Novice investors often look to copy trading as a sure win strategy to get a good return on investment (ROI). By following the market movements of successful traders with high-performing investments, they hope to be as successful as the traders they follow on copy trading platforms. Inexperienced investors or those who haven’t read a proper guide are, in general, unaware of the problems associated with copy trading platforms and how those problems may affect their investments and ROI.
In this article, we will look at the most obvious problems with copy trading platforms. These are the problems that novice investors are probably going to have to deal with when using trading on these platforms. In this article, the traders being followed will be referred to as master traders or masters, and the people following them as followers.
Problems with Copy Trading Platforms
Disconnected from Market Shaping Events
Copy trading is a form of automated trading that is not responsive to offshore (e.g., war, changes in securities laws) and market (e.g., news or events that may negatively impact performance of investments) risks.
Different Investment Goals and Strategies
Followers are at a disadvantage during trading because they may not know or understand the master traders’ investment strategies and goals. Any conflict between the followers’ and masters’ trading philosophies and/or goals can increase the risk of losses for followers.
High Performance = Poor Risk Management
Copy trading platforms rank masters based on their performance, not their trading strategies’ overall ROI. The problem is that high-performance strategies rely on poor risk management practices that can deplete the masters’ accounts and are likely to deplete the accounts of their followers, too. This often results in novice investors losing their entire initial investment and all of their gains.
Followers who rely on signals risk problems with their investments due to the following:
- Master signal traders may discontinue their signals without notice, and the followers do not have a back-up plan or signal to follow.
- Master signal traders may change their trading strategies, causing their followers to have an increased risk of loss in the market.
- Master signal traders’ trades may be stopped by their brokers because the drawdown on their accounts has been too high.
Technical risks are problems that can be caused by the operating system, server, software used to run the trades, and any other type of technology that is used to connect the masters and the followers. Things that could happen to you include:
- Signal subscriptions cancelled for lack of payment.
- Trading platforms go down.
- Followers’ accounts don’t stay in sync with the masters’ accounts because of insufficient funds to make the same investments or trades as the masters.
- Followers’ trading accounts get hacked.
Financial considerations relate to the costs paid by users of copy trading platforms. Platform users must pay a myriad of fees when they open and use existing accounts on copy trading platforms. These costs are not optional and often are not obvious to novice traders.
Novice traders often become aware of them when they try to withdraw funds from their accounts, close their accounts, or withdraw their bonuses. They learn too late that these fees significantly impact their financial gains and may even diminish their initial investment.
Some things to consider are:
- Cost of upfront fees, spread fees, and overnight fees
- Following masters may eat up large amounts of followers’ profits if the masters frequently trade.
- Masters may receive a percentage of their brokers’ commissions for trading based on their number of followers. This may be problematic for followers if the positions the masters hold are bad ones. In such cases, the masters’ accounts can be impacted, but the masters will still make a profit. The masters’ profits come from their percentage of brokerage fees received from the broker who handled their followers’ trades.
Lack of Diversified Portfolios
Lack of Diversified Portfolios often lack diversification. Usually, they concentrate their investments in specific areas that appear to be high-performing (e.g., binary options, forex, penny stocks) and don’t balance out their market risks.
Be Aware of Pips
Copy trading platforms have much more expensive spreads than other trading platforms. For example, they may have a spread of 3 pips for US/EUR trading. Whereas, a forex platform may only have one pip for US/EUR trades.
Bonuses are used to induce copy trading platform users to join a platform or even to continue trading on a platform. The problem is that the bonuses are not free money with no strings attached. Often, the bonuses are accompanied by limitations and restrictions that are only obvious when the platform users try to do something that is not in the interest of the platform founders and shareholders (e.g., withdraw their investment funds, withdraw the bonus).
Bonuses may be given for:
- opening an account on the platform
- using registered accounts on the platform
- referring a friend
- issuing invitations to join the trading platform on account holders’ personal social media accounts
The bonuses received generally lock in an investors’ initial account deposits. In addition, accepting bonuses makes it very difficult for them to withdraw funds from their accounts. It is common practice for the bonuses to be applied to accounts in increments and for the incremental payments to be made over an extended period of time. This is done so that the platform can recoup the full cost of the bonuses before they have been paid out in full. The platform recoups the cost of the bonuses from the investors’ trading accounts via fees charged for trading on the platform.
One of the trickiest parts of using copy trading platforms can be withdrawing funds from the platform. In theory, investors can always withdraw their funds. However, copy trading platforms have an added twist. Consider the following:
- Withdrawing funds can be a lengthy, time-consuming process on a copy trading platform.
- Account holders on copy trading platforms may be required to pay processing fees, which are not likely to be listed on the site. In other words, they must contact the site and speak with a representative of the platform to find out how much they must pay (in processing fees) to withdraw their initial investment.
- Withdrawal fees for accounts under $1,000 may be between 2.5% to 4.9% for removing and transferring funds to account holders’ bank accounts. When compared to other types of investment platforms, these fees are incredibly high.
Platforms may have account designations that require different minimum lots. Changes in a trader’s account designation can increase the trader’s chances of losing money. Be aware of the following:
- Account designations are automatically made by a computer program.
- As investors’ account designations become a higher priority, the amount of risk the investors are required to assume significantly increases.
- Investors can contact trading platforms and request that their accounts be changed to a lower designation.
Online Trading Casinos
Copy trading platforms generate huge profits for their founders and shareholders. Sadly, at least 90% of novice investors lose all their investment capital on these platforms. This happens because trading platforms have virtually no risk management in place and, generally, have unreliable risk management assessment ratings.
Baiting the Hook & Reeling Them In
Copy trading platforms draw novice investors to their platforms by giving them the impression that the platforms are a safe way to begin investing in the market and get a good ROI. This is done by creating attractive, persuasive, and professional websites that hoodwink novice investors. Inexperienced investors using these kinds of platforms perceive them as being user-friendly, having high ROIs, and being less risky than investing on their own.
Some of the common features of these websites are:
- Large social investment networks
- User-friendly trading software
- Platform trading academies
- Professional, polished websites
- Regular, smooth communication between the website and its platform users
- Strong internet presence
- Bonuses available to investors who join the platforms and who are active on the platforms on a regular basis
Novice investors often believe that copy trading is a guaranteed way to successfully invest in the market, whether it is crypto or stocks. They assume that by copying the market behaviour of successful traders, they too will be successful. Unfortunately, the assumption that the success of individual traders will rub off on or be automatically conferred upon them is naïve. This kind of thinking also causes them to mistakenly believe that they do not need to study the market and develop their own investing philosophies, goals, and trading strategies.
So, if you are considering using copy trading platforms as a way to invest in the market, familiarize yourself with their advantages and disadvantages. In addition, you should invest in a variety of investments with different levels of risk. Ideally, your low-risk investments will buffer your portfolio and prevent you from being wiped out by a bad market or trading day.