Copy Trading 5 Facts You Should Know Before Investing Your Own Money
Estimated Reading Time: 27 minutes
- 1. Five Facts You Should Know Before Investing Your Own Money – Introduction
- 2. Copy Trading Five Facts
- 3. Copy Trading Appendix
- 4. Appendix – Alternative Passive & Own Trading
Five Facts You Should Know Before Investing Your Own Money – Introduction
Why Do We Use Copy Trading To Earn Extra Money?
Our site intends to provide you with the smart ways to make money on the side. Firstly, in case you haven’t read Three Clever Ways To Diversify Your Income For A Rainy Day, suggest you do so because it explains the whole background & rationale behind why you need Extra Income from Passive Financial Trading. Anyhow, let me quote a point as follows;
Copy Trading Five Facts
Now, let me start listing and explaining 5 simple facts, which you should know before investing in copy trading and may facilitate you to start it accordingly;
Fact 1) Copy Trading Market Potential
What’s All About Copy trading
Firstly, in case you’re not familiar with Social Trading or Copy Trading, please take a look at Three Practical & Safe Ways To Succeed In Passive Forex Trading; But very briefly, Social trading companies allow investors to automatically follow the trades from traders they believe to be profitable via copy trading software, of which process is called “Copy Trading" i.e. auto-trade. In the copy trading, you do not need to make any input at all on all trades but the professional trader who you copy makes every single decision and you basically get the identical returns on the trade as the traders does on their personal account. Therefore, Copy Trading (or Social Trading) is one of the easiest way to utilize the expert’s knowledge & skill in various financial trading including Forex.
I want to share specific numbers in this industry though, unfortunately, there are very little numerical data related to the market. However, let me pick & mix a few reliable information to provide you with some insights on how this industry has been growing & could be evolving down the road.
Overall Market (Germany)
Phillip Capital, Singapore based securities research firm summarized ayond ltd business (ayond is 1 of the top social / copy trading platform companies) including industry analysis in Aug 2018. I believe sharing their data & charts would shed some light on the market.
Customer / Trader (UK)
Let me take some consumer (trader) related research result numbers from the press release from ayondo themselves;
- One in four investors say they are considering Social Trading in 2018
- A third (33%) say a traditional stock market approach is over-complex, which can be simplified by automatically following Top Traders
- Social Trading allows investors to follow experts’ moves, meaning they can effectively trade the markets without excessive time-commitment
- The model appears to suit most investors. 52% say they always seek advice from experts or peers before making any decision
Social Trading Platform (Market Leader)
The below infographic (100M Positions) gives you a snapshot of eToro, the market leader of copy trading.
This is relatively old data of 2014. The remarkable point is that eToro celebrated 50M trading positions in the previous year, means they doubled trading positions less than a year, huge growth. As long as we see from eToro Income Statement; etoro income statement Revenue shows sky rocket from 416k in 2015 to 2.1m in 2017, that proves continuous rapid growth of customer base. Geographically, in 2014, majority of the trading came from Europe & Asia and North America contributed only 10% due to the eToro’s limited trading license. However, in 2018 eToro opened its doors to the US market, yes, copy trading USA via eToro started and a gradual rollout among the states is planned (see eToro Explanation), which again enabled them to achieve massive revenue growth to 8m in 2018. All the above numbers prove the Copy Trading System has caught on with the implication that it’s working.
Fact 2) Copy Trading Research & Comments
There are several academic & business research or key comments from influential conference related with Copy Trading, some of them are;
- MIT Computer Scientist and researcher Yaniv Altshuler described social trading networks as complex adaptive systems, and in his 2014 research on eToro’s OpenBook, wrote that “Having the inherent ability to share ideas and information between each others, OpenBook’s users are given a new source of information they can use in order to enhance their trading performance. As the users are not playing against each other but rather – against the market, this situation becomes a non zero-sum game, hence incentivizing the users to share as much information as possible." His paper concludes that “social trading provides much better opportunities for profiting compared with individual trading," but that users make “excellent but sometimes not optimal decisions in selecting experts when they can see others’ choices."
- A 2015 World Economic Forum report described social trading networks as disruptors, which “have emerged to provide low-cost, sophisticated alternatives to traditional wealth managers. These solutions cater to a broader customer base and empower customers to have more control of their wealth management,"and “pose a tangible threat to the traditional practices of the wealth management industry".
- Economist Nouriel Roubini's thinktank predicted in 2016 that “newer forms of investment, such as socially responsible investments and social trading" will bring some of the largest industry growth in the coming years."
- A 2017 St. John’s University study found that 'leader’ traders, or those with followers, are more susceptible to a phenomenon known as the disposition effect than investors that are not being followed by any other traders, with the authors suggesting the observation may be explained by “leaders feeling responsible towards their followers and an urge to not let them down, by fear of losing followers when admitting a bad investment decision and signaling confidence in their initial investment choice, or by an attempt of newly appointed leaders to manage their self-image."
- We classify copy trading as portfolio or investment management where no manual input is clear from the account holder. This entails standard regulatory obligations for authorised management.
- We support the view set out in the question nine of European Securities and Markets Authority’s (ESMA) MiFID Questions and Answers: Investor Protection & Intermediaries (PDF, 15 pages) as to how copy and mirror trading fit within the MiFID Directive. It considers them an automatic execution of trade signals.
