Certain forex brokers (commonly known as copy-trading brokers and social trading brokers) allow traders to mimic the actions of other successful traders instantly. The experienced traders simply publish their trades live and the interested people who follow them can have those trades copied to their accounts albeit with some predetermined risk settings. As copy trading in forex grows more popular, traders however need to examine the following benefits and risks associated with copy trading facilities.
1. You earn while you learn
The majority of retail traders who ventured into forex trading still make losses or struggle to keep their accounts afloat. That can be attributed to the fact that a really good number of them start live trading without really knowing the risks involved in forex trading. The learning process involved before finally going live is quite stringent and that makes many people commit their money too early or simply quit their forex trading career before it takes off. Copy trading on the other hand helps to minimize that problem as people can still earn money as they learn to trade. It provides that opportunity to copy the very best of what profitable traders do and learn to avoid what they avoid.
2. Benefit from the technical experience of other traders
It is a good learning experience because a lot of the copy-trading platforms also offer chat-facilities and you can in that way interact with traders who share a certain viewpoint on some trading decisions. Even without talking to other traders directly, newbie traders can easily monitor trends on the experienced traders’ money-management styles and learn a handful. As an example, some experienced traders open fewer positions when there is pending news or they do smaller trade sizes when the market looks too uncertain. This helps them to stave off the risk of being whip-sawed out of some position when negative news outcomes do not favor their trading positions.
3. A right solution if you do not have the time to trade
Copy trading also comes in handy when you do not have the time and experience to continuously monitor the trades and look for new trading setups for the day or hour. Investors may be too busy engrossed in their day to day jobs but still want to earn some extra money from the forex markets. In such a situation, it is wise to register for a copy trading account and let people with more experience trade while their activities reflect in your account. Simply put, it is a very nice way of earning from the collective success of other traders.
1. You may lose if you follow erratic traders
Copy trading may not always be rosy and profitable as some people may put it. There still remains a high likelihood of copying a series of bad trades from an erratic trader. For this reason, you need to thoroughly scrutinize the trading history of an account before you decide to mirror it to your account. Worse still, some traders start off well with seemingly high profits at once but hidden behind the detail is a number of trades that maintain high drawbacks. Always examine the frequency of trading and get the information about how long some traders take to close bad trades.
2. An insincere broker may recommend the wrong traders
A good broker who offers copy trading facilities will go the extra mile and examine the stability of performance before recommending as certain trader for you to copy. Unfortunately, some of the brokers do not do their homework quite well and would be quick to recommend an account without properly vetting them. A sincere broker should only opt for traders who have a long history of moderate but stable profits instead of a trader who has had a brief stint of high profits.
3. Overtrading can occur if you mirror trades from too many accounts
Over trading can also occur when you follow too many mirror accounts at once. A little diversification is advisable but too much of it can also work against you. When trading alone, people used to lose money or make bad decisions when they usually open too many positions within short periods of time. The same can also occur when you are running a copy trading account because all the actions from the other traders also reflect in your account, including the possible drawdowns. Keep the number of accounts you follow for trades as low as possible and always keep on altering the mix depending on their performance.