In today’s episode, you’ll discover the truth about copy trading and what you must know.
So tune in to learn more…
Hey, hey, what’s up my friend?
In today’s episode, I want to talk about copy trading. If you’re into copy trading and want to learn more about it, then today’s episode is for you.
Copy trading is like a social media platform for trading, where you follow somebody and when he places a trade, that trade is automatically triggered on your account.
You don’t have to do anything. The account is tagged to the person you follow. If they buy, you buy. If they sell, you sell. That’s what we mean by copy trading.
So can you make money from this? Can you make a living from copy trading?
My answer to you (which you probably know by now) – is no.
And here are a few reasons why…
1. Conflict of interests
Let’s say I’m an influencer on the copy trading platform and many people are following me.
How I get paid is based on the number of followers I have. So the more followers you have, the higher you will get compensated by the platform provider.
If I have 100,000 followers and I hit a certain level, I’ll get a certain amount of money.
Compared to someone with 20 followers, of course the one with 100,000 followers is going to get much more money. You can see that the incentive isn’t to help traders become profitable. The incentive now is to grow their following.
But how do you grow your following? How do you attract new traders to follow you or your signals? It’s not difficult.
All you need is to have an equity line that goes up from left to right, going up every single week or every month and you have little to no drawdown. Your equity curve is very smooth, going up from left to right. This is going to attract a lot of traders.
You might be thinking:
“Okay Rayner, but that sounds pretty darn difficult to do.”
But no, it’s actually very easy. All you need to do is to a very small target profit. Let’s say if you trade Forex, you have a 5-pip target profit and you have to a 500 pip stop loss.
You can be sure that your equity curve line is going up from left to right with not much drawdown.
This is going to attract a lot of people who think this system wins most of the time with 99% win-rate.
This trading approach will offer you a very nice equity curve and it’ll attract a lot of followers to your copy trading account. But unknown to most traders, it’s just a matter of time before that system goes into a drawdown, blows up and loses everything.
At the end of the day, the ones who follow the influencer get hurt.
So there’s a conflict of interest down here. The influencer wants to grow his following so he can make more money.
And the easiest way to do so is just to use such a trading system with a very high win-rate, small target profit. But if your massive stop loss gets triggered, you’ll get wiped out of everything and more.
2. Wider spreads
On copy trading platform, the spreads are usually wider compared to the other brokers out there.
For example, you can just check a copy trading platform on the spread or the transaction costs for the trades that you’re making.
Compare it with another broker that doesn’t offer any copy trading and you’ll realize that usually those brokers which don’t offer copy trading, their transaction costs and spreads are tighter.
In the long run, who’s going to pay for this? It’s the people who join the copy trading platform. They’re the one paying for it. Although it’s not much on a trade-to-trade basis, when you amplify these to millions of trades, that’s a lot of money.
So number 2 is the spreads are usually marked up. if you’re a high-frequency trader, and you follow someone who trades a lot, you’ll be the one paying for those transaction costs.
3. Not understanding the trading strategy
Even if you follow a legitimate trader who trades using a sound trading methodology, you can expect the equity curve to go up and down.
It’s not going to be smooth, it’s not going to be comfortable when you follow him because when the drawdown comes and you’re losing money, you’ll have doubts on this guy.
Does the trading strategy work? Is it still working or has something changed?
Here’s the thing:
You might be following a real trader, but if you don’t know his methodology and how his strategy makes money, the slightest drawdown will cause you to press the panic button and you’ll bailout. You’ll never follow the trader and claim that the trader isn’t profitable.
You’ll likely find someone else who has a higher win-rate, has a better-looking equity curve. It’s a never-ending game, where you try to look for the next best thing, the Holy Grail but get burned over again.
So even if you find a trader who is legit, systems will have drawdown. If you do not understand the system or the methodology, there’s no way you’ll stick to it. You’ll just abandon it after a series of losses.
This is why I don’t believe that copy trading works.
If you’re involved in it be aware of the few points that I’ve just shared.
I hope it helps and I’ll talk to you soon.