i. Copy trading literally means copying another trader’s trades.
ii. Copy trading platforms allow you to subscribe to traders by paying a fee.
iii. Copy trading is not a get rich quick scheme.
What is copy trading?
Copy trading is an activity through which individuals can take the same trades as another individual or a trader. Just as the name suggests, the trades that are taken are a complete copy.
For instance, person A is a trader, has a strategy that he uses to trade the forex market, and has been successful in capitalizing on price swings of currencies.
Person B can take the exact same trades that person A takes through this concept of copy trading.
This concept of copy trading came into the picture because of automated trading or algorithmic trading.
As technology advanced, traders and institutions started looking out for better methods to trade, and algo trading was formed.
In algorithmic trading, traders look to codify certain rules that allow them to enter into trades, they may also have stop loss and take profits in place.
Since in algorithmic trading, trades were taken at any point of time during the trading session, as and when the conditions were met, traders were able to keep their system analytical and completely emotions free.
Copy trading allows individuals to copy these trades and profit. These individuals could be anyone, a normal person with no experience in finance or even a trader that already trades the markets.
For traders that have a good system that works in the market they look to participate in, this was a potential income stream. They could allow individuals to sign up for a fee and copy their trades.
As this market of copy trading grew, there were certain copy trading platforms that came up like Etoro, FXTM, ZuluTrade, etc.
These platforms replicated a social media platform where individuals me traders with their strategy that could be copied i.e. individuals could take the same trades.
Copy trading platforms charge small fees from individuals. The trader then gets his share from the fee.
There is no cap on the type of markets that can be traded, all that’s required is that the trader has some strategy and has a good track record, he would then list it on the platforms and individuals can avail the service.
Copy trading - The pros and cons
Everything in life has its own share of pros and cons and copy trading is not an exception. Individuals must know both sides of the coin before taking any decision.
1. No experience required
Individuals that have no exposure or experience in the financial markets whatsoever can avail these services and maybe earn from the markets.
Since they are simply copying trades of another person they are not required to have any knowledge about this field.
Trading might not be a priority for everyone as it requires quite a lot of time, patience, and education. Individuals that are not interested in spending time learning the skill may opt for these copy trading services.
There are numerous markets that facilitate the trading of financial products and it is difficult for individuals to participate in all of them.
Normally individuals would trade only in the markets that they are comfortable with and would limit their exposure to the financial assets of those markets only.
Copy trading allows individuals to tap into other markets and capitalize on the price movements of the financial assets in those markets. It expands the scope of profitability and allows diversification.
1. Black hat techniques
The copy trading platforms are full of traders with their own strategies and their proof of track records trying to lure individuals to choose them over the others.
This competition results in something known as the black hat technique. The main criteria on which individuals would judge the traders is by looking at their track record and their equity curve.
It is obvious that only those traders that have a steadily rising equity curve with little to no drawdowns will be the most popular ones on the copy trading platforms.
In order to attract more subscribers, traders do not provide complete details of their strategy or may have sugar-coated strategies.
For instance, a strategy with a 50 pip target and a 500 pip stop loss, will have a good hit rate and a steady equity curve for some period of time. But one-stop loss triggered will wipe out everything.
I don’t intend to tarnish the image or reputation of the genuine traders, but they are surely outnumbered by the dodgy ones.
2. Conflict of interest
Traders that list their service on the copy trading platforms get a cut from the fee the subscribers pay. More subscribers will fetch them more money and vice versa.
Here there is a conflict of interest. In this scenario, traders look to get more subscribers rather than trying to generate more profits through trading.
There is a marketing campaign that will be run to lure and convince individuals to subscribe. The subscribers join hoping for profits through trading while the traders look for more subscribers.
3. Unrealistic expectations
This is one of the biggest cons not only in copy trading but in trading as a whole. Traders try to project a rosy picture and pitch trading as a get-rich-quick scheme to investors and convince them to take action.
In copy trading too, traders will have strategies with unrealistic expectations. They may claim to have a strategy with a high risk to reward ratio and near to perfect win rate.
These are simply marketing techniques to make money out of the pockets of subscribers. Hence, it is important to treat trading as a serious business with realistic expectations.
Can you make a living out of copy trading?
There cannot be a one-shot answer to such a question. There are many factors that play a role. It depends on which trader’s trades are you copying, what is his strategy, what is his trading plan etc.
There is no denying the fact that there are some traders out there that are genuine and actually look to help subscribers profit from their trades. They may have different strategies according to the markets or assets they trade.
Every strategy has its peak and its lows, the strategy will work wonders during a period of time and might not give many returns during another time period.
In such scenarios, investors of subscribers get annoyed and panic. They fear that they may lose all of their money and this leads to them jumping to another trader.
There is no guarantee that the other trader too will never have lean periods in the market and the vicious cycle of jumping traders will continue.
Through this, I just wanted to infer that nothing in the financial markets is guaranteed. Even the well-equipped traders lose in the markets while at the exact same time someone trading from the comforts of their home could make a killing in the market.
If you are someone that is looking for a 100% win rate and want to profit all the time from the markets then maybe trading isn’t for you and you would be better off investing your time, energy, and money into something else.
Copy trading does sound like an easy way into trading where you can earn money from the price movements of financial assets. It sure is a shortcut that allows you to skip learning about the markets and jump straight to making profits.
But I don’t believe in the shortcuts. And I would strongly suggest that you avoid copy trading and would be better off learning to trade on your own.
In copy trading, you are always at the mercy of the trader, you have to blindly follow what he does, you sure can at times choose not to take the trades they take but mostly you are just being a follower.
This business of copy trading is a sure-shot one for the traders as they get their subscription fee no matter how their trading results were, but it’s not the same for the individuals that follow them.
It is always better to get educated and then take trades all by yourself. Yes, you may not earn in the beginning, and in the worst case, you might even lose some money. But the process will only make you a better and experienced trader.
There are tons of materials available online for free that can help you learn this skill and if you can afford a course offered by reputed and genuine traders then maybe you could think about taking up those too.
Trading courses offered by traders is a topic for another discussion for another day, but whatever decision you take make sure that you research properly and then only make an informed decision.
If you are someone that is hell-bent on indulging in copy trading and are not interested in learning how to trade on your own then I would just suggest that you do not take up the services of any random trader.
Like I discussed, traders do not always display the proper information and you may fall into their trap. So the best thing to do is to contact the trader and shoot every little question you may have at them and then judge them.
Do your research, compare different traders, jot down the pros and cons of everything and then decide on one.
Do you copy trade?
Have you already signed up on any copy trading platform? Which one? How has the experience been for you? Do let me know.
Share this blog post with others and let them also understand what exactly copy trading is and the various pros and cons associated with it.
You can always reach out to me through the comments section for any questions or queries you may have and I will get back to it at the earliest.