The rise of copy trading and three reasons to avoid it

For the inexperienced, trading can be a minefield. When you start out, naturally your trading knowledge will be limited. Consequently, you may like the idea of  leaving the market analysis and heavy lifting to somebody else. Then you can just sit back and  reap all the benefits of their work without any effort on your part. That’s exactly the attitude that has brought countless individuals into the world of copy trading.

Copy trading is essentially following the trades of another  trader who has been successful in the past. You replicate their actions, either automatically or manually. Then, in an ideal world, you relax and watch the same rewards pour in. If only it were that simple, though.

As Trade Nation explains, copy trading can quite easily go wrong: “Even the very best traders get things wrong, and if you’re copying them, their losses become your losses”. Here we’ll walk you through why, despite its popularity across many platforms, copy trading is often just a lot of hot air and false promise.

1. All is not as it seems

If you have already dipped your toes into the world of online trading, you may have noticed that many platforms give scores for certain traders. These scores measure their performance, the assets they trade and the risks they take. This is all to help you decide which traders to follow and imitate. The idea is that if you follow them, their successes become yours too. But these seemingly transparent indicators can be misleading. For example, a trader’s ‘returns’ are often taken from their use of a demo trading account, and not an authentic one — clearly an inaccurate measure of performance. After all, there are no emotions involved when you’re not trading with real money.

There’s also the danger of falling for copy trading scams which have increased in prevalence, particularly across social media platforms. In 2021, The Mirror reported how a 20-year-old had allegedly “conned victims out of £3.8million” by urging over 1000 Instagram users to join his copy trading scheme. He did this by styling himself as a financial influencer and luring in new investors with images of flashy jewellery, luxury cars and a lavish lifestyle.

It’s often the case that these so-called experts don’t have any success themselves, but their income is the commission they earn by getting unsuspecting traders to sign up for dodgy, unregulated businesses, trading  platforms and products.

2. It can go horribly wrong

It’s not just about unreliable platforms and fraudsters. The lure of fast financial gains has led many to look for ‘guaranteed’,  quick-fire solutions.

Take Derrick Clark, for instance. This 43-year-old businessman saw copy trading as an alternative to the trickier aspects of day trading, whereby users open and close trades rapidly in a single day. Despite carefully examining the data, Mr. Clark put his faith in following one trader with a reliable track record — and then the market moved in the opposite direction. While Derrick managed to close his account quickly, other’s did not — and went on to lose millions.

The secret that all those online ‘experts’ are not so keen to admit is that, in truth, no one individual can precisely predict how a market is going to behave. “The biggest illusion”, writes Patrick Hosking in the Times, “is that the past performance of a stock picker over a short period of time says very much about their likely future performance. Another is that there are huge numbers of traders making fabulous returns.”

3. You won’t actually learn to trade

In the beginning, you may get lucky and make a profit. The success stories of this largely passive strategy often go something along the lines of “I barely had to lift a finger and I made X amount of money”.

But at the end of the day, does that really do you any good? You might profit, you might incur losses – but will you actually know why? Just like copying someone else’s homework back when you were in school, blindly copying someone else’s strategy robs you of your trading education.

Any trader worth their salt will tell you that you need to treat trading as a business, not a get-rich-quick scheme. That means putting in time and effort to learn about markets and develop a strategy designed to keep your emotions in check. Once you’ve done this, you can  let your trading plan evolve from there. So read books, listen to podcasts, and keep yourself up to date with news from the financial markets.  Go against the herd instinct, and forge your own path. It’ll be better in the long run.

Written by Eric

37-year-old who enjoys ferret racing, binge-watching boxed sets and praying. He is exciting and entertaining, but can also be very boring and a bit grumpy.