Pro’s and Con’s of Copy Trading
September 21, 2016
Foreign exchange trading gained in popularity in recent years as more and more wannabe traders are opening trading accounts with various forex brokers with motivation being different from person to person.
Some are interested in applying their beliefs about an economy in the actual marketplace and if they are right, why not making a buck out of it?
Others are looking for quick and steady earnings to come and complement their regular incomes given by the day-to-day job they have.
And others are simply attracted to the industry due to the fact that it is extremely aggressively advertised. More importantly, on these commercials, the focus is on how easy it is to make money trading forex and not what effort it takes to be able to be successful when trading financial markets.
Having said that, the vast majority of retail traders failed and are still failing to make a constant income out of trading and, at best, they’re keeping the trading accounts floating. This means loosing and winning periods alternate, but all in all, there is nothing staggering from a performance point of view to make trading a viable solution to start trading for a living.
Copy trading was invented exactly for these traders and was embraced rapidly and with great enthusiasm.
What is Copy Trading
The idea behind copy trading is very simple and this is why it is appealing to retail traders. Recent technologies allow trades from a trade account to be instantly mirrored in other trading accounts based on the risk settings of each and every account.
For example, if one is trading one lot EURUSD and that lot for his/her account is representing 2% of the total size of the trading account, the same percentage will be traded in the follower’s account, hence the actual volume will be different, keeping the risk exponentially the same.
Forex brokers allow traders to follow other successful traders via a “bridge” solution that connects the successful trader’s account to the follower’s account. All positions traded by the successful trader are mirrored in the follower’s trading account and all parties involved are happy.
The successful trader will earn a fee based on the how many followers his/her trading account has, the follower will be happy as there’s no need to be concerned about trading anymore and profits should just pour in ad the broker is happy as well as trading commissions are increasing due to the fact that everybody is trading.
Why Do Brokers Offer Copy Trading Solutions?
The answer to this question is quite simple as in order to have access to such a service one should open a trading account with that respective broker. This way the broker is gaining new traders and incomes are on a rising path.
It is also a great way to retain old clients that didn’t have a positive experience on the forex market and stopped trading because of that. This way the broker gets new customers and turns the ones that ended up not being active into active traders again.
So far it seems that this is a win-win solution for all parties involved: broker, followers and the actual trader that takes the trades.
While for the broker and the trader that provides the signals copy trading is indeed a viable solution, for the actual followers there are some drawdowns to be considered.
First of all, the risk of still not performing is there as these traders have the tendency to follow more than one account and will end up doing exactly the same thing as they did when traded alone: overtrade. If in the first instance the overtrading was related to the fact that multiple positions were opened in a trading account, now overtrading comes from the fact that multiple trading accounts are followed and even a small drawdown will end up in the follower’s account to be depleted.
Second, the traders that follow another trading account will not learn anything and will end up just blindly following some trades without knowing the logic behind, and therefore are being totally dependent on other trader’s success. On the long run, this will turn up to be just a temporary solution for successful trading.
All in all, copy trading is just another part of the overall offering of a forex broker and it has both advantages and disadvantages for the actual retail trader.
What is important is the fact that the retail trader sees an alternative and, providing trading through such a service is profitable, it is a living proof that profits can be made while trading the forex markets.