Risks of Copy Trading? I Thought I can Only Make Profits!
The Risks of Binary Options Copy Trading Explained
Social trading is fast becoming the leading form of online financial speculation. It encompasses the realms of copy trading, forums, signals services, trading diaries and market gurus. It combines them into a kind of one-stop-shop for all your trading needs. A good social trading platform is full of strategies, tools, analysis, assets and experts on each along with the ability to follow the trades of top traders. The thing is, no matter how easy it may seem it still comes with risks, many of them risks the average trader may fail to notice until it is too late.
The very first and deadliest mistake a wannabe social trader can make is thinking it is easy. Yes, social trading makes it easier to learn because you have the knowledge and support of the community to fall back on but you still have to put forth some effort. You must take the time to learn about what it is you are doing or else you may end up like a lemming and copy somebody right over a cliff. If making money from trading, or binary options trading, or social trading was that easy then everybody would do it and they would all be rich don’t you think?
Most traders jump right into the social copy trading thing without understanding what they are doing. Most platforms are only offering copy trading, a part of the social trading scene but not the whole by any means. Pure copy trading allows you to follow a trader and all the trades that trader makes with no ability to interact or to pick and choose which trades you like. This has too many conditioned to expect the same thing from a social trading platform, you just find someone with a good percentage and copy, copy, copy. This completely subverts the entire purpose of social trading which is to learn. Yes, copying is good, but learning to make trades, or at least to recognize a good trade from a bad one, is far better. A wise man once said, it’s better to teach a man to fish than to feed him one. You simply can’t learn to recognize what a good trade is if all you do is copy. Don’t forget, not everything is as it seems. This is the internet we are talking about, a place where it is easy for scammers to prey on unwitting traders. No matter what you do, where you go or who you follow be sure to know who and what they are.
Why AUTO Trading Can Ruin Your Account
A big part of copy trading is represented by autotraders or trading robots. What these do is to copy automatically a trade on the user’s account. The software generates a trade signal based on a shady strategy and that trade is automatically opened on your account. I say “shady” because most of the times the details of that strategy are not clearly laid out and instead the user is shown photoshopped account statements, with mostly wins on them. Sometimes the signals are allegedly generated by Pro human traders, but you can never make sure that is really the case; and even if humans trade, how can you be sure they are really Pro traders? You can’t. And following that course of thought – your account is set on AUTO mode so every trade taken by the software (or by the alleged Pro) is automatically copied onto your account. That means YOU are NOT in control of your money! You cannot say: “Hey this trade is stupid, I’d better pass”. Nope, because the trade is already open. That’s why AUTO trading can cause heavy losses and it’s a big risk of copy trading. If you are not absolutely, positively, 100% sure about the proficiency of the trader of software that you are copying on AUTO mode, then you shouldn’t do it and instead settle for a more “docile” way of copy trading. Learn a bit about the market, about trading and don’t assume that you can piggyback completely. Once you have at least a basic understanding of how things work, you will probably be able to identify a completely stupid trade and stay out of it. But with AUTO trading, you don’t have this luxury: even if you realize the trade is wrong, you can’t do anything about it. Social trading is fine, Copy trading is fine, but Copy trading on AUTO mode is just closing your eyes and crossing the street hoping you don’t get hit by a car.
Hidden Risks Of Social Trading
Again, most social traders make the mistake of thinking that all they have to do, or all they can do, is copy. It is OK to copy but if done blindly can wipe out your account in the blink of an eye. The reason is because of the multiplier effect of money management. Most successful traders, the ones you want to follow, use a form of money management that dictates trade size by percent. This means that all trades made by trader M are 1%, 2% or whatever % they feel is acceptable for their account. However, when they make a trade the platform wont say that trader M made a trade of X%, it will say that trader M made a trade of $30, $300 or $3,000. If you were to simply follow the trade amount with no regard to your account size you could easily blow your stake in one go. So, even if a trade is good you may be better off simply making a new trade rather than copying the old one so that you can abide by your personal money management rules.
The ability to pick and choose which trades you follow is a two edge sword and one of the hidden risks of social trading. On the plus side it means you can weed out trades based on asset, expiry or other reasons. This is good but it may also open you up to increased loss. Past history is one of the indicators used to pick traders to follow. These results are built up over time and include all the trades a trader makes, on a particular asset or for the whole account. If you want to be sure to match that success in your account you really can’t pick and choose trades because you might pick all the ones that lose.
You can’t be a sheep when it comes to following the crowd. The crowd is often right, but it is often wrong as well. Simply assuming that copying the crowd will be enough to ensure profits is foolish. Too bad a lot of traders rely on it. If this were not the case the brokers would not have tools or features to measuring trader sentiment. In order to effectively social trade and get the most out of the experience you must engage with community, put in some effort and learn to swim with the sharks. Otherwise you’re just going to be shark bait like all the rest.