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Copy Trading: Important Risks & Advantages To Consider

By: Luke Britton

 

Ways Online Trading Can Be a Viable Source of Income

Copying the trades of someone else, especially one more experienced than you in the foreign exchange market, is no new phenomenon, and has existed for as long as the financial system has.

However, remotely computing the trades of another through automated systems is where evolution stuck its tent, now enabling newbie traders to copy the trades of others —from the comfort of their homes. 

This style of trading has even been made more popular with advanced social trading platforms, such MTrading. MTrading is a registered forex broker which came into the limelight in 2012 and has since become part of the necessary revolution that the financial systems have undergone. Speaking matter-of-factly, retail forex brokers such as MTrading have been predicted to garner over €70m by 2025. However, the whole idea of copy trading has been sold to so many that people now ask themselves —is it really worth the hype?

Is Copytrading Regulated?

Make no mistake, copy trading is regulated amongst various jurisdictions and countries. For instance, in the U.K., the Financial Conduct Authority (FCA) controls the capital market and categorizes “automated copy trading” as a type of investment management. This implies that those you wish to copy trade from must be regulated by the FCA.

These portfolios are people-centric, as against investing in the market. However, copy trading has been criticized, and for various reasons too. This article will highlight the various risks and advantages associated with copy trading. 

Advantages of Copy Trading 

  • Income diversity

These days, online trading has become one accessible way to make passive Income for every prospective trader. With the technological advancements that back the plethora of available options, forex trading has even become a primary source of income for some people.

Copy trading easily allows for this type of income, because under this type of trading technique, the less experienced traders are allowed to copy —either manually or automatically— the trades of more seasoned investors. 

  • Perfect entry for all

Another important factor that makes investors give copy trading a second thought, is that it eases newer investors into the system, supplying them the ample time to hone the necessary skills that will deliver great results. 

This strategy will ensure that new traders do not rush into making trades. Here, they can earn by copying seasoned traders devoid of rookie mistakes. As a newbie or semi-pro, this may also serve as a confidence booster for you, as you are thoroughly nurtured by the most seasoned forex hands.

  • Saves time

Copy trading will save you time. Seasoned forex traders spend tons of hours poring over charts, analyzing positions and market conditions, while forecasting based on past experiences. 

On one hand, technical and fundamental analysis —which are strategies in the forex market— will always take up the majority of your time. You will be required to explore every single aspect for you to keep up with an ever-changing market. On the other hand, copy trading will allow you to learn from the moves and strategies of the best traders! All you need to do is copy their trades and use the remaining time on your hands to build your pool of knowledge on the financial market.

  • You can go long or short

With copy trading, you can use derivative products like Contract For Difference (CFDs) and even short sell, as one of the core parts of forex is short selling.

This is because, in this financial system, you are always willing to sell one currency to buy another. In essence, the extent you decide how your prediction goes will eventually give you a profit or loss.  

  • You can trade anytime

Finally, the 24/5 principle works in the forex market. One is allowed trade in the forex market from 9 pm on Sunday to 10 pm on Friday within the GMT zone. 

Various forex transactions are typically conducted over the counter and not through any central exchange, and thus, the difference in time zones can be used to one’s advantage. Thus, understanding copy trading as a strategy will enable you to monitor these time zones —due to the automatic placement of trade that gives you enough time— and open and close positions, utilizing the time zones to your advantage. 

Risks of Copytrading 

As expected, there are some risks attached to taking up copy trading as a strategy. These include: 

  • Exposure to signal selling scams

Being a member of a social copy trading platform means that you interact with fellow traders. Some of the social traders have ulterior motives, which may include selling fake trading signals on the black market. 

For instance, in 2018, the FCA won a case against the 24HR training academy, due to the illegal sale of signals, further directing clients to sign up with ‘partnered brokers’ in return for financial favors. Their actions were deemed unlawful, and the court ordered the training academy to pay back €530,000 with interest. 

  • Market Risk

In as much as traders are copying the trades of seasoned traders, there is a certain minimum requirement that you must pay, to get access to the trades. 

After this has been cleared, another risk to consider is the equities of your account notching that of the trader. This is a risk because the trader is copying the trades of the person who probably has more equities than the new investor. Thus, the losses may be felt more on your side than theirs. 

  • Difficulty in finding the ‘right’ trader to copy

Finally, there may be a major issue in following the right trader. Even though you may have analyzed the winnings and charts of the trader, it is still not guaranteed that such a strategy employed by the trader will last. Also, so many of the master copy traders only have a solid track on paper.

Conclusion

In conclusion, is it safe to copy trade? That answer is that —there is no right answer. As it is mainly dependent on the personality of the character of the master trader, copy trading can either be great for one, or bad for the other. Be sensitive. 

Any financial information or opinions contained in this article are the author’s own and do not represent endorsement or support of any products or services by SmallBizClub.com.

Published: November 18, 2022
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