As Copy Trading has increasingly become a more familiar term to investors, the new age of Social Trading has reached its peak in popularity, emerging as one of the quickest and easiest forms of earning extra money. But how much can you actually earn? What are potentially the greatest threats to its success?
With a lot of marketing ploys from social trading platforms and advertisements, there doesn’t seem to be a neutral ground to find out exactly how profitable Copy Trading can be. I am going to look at a few of the industries top influencers to see just how profitable following them can really be.
Malsolo – eToro
Gathering a large following from Social Trading, Spanish trader Malsolo, has been one of eToro’s most well known top performers in 2012 and 2013. If you assigned $1,000 to him on 1st June 2012, a month later your net performance would have been $1,292. Over a year, you would have resulted in a net balance of $1,637. With investors seeing over 50% return in only a year, this would have outperformed nearly every investment product out there, making it a very wise and profitable decision to follow him.
Like most, it was only a matter of time until the bubble burst for Malsolo. With stop losses at 2000 pips difference and open trades generating huge losses, it was risky business being one of his copiers. Since his peak in 2012/2013, his performance has tended towards a downwards trend. In February 2015 he lost 45% of his equity. That month over 4,000 people who copied him lost close to 50% of their investment.
Looking through his profile of recent trades, Malsolo is not very communicative and hardly responds to comments from followers. This makes the whole Social Trading experience less personal and trustworthy, unfortunately, a common characteristic of some popular social traders once they are reaping the rewards of being copied.
So this is a prime example of where good research, good timing, and luck can make you a lot of money. Choose wisely where you invest. You are wrong to think that the most popular traders are the most successful and everyone else must be copying them for a reason. This is often a ‘chain’ following effect that happens from people who have been on there for a while, gaining more followers due to their existing popularity, as opposed to current results. If a social trader is reluctant to answer questions, or has generally been performing poorly and has evidently ‘burnt out’. Take the hint and accept that ship has sailed.
Basic understanding is always a good idea
It is recommended that a basic understanding of markets, pips and the process of Trading are a good idea before entering into the world of Copy Trading. Despite success depending on the decisions of the expert, it is down to YOU to choose who to invest in and for that reason, it is good to have at least an idea of what your comparing, as opposed to who’s currently at the top of the most copied table. Spotting a good and consistent trader to copy is the key and it can be as simple as setting up an account, picking a trader and clicking copy to earn. However, understanding what you are actually putting your money into can save you from a stretch of bad luck and losing money by a top performing trader burning out.
Past Performance is not Guaranteed
Bad luck is just one of those things you can’t escape from. Markets change very quickly and a strategy that once worked for one investor can suddenly lead to high losses. Sometimes, it’s the opposite and a string of good fortune can result in hundreds of traders appearing in the leaderboards of certain platforms and will be soon followed by many. The Copy trader will not know whether they have been successful because of skill, knowledge, experience or sheer luck.
Investing vs Gambling
Both Trading and gambling attempt to create a capital gain in a short period of time, both are unpredictable and fundamentally carry risk. Unlike Trading, Gambling has a fixed odds system for all major games, trading is genuinely unpredictable, serving to potentially make greater gains. Gambling is often based upon statistics, whereas trading requires different forms of analysis, calculations, and strategies based on market behaviour to ensure success. This is what essentially makes trading a good investment – it is based on analysis and research, not simply a roll of the dice.
Managing the risk of your account is one of the most important things for a successful trading strategy when Copy Trading. It’s important to note, that when you allocate a proportion of your investment fund to a selected trader, the leverage and risk that the trader selects for their account will automatically be copied proportionally to your allocation in them. For nearly all sites, the only way you are able to control the overall risk level of your account is by changing the amounts you devote to each trader.
Most sites now allocate a risk score to traders profiles which incorporate the choice of instrument, leverage and the amount invested in a single instrument, to enable a digestible method for beginners and those with no prior trading experience to be able to understand the risk of the trader that they are committing to.
When choosing your investor, analysis of their previous trading history is a must. Not only to see a track record but also to see if their style and strategy fits what you are looking for. Whether that is prioritising low risk for sustainable growth or high returns gained from volatility and high risk. What’s most important is being aware and fully understanding who you are trusting with your money.
It is OK to be unsure. Most platforms have Demo Accounts which show you exactly how the process works, working in real time with results from real traders. Unlike the real thing where you are using your own investment funds, a Demo Account allows you to learn without touching your own money. It is definitely recommended for beginners when starting out, allowing you to get to grips with everything before misallocating funds or making bad decisions.
Ultimately, Copy Trading has made life easy for those looking for a sizeable return on investment and those wanting to start learning to trade – without months spent studying the economic market. Copy Trading can be very profitable if you catch onto a good trader, but it is also imperative that you learn to manage the risk of your account and know when to back out.
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