Copy trading explained

Is it really worth it?

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Copy trading

When you were younger, did you ever copy someone else’s homework because you didn’t have the time or knowledge to do it yourself? Copy trading is basically the equivalent of that in trading terms. You find a trader who seems to know the ropes, mirror their movements, and hope for the best.

Obviously the aim of copy trading is to profit from other people’s good decisions. However, nothing is guaranteed in the trading world. Even the very best traders get things wrong, and if you’re copying them, their losses become your losses.

Copy trading can be automatic, meaning anything another trader does instantly applies to your account too. Or it can be manual a trader you’re following announces their positions and it’s up to you whether you follow their lead or not.

Is copy trading right for you?

If you’re a beginner with very limited trading knowledge, copy trading probably sounds like the perfect way to get started. Rather than investing time and energy into learning about the markets, you can just let someone more experienced take the reins and piggyback off their success. Sounds ideal, right? Think again.

Yes, things may go your way and reward you with profits you didn’t need to work for, but what if the trader you’re following isn’t as brilliant as they look and they get it wrong? What if they’re willing to take bigger risks than you’d ever dream of? You could lose far more money than you can afford. Worst of all, blindly following another trader means you might not understand why or how things went so wrong, so you can’t even learn from your mistakes.

In a nutshell, copy trading can be a very risky business, especially for beginners who aren’t yet equipped to make informed decisions.

What people think copy trading means

  • Copy an expert - Take advantage of another trader’s expertise so you can react to trends that would normally pass you by.

  • Save time - Instead of spending time educating yourself or watching the markets, copy traders who seem like they’ve already put the work in.

  • Diversify your portfolio - You can use other traders to get involved with unfamiliar markets you want exposure to.


How copy trading works

Automated copy trading:

As we’ve already mentioned, copy trading can be automated. This means you pick the person you want to copy and when they trade, you trade. Some platforms give scores for things like performance, assets and risk score to help you choose who to follow. You then select how much money to commit, and away you go.

First of all, the data ascribed to particular traders should definitely be taken with a large pinch of salt. Much of the time, a trader’s returns’ will be based on their activities using a demo account rather than a genuine trading account. Clearly this isn’t an accurate way to assess performance. Will this trader experience the same emotions when they actually put up their own hard-earned money? Of course they won’t. Success with make-believe money doesn’t mean they can walk the walk when it comes to the real thing.

It’s also worth noting that while you should be able to pause or stop the copy whenever you like, it could be too little late.

For example: Say the market isn’t moving in your favour but you can’t access the internet to exit the trade. You’ll be stuck and losses will mount until the trader you’re copying decides to back down. The power is entirely in their hands.

Manual copy trading:

Manual copy trading isn’t quite as risky as it’s up to you whether you mimic another trader’s position. However, if you blindly follow their every move without doing your own research, this could potentially be just as disastrous. You also need to be aware of copy trading scams on Instagram and other social media channels, where so-called 'experts' often tell people what to trade in order to secretly line their own pockets.


When copy trading works

Copy trading platforms will have top traders who tend to perform well, and when they do, all of their followers reap the benefits too. For example, Jay Smith, eToro’s No. 1 copy trader drives the investment decisions of more than 21,000 people with $40 million in assets according to Bloomberg.

However, Smith’s trading expertise means he is benefitting far more than any of the traders copying him. As an eToro 'Popular Investor’, he is paid up to 2.5% of the assets following him, pocketing $1 million as a result.

Smith has made an effort to get to grips with the markets and now knows exactly what he’s doing.

  • With that in mind, wouldn’t you rather learn how to trade at his level rather than simply following his moves
    without understanding why?


When copy trading doesn’t work

Of course, it’s possible that you could end up copying a trader who isn’t as flawlessly successful as they seem. This is something 43-year-old businessman Derrick Clark soon learned when he started copy trading.

In an interview with The Telegraph, he recalled how he carefully analysed all the data available until he found a trader who looked like a safe bet.

“I watched him for 10 months and he never lost on a trade,” Mr Clark said. “But then it went horribly wrong.” The market moved sharply in the opposite direction and while he was lucky enough to close his position quickly, he claimed that this trader “lost millions in live accounts”.

“It’s just not realistic to think that anyone can accurately predict any market the vast majority of the time,” Clark insisted. “In my experience every trader with a lot of followers will eventually crash and burn.”

  • This proves that even if a trader is on a good run, things could change in an instant. And if you’re copying them, your trading account will be drained too.


Is copy trading really worth your time?

Copy trading isn’t as instant as newbie traders think. Yes, you can trade without learning about the markets, but you’ll still need to spend a significant amount of time researching and examining data from trader profiles to decide who to copy. Even then, there’s still no guarantee they’ll make the right decisions on your behalf.

Surely, it’s better to spend this time learning to trade yourself so you can have full control over your own money?

Plus, 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. Similarly, you won’t understand your copy trading losses or know how to stop this mistake from happening again. The thrill of trading comes from learning and experimenting, analysing and improving.

  • Copy trading means you’ll win and you’ll lose, but you’ll get nothing else the world of trading has to offer.

Blindly following a trader who may not be trustworthy is obviously a huge risk.

However, there is nothing wrong with using insights from regulated industry experts to inform your decisions.

Trading signals that help traders up their game

These are called trading signals, which are suggestions alerting you to trading opportunities based on either human analysis or mathematical algorithms. Such insights can help beginners learn new strategies, but of course there’s no guarantee they’ll actually pay off.

Here at Trade Nation, we are very proud to be partnered with Signal Centre, the only major trading signal provider authorised and regulated by the FCA. Every signal comes from an unbiased professional conforming to the FCA’s strict criteria, and includes a detailed explanation showing how the idea was formulated. This helps you better understand such analysis so you can improve your own trading strategies. Remember that signals are guidance not trading advice. Every trade carries risks and could result in losses.


Our platform and signals

We offer a practice account where you can give trading a go without risking your own money, but you’ll need to sign up for a live account to access our premium trading signals. However, as there’s no minimum deposit, you can see how these signals work without committing any money to your account. That said, you won’t be able to trade without making a deposit.

How much do you need to trade with us?

We recommend no less than £500 to access most markets, but ONLY if this is money you can afford to lose.

You can also place orders to limit potential losses, so you’re always trading in line with your risk appetite. And if you need any help, our friendly customer support team is here to lend a hand 24 hours a day, Monday to Friday.

Join our nation of traders

Financial spread trading comes with a high risk of losing money rapidly due to leverage. You should consider whether you understand how spread trading works and whether you can afford to take the high risk of losing your money.