Common Risk of Copy Trading

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Common Risk of Copy Trading

Traders can instantaneously copy the trades of other successful traders using certain forex brokers (also known as copy-trading brokers or social trading brokers). Experienced traders simply broadcast their trades live, and individuals who follow them can have those trades duplicated to their accounts, though with some risk level. As forex copy trading becomes more popular, traders should consider the following benefits and risks associated with copy trading.

If you follow erratic traders, you may lose money.

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Some people may portray copy trade as always being easy and profitable. There’s still a good chance you’ll copy a series of terrible deals from an unpredictable trader. As a result, you should extensively examine an account’s trading history before deciding to copy it to your own. Worse yet, some traders start off well with seemingly huge gains right away, but there are a lot of deals that have high downsides concealed below the details. Always look at the trading frequency and find out how long it takes some traders to settle poor trades.

A dishonest broker may suggest the wrong traders

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Before selecting a certain trader for you to follow, a professional broker who offers copy trading services would go the extra mile and assess the consistency of performance. Unfortunately, some brokers do not perform their due diligence and may quickly offer an account without thoroughly researching it. Instead of a trader who has had a brief period of big earnings, a serious broker should only choose traders who have a lengthy history of moderate but consistent profits.

If you mirror trades from too many accounts, you risk overtrading.

 

When you follow too many mirror accounts at once, you risk overtrading. Diversification is beneficial in moderation, but too much of it can harm. People used to lose money or make poor decisions while trading alone because they would start too many positions in a short period of time. When you run a duplicate trading account, the same thing can happen because all of the other traders’ actions, including prospective drawdowns, are reflected in your account. Reduce the number of accounts you track for trades as much as feasible, and adjust the mix as needed based on their performance.

There are no independent perspectives

silhouette photo of a person standing near wall in dark roomOther traders’ opinions are not necessarily independent, which can be a serious issue for inexperienced traders who are taking a big risk by having to listen to other traders.

Expectations are excessively high

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When it comes to copy trading, the possibility to generate large gains with little investment is a major draw for most people. As a result of these great results, people’s hopes are increased. However, many people are unaware that by boosting their prospective gains, they are simultaneously increasing their possible losses.

There isn't any diversification

silver and gold round coins in boxThe vast majority of new traders invest their whole portfolio in a single trader or signal provider. Every network has a different set of traders to follow and copy, so diversifying your investment over a number of traders can help to reduce overall risk.

Poor risk management

man walking on string over the hill during daytimePoor risk management can take many forms, but the end result is nearly always severe losses. Even if the trader copies five other successful traders, the danger of losing all of his or her money is very great if the trader does not set a limit on how much money can be lost.

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