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Yes, Give it to me

The Truth about Copy Trading Nobody Tells You 

Last Updated: October 28, 2020

By Rayner

A group of researchers did a study on between 2013 and 2015.

They wanted to find out how many % of traders made money consistently.

And do you know what they found?

  • 97% of them lost money
  • 0.4% earned more than a bank teller (about $54 per day)
  • The top trader earned $310 per day

Clearly, the odds are against you.

So what now?

Well, that鈥檚 why many traders hop onto the copy trading bandwagon.

After all, you鈥檙e thinking:

鈥淪ince trading is so difficult, then why don鈥檛 I follow the trades of a pro trader鈥攚ithout having to figure things out on my own?鈥

From the look of things, it makes sense, but there are a few 鈥渉idden鈥 pitfalls that nobody tells you (and I鈥檒l cover more later).

But first鈥

What is copy trading and how does it work?

Copy trading is when you follow the trades of another trader.

So when the trader buys, you buy. When the trader sells, you sell. When the trader adjusts his stop loss, you鈥檒l adjust it as well.

Here鈥檚 how it works鈥

There are 2 types of account in copy trading:

  1. The master: This is the person who makes the trading decisions
  2. The follower: This is the person who copies the trades of the master

Also, the masters and followers are on a platform (like Etoro and Darwinex) which facilitates copy trading鈥攁nd it鈥檚 how they connect.

Now:

I know you鈥檙e excited to fund your copy trading account and copy the trades of other professional traders.

But before you do so, here are some things about copy trading you must be aware of.

Read on鈥

Copy trading: Why you won鈥檛 have the conviction to copy for long

Here鈥檚 the deal:

You鈥檒l never know who is the person that you鈥檙e copying your trades from.

Sure, they can give some short biography about themselves, how they trade, etc.

But how do you trust their trading strategy if you have not validated it yourself?

威客电竞竞猜 when the drawdown comes (and it definitely will), you鈥檒l start having thoughts like鈥

鈥淲hat鈥檚 going on?鈥

鈥淒id the trading strategy stop working?鈥

鈥淪hould I still copy the trades after 5 losers in a row?鈥

Now, these questions are impossible to answer because you didn鈥檛 develop the trading strategy. Instead, it鈥檚 copied from another trader and that puts you in the back seat.

Do you agree?

Beware of transaction costs and fees

Copy trading is a business.

So, if you鈥檙e not being charged any upfront fee, then you鈥檙e paying more for the spread and overnight fees.

I鈥檒l explain鈥

The spread

For most Forex brokers, the spread on EUR/USD is 1 pip. But on a copy trading platform, you might pay 2 to 3 pips more.

But don鈥檛 take my words for it because you can compare the spreads of a normal Forex broker with a copy trading platform and you鈥檒l see the difference.

So, what鈥檚 the implication?

Two things.

#1: If you鈥檙e a trader being copied, then bear in mind your trading strategy won鈥檛 work as well because you鈥檙e paying more in spread (compared to a typical Forex broker).

#2: If you鈥檙e copying another trader, then it鈥檚 best to follow traders who trade infrequently so the spread doesn鈥檛 eat up a huge chunk of your profits.

Overnight fees

Now, the spread isn鈥檛 your only cost because you still have to consider overnight fees (if you鈥檙e holding positions for longer than a day).

This fee is calculated by taking Libor + X%.

(Libor stands for inter-bank offered rate. It鈥檚 an interest rate that banks charge to other banks for borrowing the money.)

So, what is X?

Well, this is the mark up that鈥檚 determined by the copy trading platform and you鈥檒l need to check with them for the exact amount.

The good news is, you don鈥檛 have to worry about calculating all these because the platform will likely do it for you鈥攕o do check it out before placing a trade.

Now, there are probably other fees to consider but the spread and overnight fees make up the chunk of it.

Moving on鈥

Beware of a possible conflict of interest

As a master trader, you get paid more as your number of followers increase (that鈥檚 because you have a larger amount of assets under management).

So the golden question is鈥

How do you increase your number of followers?

One technique is to adopt a high winning rate trading system (like having 500 pips stop loss and 5 pips profit target).

Clearly, with such a trading methodology, your equity curve will be sloping higher for a long time鈥 which will entice new traders to follow the master.

But there鈥檚 a problem with this.

It鈥檚 only a matter of time before the trading system encounters a loss and wipes out all the earlier gains (or more).

And by the time it happens, the master trader would have already profited from his 鈥渇ees鈥 and the ones left suffering are the followers.

Now, I鈥檓 not saying all masters are bad, but you must be aware of this possible conflict of interest.

