Copy trading is a form of investment that involves the commitment of a given amount of capital to trade. Many may think that there is no risk involved with copy trading since it involves the replication of another trader’s performance. However, that is usually not the case. Copy trading, like all other investments, has risks.
Some of the risks associated with copy trading are as follows.
1. Not Having the Knowhow of the Platform’s Operation
The first step towards successful copy trading is learning the copy trading platform. Research and educate yourself on how the platform operates before you commit your hard-earned capital in the trade.
Proper preparation is everything when it comes to copy trading. It can be very depressing to keep losing trades, especially those which you have replicated from an established winning signal provider.
There are various copy trading platforms in the market. The internet is the best place to learn and educate yourself on anything regarding copy trading. Hence, perform your research, and enrol for a demo account to practice what you already know about copy trading, before committing your money to live copy trades.
As a beginner copy trader, you have very little money to commit to the forex trade. Thus, research and learn copy trading, plus how a given platform operates before commencing the trade.
2. Overlooking The Risks Associated with Signal Provider’s Technique
Your decision to copy trade will involve finding the best signal providers. Most times, you will encounter signal providers with impeccable trade performance. Their trades may depict pure wins with a smooth equity line, with constant daily profits.
You may be tempted to replicate this signal trader because of the huge profits you stand to gain from the successful trades. However, what is not clear is the strategy or trading technique the signal trader utilizes on the trades. You can only guess that the strategy is promising.
However, assuming that the signal provider’s trading strategies are riskless based on the wins attained, is a big mistake that can cost you big time. The strategies may give false hopes of generating huge returns in the short run. However, the profitability may not be equally sustainable and may result in great losses in the future.
Therefore, there is a need to study the signal provider’s trading techniques, taking note of all risks related to the trading techniques. Doing so aids in the elimination of copy trade losses.
3. The Inability of Knowing the Capital to Allocate to The Trade
Knowledge on how to split trade capital is key in maximizing profits by minimizing losses and establishing optimal risk. Hence, it is vital to know how to properly split your capital into various investment portfolio.
Investment diversification in forex trade is paramount. It ensures that you end up with a given level of returns even when the market is not doing so well. Investment diversification ensures you do not commit all your capital on a single investment.
However, forex traders, especially the beginner traders experience difficulties when splitting capital to various portfolio. Hence, learn how to slit capital to your various assets so that you avoid losing so much in case of a losing trade.
4. Uncontrolled Portfolio
You must learn how to balance your portfolio as you perform various trades. You can be sure of being able to get a balance in your portfolio over time. You cannot trade once and think that you now know how to put together certain portfolio for trade.
Also, doing it full time is not recommended for the trade. Hence, find a trade balance to enable you regularly observe the advancement of your trade fund, in addition to learning how to tackle any trade adversities that come your way.
You may decide to be a day trader, night trader, or perform trades at a particular time of day. Also, you may want to perform your trades when you think the chances of winning are high, and the returns are worth it.
Conclusion
Copy trading is a great trading technique that somewhat guarantees successful trades. However, one must be careful not to assume copy trading to be riskless. The above-explained risks are common with copy trading, which must be taken into account.