Forex trade involves the buying and selling of securities in the securities market. Forex trade is exciting and mostly requires one to have trade skills plus the capital to perform the trade.
It is worth noting that returns in forex exchange are never a guarantee. On the contrary, it often depends on one’s skills and thorough understanding of the exchanges. However, the new trading phenomenon commonly referred to as copy trading is changing the forex trade.
Copy trading involves mimicking the trades of an expert trader by a forex investor. This type of trade takes place in a copy trading platform. Most times, there is nothing much that a follower trader does, other than copy another trader’s trades and trading strategies and implement them in his or her trades.
Most copy trades are often successful and generate great profits for the trader. Most beginners opt to copy trade since it does not require any skill to implement. All one has to do is look through the market for expert traders who experience wins in almost their trades, and copy their trades.
Unfortunately, copy trading does not sometimes bring about profits but losses. This can be very discouraging as you may not get to know the cause for the loss as the trade was mimicked. The losses incurred can be too much given the level of trust an investor has placed on a trade.
The losses incurred in copy trading are attributable to the following factors.
1. Unrealistic Expectations
Copy trading is attractive to most investors because of the high possibilities of making mega returns from investing very little. The returns are expected to accrue within a very short period.
Most promotional adverts brokers plus other social trading platforms utilize are often focus on the huge returns one will get from putting money in the trade. Also, there is often a ranking of the highest earners in the forex market.
The analysis of the top-ranked expert traders often illustrates gains of over 100% to over 500%. The motivation behind every forex trade is often the returns to expect. Hence, most copy traders jump into the trade expecting too much, without considering the possibility of the trade failing.
2. No Patience
Copy traders are often quick to trust and embrace trading strategies. They do so without carrying out thorough research to determine the viability of the expert traders’ strategies. As such, losses are uncontrollable and can occur with any trade.
You should consider giving a trader a reasonable period for them to prove their trading strategies before you can mimic them. Also, monitor the copied trades to know how the trade is going through observation. You will be able to predict the trade’s outcome.
3. No Effort
Copy traders invest very little of their energies in forex trade. Very little to no research is done, and traders know that as long as they have a broker to trade on their behalf, all they need to do is signal the trades they want to be copied.
Most expert traders are risk-takers and would employ extremely high-risk trading strategies. Hence, copying such trades and not monitoring how the trades are performing, or even looking at the comments and results from such trades, ultimately result in failed trades, hence the huge losses.
A system that produces consistently high returns does not mean it is perfect. You will still require to show effort by doing some bits of research and monitoring the trades.
4. No Diversification
Diversification involves splitting your money and investing in various securities, trading systems, and signal providers. Using all your money to trade in one system or with one signal provider is risky and could easily result in great losses in case the trade fails.
Thus, to minimize losses, copy traders should consider spreading their money among different traders. Also, as a forex trader, you should learn to diversify your portfolio so that when one fails, the other augments the loss.
Moreover, you may want to consider investing in different copy trading platforms or networks, and not sticking to just one. Trading platforms or networks are different. Each has its pros plus cons.
5. Poor Risk Management
Risk management is key to successful forex trades. However, poor risk management arises at any given stage of trade and result in exorbitant losses. Most copy traders copy trade without considering the level of risk of the trades.
Copy trading can be very promising. At the same time, it can be a great nightmare to forex traders who are not keen enough. Some of the reasons for the losses occasioned in copy trading include poor risk management, the lack of diversification, lack of patience, not exerting more effort in the trade, and finally, having very unrealistic expectations.