The Rise of Copy Trading

With copy trade services such as Zulu Trade and Etoro, it’s become very easy to find a “good” trader. Just set up an account with £1,000 and automatically copy their trades. You don’t need to know anything about trading, technical analysis or fundamentals, you can just click a button and follow the leader. It’s a great idea on the face of it, make money with no effort, other than researching who the best traders are to copy. You can go and work and come home and find extra money in your account for almost nothing.

The only thing is, money for nothing is not a reality in this world. Consistently profitable traders spend years learning their craft, like any professional. They understand the mechanics of trading, the discipline and control of emotion that’s required. A professional trader has a master plan, a plan on how to manage risk, a plan on how to handle losses, a plan on how to manage leverage, which is suited to their personality and account size.

Copy-trading can work well but every trader has losing trades and losing streaks. You need to be able to be sure you can handle those losses yourself. Is your account size big enough to handle the drawdown? Are you able to hold your nerve for the long haul? Are your expectations realistic, looking for maybe 3% per month rather than 30%?

My advice is if you want to copy trade, to educate yourself to at least a small degree before, rather than just blindly following. If you understand the type of trader that your following, you can understand how they trade. If they are a technical analyst you’ll know they are just looking at charts, a fundamental trader will be glued to the news. Knowing how wide their stops are so you know what sort of losses you could expect is a good idea and having an idea of their target and timeframe. Once you understand this you can study the trading statistics and see if they are suited for your personality and risk profile.

I’ve found that if the trade doesn’t work, those who followed are able to look back at the analysis and understand why the trade was placed and maybe even look at why it failed. Have a discussion with the trader on the trade and why it may or may not have worked. If you are just blindly following with no idea, the losing trades and streaks will be frustrating and upsetting. If you don’t manage your account size properly, you’ll just blow your account and feel like it’s the traders’ fault when in reality, it’s your own for not spending a little time studying. Blaming someone else is all very well but it’s your account that will take the hit and suffer the loss.

Copy-trading has many advantages, one thing I like is the transparency it brings. So many traders and analysts will show their winners and winning streaks but never their losses. As a new trader when you’re learning, this can be very disheartening as it would appear everyone around you is making lots of money and you’re the only one who’s not. This is never the case, even the best day traders in the world will lose. What makes them the best is in the long term they manage those losses and stick to their plan. So again, this is a red flag in copy trading when you do your due diligence, check the trader has a reasonably long track record and if they have never lost they either have such a massive stop loss and when they are just in profit they take a small profits and move on to the next trade. So this means their track record may look great but one loss and you have lost your whole account. Second is to keep an eye out for short fast profits as the trader will do well but then blow up and close their copy account and reopen in another name. So look for established people with losses so you can judge how you and your account can deal with their loss.

It’s very important to be open and honest about trading, especially when people are trusting their money to your control. Follow the trader on social media to see what they post, you’ll be able to read their personality, see the content they publish and whether this may suit you.

My suggestion is if you are going to copy, spend some time researching, get to know the trades. If you’re going to trust your money to a decision out of your hands, it’s the least you can do for yourself. You wouldn’t hand someone £1000 on the street and let them trade your money because you “thought” they were good.

Do your research and spend some time educating yourself, which in turn will help you manage your expectations. Then you’ll have a chance at making some passive income with a lot less stress.

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