Copy trading is one of the most popular ways to make money in the forex market. It removes the barriers of expertise, knowledge and years of practice to gain a profit. Copy trading does involve risks in itself like normal trading. However, the magnitude of risk is much less as the strategy followed is of an expert trader. In fact, copy traders do unknowingly make some mistakes that makes them more exposed to losses and risks. This article covers mistakes that copy traders should avoid in order to enhance their profits.
Funding Of Accounts
When copy trading, the strategy of the main trader is copied by the clients (or the copy traders). However, those who understand forex trading will know that strategy making involves certain levels of risks and customised money management as per the individual trader. If the main trader whose strategy is being copied has an account balance of $100,000 and opens each trade with 2% of the total capital, it is not suitable for a copy trader with $1000 capital in their account to follow the main trader. Because, both the former main trader has a higher margin level and bigger risk appetite than the copier. He might wait in trades having bull-runs for too long that can go beyond the margin level of the copy trader and ultimately blow his account. A trader following the copy trading approach must fund his account according to the trader he wants to follow.
Leverage Used
Some brokers permit copy traders to double the outcomes by 2, 3, or even more. This temptation here is something that traders must avoid. The trader would undoubtedly be taking those positions himself if he believed he could get away with it. The duplicate trader’s account blows up while the primary trader continues to trade if he leverages the original trader’s lot size by four times and has a 25% downside. Some individuals believe they are safeguarding themselves when they use the trader’s highest drawdown to estimate how risk-free leverage is. This isn’t always the case. The copy trader needs to keep in mind that it really is only anticipation. The previous maximum drawdown is not permanent and is unlikely to occur again and again. A greater decline could occur in the future.
Choosing The Right Trader To Copy
Carefully choose a broker that offers ‘live’ statistics of traders who are open for clients to copy their trades. There are several trustworthy websites that provide statistics, but be sure they’ve been updated at least once per day. Another characteristic that the client must look forward to is how long has the trader been trading. Look for traders who have been trading for at least more than a year. If a trader has a past record of statistics for less than 6 months, it must be viable that the trader blows up his account every few months, deletes statistics, and begins all over again. When examining the trader’s prior performance, it’s vital to additionally look at the maximum drawdown levels and monthly growth rates.
Using VPS and MT4 Hosting
Sometimes we might come across traders who are living/trading from a different part of the world and having a completely different time schedule for trading than us. Sometimes, copy traders face this situation when trying to choose the best trader to copy trades from. As a result, the copy trader would need to keep his system on 24/7 or have trouble scheduling his time-table to the trader’s he wants to copy. Many large traders who provide the service of duplicating their trades integrate a virtual private server (VPS) or an MT4 Hosting into their offering to address this issue and save the copy traders from having to deal with the time zone issue. The copy trader only needs to determine whether VPS and MT4 Hosting are offered. If so, a fee must be paid in order to get the signal to initiate and finish trades in accordance with the main trader’s timing and plan.
Copy trading is a great way for a trader to diversify his/her portfolio and trade in markets without having expertise, knowledge and years of practice in it. However, it does carry the same risks as normal trading. Avoiding the mistakes, as stated in this article, would definitely reduce the risk percentage though. If a trader is not willing to risk his/her funds, he/she should go for demo trading.