Copy Trading: Dos, Don’ts, and How to Avoid Common Pitfalls

Online Trading » Forex Trading » Copy Trading: Dos, Don’ts, and How to Avoid Common Pitfalls

Copy-trading provides unique opportunities for skilled trades to display their talents to the world in a way that was only previously available to consecrated traders of the giant investment banks. Copy-trading broke down barriers and exposed a whole variety of trading strategies that were previously hidden. 

Trading is indeed a promising avenue for investment. But as with any other form of investment, it can be quite perilous for your capital. Not to mention that any trader that promises you anything different can very easily become your worst foe. The great thing about knowledge is that it offers you the means and tools to handle any situation that comes your way. In that case, understanding the risks that are likely to come your way will help you know how to avoid them or reduce their effect. In doing so, you will be ready to copy trades in a much more effective way. 

Not only that, but you have to be aware of the possible blunders that every novice copy trade makes. This will help you overcome common pitfalls that can ruin your trading practice. Read on to learn what you should avoid as you start copy trading: 

How does copy trading work? 

Contrary to most inexperienced beliefs, copy trading isn’t as dependent on the information provided by other traders as it is dependent on their actions. Simply put, copy trading allows new traders to copy the action done by other traders. In order for the process to be considered copy trading, you will need to copy a trader that’s using the automatic system offered by the platform you’re using. 

For instance, the process it’s called copy trading when you link a part of your portfolio with the portfolio of a trader of your choice. Once you become a copy trader, all their opened traders are copied to your account. What’s more, all of their future actions will be automatically copied to your account, as well. You will be encouraged to choose a sum to invest in a certain trader. There are many reliable FX brokers that offer copy-trading service on which you can count on, but it depends on everyone’s trading needs. Most of the time, the sum will not exceed 20% of your portfolio. All sums used in the trades are an estimated percentage of the trader’s portfolio based on the sum you chose to invest. 

Not Supervising Your Portfolio 

Novice traders look at the strategy as an easy way to get money. And who can blame them? Unfortunately, copy trading isn’t something that you just prepare, set up, and forget about, only to remember it when you want to cash in your winnings. 

Professional copy traders recognize the value of time. They know success isn’t something that comes while you’re laid back. It comes in time, with constant vigilance and effort. You need to monitor your portfolio constantly to ensure that your signal provider is still making you money. But how? By doing your own research, keeping up with an ever-changing market, and identifying trends. And the list goes on. 

As a novice trader, you will have to stay active and aware of what’s happening to your portfolio. That doesn’t mean you should transform trading into a full-time job because then it will lose its convenience. But it’s still essential to strike a balance. In doing so, you will continuously monitor your trading account’s advancement while still recognizing and dealing with the challenges that come your way. 

Not Understanding the Signal Provider’s Strategy

While searching for the best signal providers to follow, you will certainly run into some that have seemingly remarkable performances. The chances are, you will be attracted by the perfect equity line, winning percentages, steady daily profits, and no drawdown.

However, it’s imperative to recognize very early that these performances are nothing more than smoke and mirrors. Not everything that sparkles is gold, so there’s a big chance these types of trades are sure-fire route straight to failure. Believe it or not, some trades are based on sneaky and dodgy techniques that will cause you more harm than good.

The thing is, you will notice some convincing results in the short run. But these strategies are not suitable in the long term. Sooner or later (most of the time, it’s sooner), you will face discouragement that could abolish your short run-in copy trading. To avoid that, it’s much better to focus on small but modest profits. You might see it as a drag since the whole point of copy trading is to get quick money. But if you plan on making a long-term career out of copy trading, moderation and patience are skills that will serve much better.

How Much Money Should You Commit to Each Signal Provider?

Most certainly, you will be working with more than one signal provider. But that will make you wonder: how much money should you assign to each? 

As a beginner copy trader, you need to understand how to distribute your capital across different assets. But to do so, you will need some criteria that will help you do this in such a way that will help you maximize profits, minimize losses, and maintain optimal risk. If not, you’re likely to assign more capital to more uneven assets and less to the reliable ones. 

Lack of Familiarity with the Social Trading Platform

One of the most common mistakes novice traders make is delving through copying trades right after joining a certain trading platform. Rather than trying to replicate top-notch providers, why don’t you spend some more time on research?

In doing so, you will avoid common pitfalls or overlook a small setting change that could cost you a lot of money in the long run.

A smart and straightforward way to get it right is to join the best social trading platforms. There are plenty of them. For starters, you can join the Real Trader Community to get the best community advice, as well as access to successful traders.

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