December 03, 2021

Copy trading is available through certain companies who, while licensed, are not regulated by the FCA (Financial Conduct Authority) in the United Kingdom. They provide you with a list of traders using their platform along with statistics and a score card showing what they trade and how successful they’ve been in the past. In essence, when you copy trade, you choose to follow one or more of these traders. Once you do this, every trade and order they undertake is duplicated on your own account. It’s sold as being a simple way to make money. All you do is fund your account, pick the person, or people, you want to copy and select how much money you want to risk. Then, when they trade, you trade. 

Sounds good

It sounds like a great way to get involved in fast-moving and high-risk financial markets, particularly if you know nothing about trading. But there’s so much to be aware of before undertaking a trading decision like this. For a start, don’t take their trading statistics as gospel. Some returns are based on how well they performed while using a practice or demo account. This means they weren’t risking any of their money on their trades. So, their results cannot be viewed as being a true and accurate impression of how they would trade in real life, with their own money at risk. Without this, it’s impossible to judge their attitude to risk and how they react to taking losses, or what they would do if their trades were winning.

But let’s assume their results are genuine and that they risked their own funds. Are you able to switch off and let another person decide what happens to your money? With copy trading, the person you’re copying may increase the riskiness of their positions by extending their stop losses. Your account will duplicate everything they do. The power is entirely in their hands.

It can work

Now this isn’t to say that copy trading can’t work. Undoubtedly there are traders who operate on copy trading platforms that have performed well and have impressive trading statistics. These are the star traders and anyone who copies them should also do well. Of course, the copied trader will do better as they receive bonuses from the platform provider, based on a percentage of the assets that copiers risk them with.  

But what if they have a losing streak? If you’ve been following a copied trader for a while this may not bother you too much. But what if you’ve only just started, and you first batch of trades all lose money? The point is that even if a trader has great trading statistics, they won’t win all the time. Situations can reverse very quickly, and this will affect you too. And bear in mind, you really don’t know much about the trader you’re copying, including their attitude to running losing positions.  

Is it worth it?

Copy trading sounds like a great way to play the markets without doing the hard work. But is it?  Sure, you may not need to know much about trading, but you’ll have to spend time researching who to copy. Wouldn’t it be better to learn about trading yourself? It may take time but it’s far more rewarding to make your own decisions and stay in control. Then you can experience the highs and lows of trading – learn for yourself what style of trading suits you, learn which trading techniques can help you make money, and which don’t. That’s the real thrill of trading.

Social trading

Social trading is different. There’s nothing automatic about it, and it’s sometimes referred to as manual copy trading. With social trading you’re following and communicating with experienced traders who are happy to offer you their tips and trading methodology. Ultimately, it’s down to you to decide whether to follow another trader by doing what they’re doing, so you do have an element of control. You’re also learning from other traders, and many find this fulfilling. It’s also good to have company when you’re trading as it can be a quite a solitary pursuit. Social trading can be a great way to get together with other traders to learn new strategies, as well as to discuss your winners and losers.

Again, it all sounds good, and it can be, particularly if you are a social animal. But it can also be time-consuming, and as with copy trading you must be confident in the abilities of any trader who offers you advice. The greatest danger is following someone into a trade without understanding the rationale behind it. Why are you making this trade? What do you expect this market to do? What will you do if the trade doesn’t go as planned? You must maintain very strict and clear risk parameters at all times. Social trading can be a good way to learn and develop. But it does have its downsides.

Conclusion

Towards the turn of this century, retail trading on financial markets experienced an enormous change thanks to the development in online trading. The shift led to increased competition amongst providers, with tighter spreads, greater transparency, a wider range of products and 24-hour trading all adding to a better experience for customers. Since then, aside from tighter regulation, there’s little that has happened that could genuinely be said to have added to the customer experience. Many would argue that copy trading has been a major development. But the jury is out when it comes to assessing if this has been good for customers.

At Trade Nation, we have always emphasised the importance of understanding what it is you’re trading. We also caution not to follow other traders’ advice. Why? Because you can never be 100% sure that their interests align with yours. You can never truly appreciate another trader’s attitude to risk and how they may react when a trade doesn’t work out. That’s why we say that to do anything well in this world requires effort. We don’t mean work for work’s sake, but the satisfaction of being in control and taking responsibility for one’s successes, and failures – and learning from both.