There’s a lot of chatter around copy trading these days. It’s by no means a new phenomenon, but even the briefest Google search will yield a number of self-proclaimed experts and gurus telling you just how easy trading can be — once you follow their lead.
If you think this all sounds too good to be true, you might just have the natural savviness needed to survive the slings and arrows of the stock market. However, it’s important to get a full picture of the different trading practices out there, and understand why some traders might go down this route.
So, to give you the rundown of what copy trading means for those just finding their feet, we’ve narrowed down the advantages and disadvantages of this strategy — to help you come to your own conclusions.
Copy trading in brief
If you’ve heard this phrase crop up but never got a decent explanation, the idea of copy trading is pretty straightforward: you imitate the actions of other traders, leaving your trading decisions to them.
For example, let’s say you’re using a trading platform to buy or sell forex, and you have the copy trade option: this allows you to set an amount and then automatically replicate the actions of another trader — if they buy at x price, so will you, and so on. There is also a manual copy trading option, but the principle of mimicking another trader’s position remains the same.
The pros
The chief advantage of copy trading that draws many new investors to it is that there’s less concern about making big, costly mistakes from a position of ignorance — but there are other perks that are often cited as well:
Copying saves time
For a new trader fresh on the marketplace, a lot of time and effort can be saved. Instead of trying to comprehensively understand the mechanisms of the market, copy trading technology gives you the option to do it automatically. Less time needs to be spent on your own strategy and risk management if you’re leaving those decisions to someone who, hopefully, knows better. You can find who is worth copying, as data on a professional investor’s performance is readily available. However, it’s important to remember that risk is a natural part of trading and even if you’re copying a trader who seems to be an expert, they can still make costly mistakes.
You can profit
It’s not fiction that many people have been successful in copy trading. If you choose an effective trader to copy — one who has a positive track record — you have a reason to believe that you can share in their success.
The cons
Unfortunately, far too frequently do those advocates of copy trading fail to mention some of its clear downsides. After all, the principle is pretty much the same as copying someone else’s homework because you didn’t do yours — while you may escape negative consequences, might you in fact just be cheating yourself?
It’s short-sighted
Copy trading goes against a lot of advice given out to new traders. It may well save time and effort in the beginning, but as a general rule, mirroring the actions of professionals might lead to inertia when it comes to improving your knowledge.
As Trade Nation puts it, “your detachment from the markets means you’re not getting the full trading experience. You may profit from copy trading, but you’ll never know why”. Some argue that it can be a way to analyse other’s trading strategies. But the key word that should define your approach is inspiration, not imitation.
It’s risky
Despite apparently having sensible options laid out before you — with a view to making quick wins — new investors can fall into many traps when going down the copy trading path. There are many dubious platforms out there that often require money up front, and are unregulated.
Blindly imitating a seemingly trustworthy broker can lead to terrible outcomes, such as in the case of those who have fallen victim to ruinous scams. These can be difficult to spot, especially because there are so many copy trading “influencers” out there, some of whom have made millions from naive beginners.
Summary
To conclude, there are a lot of risks of copy trading that go unexplored in many corners of the online trading world. If you still want to use this option when heading into the world of trading, we can’t stop you — at the end of the day, it’s your decision. But perhaps that’s the crucial point here: learning how to trade is not a quick process, and requires critical and independent thinking. Even professionals make mistakes — the aim is to learn from them, rather than do everything you can to avoid messing up.
The majority of traders, especially those who have worked in a pre-internet era, will tell you that you should view trading as a business. As with any business, the first year is the toughest, and you will end up doubting yourself at certain junctures. Yet in reality, there is no quickfire way to be a great stock market trader. It requires putting in time and effort, getting to grips with a particular market, and building a strategy that works for you, and no-one else.
If you’re reading this and are still curious about copy trading, go in with an open mind, learn what you can — then go your own way.
