The problems with copy trading and why no strategy is infallible
For anyone looking to get started with financial trading, copy trading looks like a smart move. The principle is simple: find a successful trader with a solid track record, someone who seems to know what they’re doing and looks to be making big money and then copy them trade-for-trade. By doing precisely what they do, immediately after they do it, you can emulate their success and learn the ropes as you go along.
Timing is everything
Unfortunately, as you might expect, it’s not quite that simple. Successful trading is all about timing and coming in second won’t always cut it. The original trader you’re copying may use a range of top investment tricks, but chances are it comes down to buying when the price is low and selling when the price is high.
This top trader is successful because they can pick the exact moment when the price is about as low as it will go, just before it turns around and begins rising again. Price is set by demand: it’s low because no one wants the asset in question. But as soon as the original trader swoops in and buys, their trade triggers the price rise. Copy traders inevitably pay more than the trader they’re copying; in fact, they help the original trader by pushing the price up faster.
If you’re following an influential investor and wait for them to alert their legions of followers about the great trade they’ve just made before copying it, then you’re even further behind. At this point, you’re just part of the herd. Similarly, when the original trader sells, everyone else sells, and the price comes tumbling down. Imitators can never match the success of the trendsetters.
One size doesn’t fit all
Slavishly copying another trader can be risky, especially if they specialise in a particular asset class. Most people are better off building a diverse portfolio that reflects their risk tolerance. There’s no one-size-fits-all strategy when it comes to trading, and you should choose an approach that meets your own needs rather than copying someone else’s just because it seems to work for them.
When choosing a broker, you should read independent reviews to find the one that satisfies your requirements, like this Skilling broker review. Similarly, you should select a trading strategy that meets your conditions, including how much time you can put in, how much money you can afford to commit to trading, your risk aversion, and your long-term goals.
No silver bullets
The unavoidable truth is that there’s no silver bullet in terms of a trading strategy. No one gets it right all the time. The trader you’re copying isn’t perfect, and eventually, they too will make a mistake. The difference is, they probably have enough capital to absorb their losses, while you may not.
Losses are inevitable, and successful trading is about how you handle those losses as much as how often you win. That’s not to say that you shouldn’t have a well-thought-out trading strategy and stick with it; however, be aware that no plan will guarantee you 100% success.
Follow the market
A strategy that works well under some market conditions may fall apart entirely under others. The market doesn’t play by the rules and can change suddenly and unpredictably, making a mockery of your plans. Follow the market carefully and adapt your strategy to its twists and turns.
For any trader who is in it for the long haul, every day is a school day. You can never afford to stop learning, and you often learn more from your mistakes than from your successes. If copy trading helps you to understand why the original trader does what they do so that eventually you can stop shadowing them and can apply what you’ve learned in your own way, then great. However, tools like auto trading often let people carry out copycat trades without even knowing what they’re doing, let alone why.
It may be better to look for a mentor who is not an active trader but is still an expert, who’s prepared to share knowledge and advice with you. That way, you’ll benefit from their experience without the conflict of interests and the chance that they’re just using you to increase their profits.
Copy-trading has its advantages but also its drawbacks. Eventually, you must make your own mistakes to become a real trader, successful or not, rather than just someone else’s shadow.