than one signal per MT4 account. Often the first provider to trade will detect higher equity and place bigger trades but you could end up in a margin call if both are working off the same balance.

If you decide to do it, choose wisely. Gary – www.fxlight.co

Get the 5 most predictable currency pairs

About Author

Comments are closed.