Once a group of researchers conducted a study of Brazilian traders in the period from 2013 to 2015. They wanted to know what percentage of traders make money steadily. And you know what they found? 97% of traders are losing money. 0.4% earn about $1,500 per month. And only the best ones were earning about $10,000 a month.
Obviously, the chances in trading work against us. This is why many traders prefer to copy the trades of other traders. They think, “Since it’s hard to make money in trading, why don’t I follow the trades of a professional trader without knowing everything on my own?
At first glance, this makes sense, but there are some “hidden” pitfalls that no one will tell you about. In today’s article, we will try to understand everything.
What is transaction copying?
Copying trades is when you follow the trades of another trader and repeat them in your terminal. When a trader buys, you buy. When a trader sells, you sell. When a trader corrects his stop loss, you also adjust it.
There are 2 types of traders in mirror trading:
- The Master is the person who makes the trading decisions.
- The follower is the person who copies the trades of the Master.
In addition, Masters and Followers use a special trading platform that facilitates copy trading.
As I wrote, this type of trading has its pitfalls. First, you never know who you are copying your trades from. Of course, you can get a short biography of a trader, see how he trades, etc. But how can you trust someone else’s trading strategy if you have not tested it yourself?
Because when there is a drawdown (and it is sure to happen), you will have thoughts like: “What is going on? “Has the trading strategy stopped working?” “Should I still copy trades after 5 losses?”
These questions cannot be answered because you have not developed a trading strategy. Instead, you copy trades from another trader, and this makes you dependent on the results of others.
Beware of transaction costs and commissions.
Copying deals is a business. If you are not charged in advance, you usually still pay for the spread and commission.
For most forex brokers, the spread on EUR/USD is 1 pip. But on the platform for copying trades, you can pay 2-3 points more. What do we have in the end?
If you are a trader who copies trades, keep in mind that your trading strategy will not work because you pay much more for the spread.
If you are copying another trader, it is better to keep an eye on the traders who trade infrequently, so that the spread will not eat up a huge part of your profit.
Spread is not your only cost, because you still need to consider overnight rollover fees (if you hold positions longer than a day). This fee is calculated based on the Libor + X% rate. Libor means the interbank rate offered. It is the interest rate that banks charge other banks for borrowing money.
What is X? It is a surcharge which is determined by the copy platform and you will need to check with them for the exact amount. The good news is that you don’t have to worry about calculations just because the trading platform will do it for you.
Beware of conflicts of interest
As an experienced trader, you are paid more as your subscribers increase (simply because you will have more assets under management). How to increase the number of subscribers?
One way is to use a trading system with a high level of profit (for example, a stop loss of 500 points and a target profit of 5 points). Clearly, with such a trading strategy your capital curve will go up, which will encourage new traders to follow you.
But there is a problem. It’s only a matter of time before it goes into a drawdown and reverses all its previous achievements. By the time this happens, the master trader will have already made a profit from his “fees”, and those who will make a loss are his followers.
I’m not saying that all traders are bad, but you should know about this possible conflict of interest. And if you see that the capital curve is too beautiful, it should cause you anxiety.
How do you succeed in copying trades?
At this point, you may have realized that I am against copying trades. However, if you want to go down this path, here are some tips to help you.
Understand the concept of a trading strategy
When you study the concept of a trading strategy, you will understand why it brings money, which will help you stick to it.
For example, a strategy trading by trend works when the markets are trendy. But statistically, most markets tend to trend less than 50% of the time. That means you’ll lose a lot, but when you catch a trend, you’ll be able to see why it’s trading in a trendy market.
If you do not understand the logic of following the trend, you will be inclined to claim that the trading strategy does not work after several losing trades. But if you understand correctly, then you know that these are simply unavoidable costs in trading.
Know the person whose trades you are copying
In the world of venture capital, some firms receive funding not because they have a good product or idea. Instead, they get funding because of who runs the company. And that concept can also be applied to trading.
I have a friend who deals with robots trading in the foreign exchange market. He trades with a wide stop-loss and a small target profit. If the market moves against it, it will average its losses so that it can quickly recover when the market turns in its direction.
This works for him because he risks less than 0.5% in every trade. To be honest, I am not a supporter of such a trading strategy. But since I trust my friend’s honesty more than his strategy, I’m willing to invest with him.
Disassemble your masters
If someone promises you that you will earn money every day, week, or month, run away. No trading strategy works all the time because market conditions are constantly changing.
The only way that a trading strategy makes a profit all the time is if market conditions do not change, which is impossible. Therefore, you can use several uncoordinated trading strategies and smooth the profit over time.
Trading on stock pulses works well in bull markets, but over time it will suffer a drawdown when the market becomes bearish. You can use an uncorrected trading strategy that usually works well during a crisis.
Strive to copy trades from different masters with different trading strategies so that you can improve your profitability and diversify your risks.
Find traders who are really interested in profit.
There are 2 identical businesses (A and B) that sell vacuum cleaners. Business owner A has invested 50% of his fortune in the business. Business owner B has invested 5% of his fortune in the business. What business would you like to invest in? It is obvious that A. Why?
Because there is more at stake. In other words, the business owner will probably do the right thing, because he doesn’t want to put his investment at risk, which is also in the interests of the shareholders. What does it have to do with copying deals?
You have to find traders who use a decent amount of their capital in their trading, because they will seek a stable profit.
- Copying trades allows you to follow the trades of another trader. You should be aware of such things as transaction costs and fees, possible conflicts of interest, and how you should not be afraid of possible losses.
- However, if you want to follow the path of copying trades, here are some tips to help you:
- You should understand the concept of a trading strategy so as not to give up after several losing trades.
- You need to be sure of the person whose trades you are copying.
- You must diversify different trading strategies in order to increase your return on risk.
- You must find traders who are interested in this, so that there is no conflict of interest.