what you need to know about copy trading
Copy trading is hugely popular since it helps the lazy trader to become profitable without spending time on trading. But, is it really that easy or does it need a little more explaining. Yes, you guessed it right, let me explain in this article if copy trading is something you should consider. Specially since we recently started this service too. But hey, let me be critical..
I will write about the following topics
- Definition of copy trading
- Does a strategy provider /platform needs to be regulated?
- Who are the traders
- How to read the track record
- Can I copy trade in my current broker account?
- Is there any latency?
- Popular copy trading platforms
- What are the cost
- Is copytrading profitable?
- Useful tips before starting
definition of copy trading
Copy trading enables forex traders to automatically copy trades that are opened, closed and managed by an investor strategy. It’s also called social trading.
An investors account is therefore linked to the copy trader’s funds account. Any trading activity like opening a position, closing a position, adjusting a stop loss order that is done by the trader is therefore copied by the investors account.
The copying trader usually has the ability to disconnect copied trades and manage them themselves. They can also close the copy relationship altogether. Copied investors are often compensated by flat monthly subscription fees on the part of a trader seeking to copy their trades.
is it a regulated service
In Europe, US, Australia and many more regions it is. But not all regions. In case a trader is managing other peoples account he or she needs to be registered as an asset manager. However, some copy trading platforms offer an “umbrella” which means that the trader himself does not need a license since the platform provider already is regulated. By registering a trading strategy, the trader automatically operates according to the regulation requirements.
In any way it is very wise to always check if either the trader or the platform is regulated. At least you will know that they play the game according to rules set by a regulator.
For example; if a traders advocates this: “join my managed account service and make 100% per month risk free” you probably have to do with an unregulated service. Now, is this a bad thing?
Not necessarily, because this specific trader might live in a region where a license is not required. This also implies that if you still go with that service there is no address to complain in case your account goes south.
Therefore you will see that we offer our algo copier service together with an FCA regulated asset manager.
who are the strategy providers
Would you be surprised if I told you that over 60% of forex traders uses a forex robot. Well, it’s estimated that this number is the same in the numerous copy trade platforms. So basically, without knowing you are fully exposed to forex robot trading.
Still, most traders use nick names and fake images and the coolest names like “fx guru” “ultimate money maker” – seriously? I feel so much more comfortable knowing the person behind the strategy, moreover it proves he or she really takes the credit or blame for it. However, it’s not said that real names will also give you real profit. Also here we simply recommend to use common sense before jumping into a strategy. Usually the proof is in the numbers.
How to read a track record
Unfortunately many forex traders only look at one thing and one thing only: how much profit can I make per day / week. These greedy people just click on a chart, see a very steep line up and think they found the best forex trader / strategy in the world. You couldn’t be more wrong. Cowboy, get rid of them Dollar signs in your eyes!!
So lets have a closer look at a strategy and see how to interpret the result. For this example we use a chart provided by FXBLUE.
This is basically the same as the “stress factor” of a strategy. How much can your account (equity) decline whilst copying it. Make sure you are aware of the risks of any system.
The profit factor is the ratio of the net profit versus the net loss (in account currency terms). This ratio shows by how much the profit exceeded the loss. For example, a value greater than 1 means the strategy has generated more profits than losses. If a profit factor is close to 2 or even more you might have found a good strategy.
number of trades;
This is very important related to the cost of copying the trades. A strategy that trades 5 lots daily in a $4K account can become very expensive. So calculate before starting how many trades you expect to do using a specific strategy.
How “old’ is the strategy. In case you can adjust the risk settings yourself and the strategy has a good description the time factor is of less importance.
Some copy trade platforms do not show the floating Profit or Losses. This can be extremely dangerous! Basically floating PnL means that even though you see a great track record, there could be still an open trade that is in a 50% minus. So make sure to check if the provider shows open trades or floating PnL.
Average winner vs average losing trade;
This is without a doubt my first number to check. Why? Because it proves if a trader makes similar mistakes based on emotion, just like the rest of us. For example; if i see average winners of $50 but an average loser of $200, it shows that the trader cuts profits fast and let the losers run. This will not give any returns in the long run, so best to stay away from those types of strategies.
can i copy trades in my current broker account
Now wouldn’t it just be fabulous to copy trades from a good strategy into your current broker account.
Well, yea.. but..
Brokers are not in this industry for fun only, they need to make hard bucks! So therefore most copy trading platforms are only connected to one specific broker. For this reason we are trying to connect as many brokers as we can to connect the best strategies to any broker account. This would save you the hassle of opening a new trading account.
is there any latency?
A lot of traders confuse copy trading with high frequency trading. Where in HFT a millisecond really matters and makes the difference between profit or loss, with a regular trade copier a few milliseconds do not make a lot of difference. However it really makes sense to check this with the copytrade provider first since if latency is a few seconds this can affect your trading results. Although all providers will talk about the super speed, it’s recommended to not have more than 100 milliseconds latency. We tested our copier many times and concluded that the average signal speed is 50milliseconds and therefore one of the fastest copiers in the industry.
Obviously a good internet connection is needed to reduce any latency issues.
how much does copy trading cost?
Typically a copy trade platform charges a marked up fee on the spreads. The strategy provider usually charges a profit fee based on a monthly basis. We have seen 50% profit share which kind of steep, after all, it’s your money at risk!. A pip mark up is ok, or a flat fee, since the technology does not come for free. Up to 30% profit share is not a bad offer if you get a responsive provider and a strategy with solid money management.
is copytrading profitable?
It would be unfair to say yes and neglect the self traders . I don’t want them to believe i am in favor of copytrading over manual trading. So in general I believe that following a pro trader will earn you more than doing it yourself. And I did not even mention the loads of time it saves. However, if you are a reasonable trader and you like to spend some daily hours in front of a screen to read and trade, copytrading is not your thing.
Besides the quality of the trader you follow it pays off to also check the trading terms. Some platforms charge over 3 pips on a eurusd trade which makes it hard to consistently make profits.
5 tips before getting started
Before you consider if copy trading is something for you, I made the following check list.
- is the strategy provider trading his strategy with his own money
- is the trader or platform regulated
- what are the cost
- can you adjust risk settings and overrule a strategy provider
- are you free to choose your broker
- For us a very important factor. Why does a trader think to make profit for you and is he or she not willing to put his own money at risk?
- Regulation is important and reduces the risks of plain lies to almost zero. What you see is what you get should be the benchmark and not false promises.
- Most platforms charge a little mark up, make sure this is not more than a pip. Also any profit share above 30% monthly we consider as overpriced.
- Make sure you can adjust the risk settings as well as determine the lot size. This ensures you to not over leverage your account.
- Many copy trade platforms push you towards their own brokerage. Be aware that not all brokers are aligned with you as well as the strategy provider.
So is copy trading a good idea or not. I think it is. Specially for newbie traders it can really help to understand different trading styles and learn from it. Make sure you don’t end up with a time bomb trader that has over 90% winners. That does not exist over the long run!
Some platforms are great for beginners and what a lot of people forget about is that copy trading saves TIME and stress.
So I would suggest to start with a small account and use the smallest lot size and to monitor it for a while. Do not forget that some traders are humans and tend to make the common mistakes that any other novice trader would make.
In case you have any question related to our trade copier, do not hesitate to contact us.
You might want to read Forex Robot Trading Explained.