And if you see an equity curve sloping 鈥渢oo nicely鈥, that鈥檚 usually a cause for concern.

How to find copy trading success?

At this point, it seems that I鈥檓 against copy trading鈥攁nd you鈥檙e right.

Still, if you want to go down this route, then here are some tips to help you鈥

#1: Understand the concept behind the trading strategy

When you understand the concept behind a strategy, you鈥檒l know why it makes money which helps you stick to it.

For example:

Trend following works when markets are trending. But statistically speaking, most markets trend less than 50% of the time.

This means you鈥檒l lose often, but when you catch a trend, your profit will more than compensate for the little losses you incurred along the way鈥攁nd that鈥檚 how a trend follower makes money.

Now if you don鈥檛 understand the logic behind trend following, then you鈥檒l claim it doesn鈥檛 work after a few losing trades.

But if you do, then you know it鈥檚 simply the cost of doing business.

#2: Know the person you鈥檙e copying from

In the venture capital world, some firms get funded not because they have a good product or idea. Instead, they get funded because of who鈥檚 running the company.

And this concept can be applied to trading.

Let me explain鈥

I鈥檝e got a friend who鈥檚 into Algorithmic FX trading. The way he trades is by having a wide stop loss and small target profit. If the market moves against him, he鈥檒l average into his losses so he can quickly recover back when the market reverses back in his direction.

This works for him because he risks less than 0.5% on each trade and if he is wrong on a trade, he鈥檒l average into his losers so he can quickly recover when the market reverses back in his direction.

To be honest, I鈥檓 not in favour of such a trading strategy.

But because I trust the integrity of my friend more than his strategy, I鈥檓 willing to invest with him.

#3: Diversify your masters

If anyone promises you that you can make money every single day, week, or month鈥攔un far away.

That鈥檚 because no trading strategy works all the time as market conditions are always changing.

Think about it:

The only way a trading strategy makes money all the time is IF market conditions don鈥檛 change鈥攁nd that鈥檚 impossible.

So, what now?

Well, all hope is not lost because you can adopt multiple uncorrelated trading strategies and smooth out your returns over time.

For example:

Stock momentum trading works well in bull markets, but during a recession, it suffers a drawdown.

So what you can do is, adopt an uncorrelated trading strategy like futures trend following which usually does well in a crisis period.

This way, your losses from stock momentum trading gets 鈥渟ubsidized鈥 from your futures trend following strategy.

So the takeaway is this鈥

You want to copy trades from different masters with uncorrelated trading strategies鈥攕o you can improve your returns relative to risk.

#4: Find masters who have a stake in it

I鈥檝e got a question for you鈥

There are 2 identical business out there (A and B) which sells vacuum cleaners.

The owner of business A has 50% of his wealth invested in the business.

The owner of business B has 5% of his wealth invested in the business.

Now let me ask you:

If everything else is constant, which business do you want to invest in?

Business A, of course.

Why?

威客电竞竞猜 the owner has more at stake. In other words, he鈥檒l likely do the right things as he doesn鈥檛 want to jeopardize his investment鈥攚hich is aligned with the interests of the shareholders as well.

So, what has this got to do with copy trading?

Simple.

You want to identify masters who have a decent stake in their account because they will do what鈥檚 right鈥攁nd this benefits you the follower (aka the shareholder).

Conclusion

Copy trading allows you to follow the trades of another trader.

You must be aware of things of like transaction costs & fees, a possible conflict of interest, and how you鈥檒l have difficulty following the trades of another trader.

Still, if you want to go down the copy trading route, then here are a few tips to help you鈥

  1. You must understand the concept behind the strategy, so you don鈥檛 give up after a few losing trades
  2. You have confidence in the person you鈥檙e copying from
  3. You diversify between different trading strategies so you can improve your returns relative to risk
  4. You identify masters who have a stake in it so there鈥檚 no conflict of interest

Now here鈥檚 what I鈥檇 like to know鈥

What鈥檚 your take on copy trading?

Leave a comment below and share your thoughts with me.

  • Honestly,copy trading once have failed me,but I was smart to pull out my balance of up to $350 after watching my equity nosedived for two months non-stop,from $500.

  • Wow, just in time Rayer. I just opened an account with a broker, so I can copy trade. After I read this post of yours, I won’t proceed with Copy Trading. I will just trade the market myself.
    Thank you.

    Edwin

  • For the people who do not have the time to learn how trading works, copy trading is a good thing. Still, you have to choose the right people by looking at their consistent performance, and the risk they take to maintain their portfolio. But I agree with Rayner that if you have your own strategy already, you should do it minimally or not at all.

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