Fact 3) Is Copy Trading Profitable?
Related to the above MIT study, MIT Professor Alex Sandy Pentland said in the Deloitte Interview that “For instance, social learning on eToro’s trading network can improve the user’s return on investment by about 30 percent, which is huge. And this has been tested over millions of people, several years, and tens of millions of trades.", quite interesting (see Further Details). Besides, let me excerpts key points from HBR (Harvard Business Review) report titled “Beyond the Echo Chamber" by this professor Nov ’13 issue, which summarized the MIT Media Lab research on eToro as follows;
The report continues;
Fact 4) Copy Trading Best Platforms
As said before, in this industry, there are very little numerical data to conclude which platform is the best based on the numbers. However, let me share aforementioned Phillip Capital’s same research data about ayond business in Aug 2018, I’ll share their data & charts as below; Regarding the industry competition, it says;
The comparison of key features among Social Trading Platforms shows below, which may help you decide which platform best suits you; From diversification point of view, you may consider having a few platforms rather than focusing on single platform.
Fact 5) Copy Trading Risk Management / Best Practice
Some of the popular copy trading site said 67% of the copy trader lost, because of very common reasons such as Poor Risk Management / No Diversification / No Patience / No Effort / Unrealistic Expectations. Means, even copying the experts fails. So, risk-management is essential. Here is how you can start your copy trading, importantly, don’t put your hard-earned money from the beginning, but start up with demo account Risk-Free.
1. Review & Select the Social Trading Platform:
Although they all broadly work along the same lines, there still differences shown in the above comparison table. You may want to carefully review key elements though, for newbies, given the established reputation, starting with eToro or ZuluTrade must be the safest approach if your residence is allowed to open their account. Suggest go through our guide :
2. Decide & Open FX broker:
If you already have your own Forex broker account then need to check if the broker is supported by the Social Trading Platform you choose (for eToro, no other choices but you need to open its own broker). In case you don’t yet have any Forex Broker account you should first check which brokers are the partner brokers. In order to ensure you chose the right broker, you may also visit my articles of 【 Select Trusted Forex Brokers With No Hidden Agenda 】;
3. Set Your Own Trading Strategy:
Copy trading may not require technical trading knowledge but it is important to develop a clear strategy on how you will allocate your trading funds and risk tolerance which would be a basis to select the trader you copy. For this purpose my separate articles of PAMM Investment Ultimate Guide – 7 Secrets To Find The Best Account must help you;
4. Open Your Account in Social Trading Platform:
Surely you can open multiple accounts with different sites. Opening account is usually quite simple by just filling out the online registration form and you do not need to deposit any money at this stage.
5. Start with Demo Account:
Strongly suggest that before going into real money trading, start a dummy trading in demo account where you will be able to trade with virtual money. The conditions will represent real market returns, therefore simulate your planned real trading, means if you intend to invest $500 then set $500 rather than any other amount like $10,000. Using the demo account, start copying a number of traders and follow their progress closely for the duration of your demo period. Track how their trade decisions turn out to be correct. Don’t switch to a real account until you start making a profit on your demo account comfortably.
6. Research & Identify The Traders You Copy:
Needless to say, the most crucial thing is to choose the right traders to copy. You may want to check the number of followers to each trader disclosed in the Social Trade Platform site, which is an easy & comprehensive indicator of how good that trader might be. However, never ever count on only this number. First, don’t pick a single trader and follow the rule of diversifying your profile by picking up multiple traders to follow. A single trader isn’t supposed to make winning trades all the time so minimize your risk of loss by following multiple traders who use different trading strategies and tactics. Traders vary wildly in their approaches and strategies, thus try to get familiar with their trading style and analyze how they perform in different market conditions. You can find out more about a traders style by checking their profile and their trading history. Do they have more smaller, consistent winning trades or are there a few huge gains with many losses? These are a sort of things you need to check. Review their drawdown rate to see how many people have stopped following that trader as well. If a lot of people have un-followed a trader, it shows that they tend to make a lot of wrong decisions. Create a risk profile of the trader and match it with your own risk profile. To ensure that you only take risks you are ready to take, select traders whose risk portfolio matches your own. You can’t simply pick up a random trader and start following them in the hopes of making winning trades. So, get your strategy in place and practice with demo accounts before you actually start copy trading with your hard-earned money.
7. Start Trading with Real Money:
Once your dummy account starts seeing consistent profits, you can then deposit real cash into your account and begin trading for real. Some social trading sites offer bonus cash when you make a first time deposit – this can be a good way of raising the amount of capital you have to trade with.
It is strongly advisable for new traders to limit early investment, choose risk and leverage carefully and take up the opportunity to copy several traders so any losses may be balanced out.
Copy Trading Appendix
Copy Trading vs PAMM Account
Both are basically passive though, there are a few differences.
PAMM Advantage over Copy Trading
No Latency / Slippage: although PAMM trader only accesses to his own capital within the entire pool of funds, his whole trade size is automatically “scaled-up” in exact proportion to the full amount that’s allocated to him by his investors. On the other hand, copy trading is first executed remotely by the expert you copy then replicated a few instants later in your account. This small delay may not result in the same entry or exit level as the trader you copy. The problem is worsened if you’re using an entirely different broker to the trader. These slippage problems should not happen with PAMM (provided the software works) because the trader’s account is one “big virtual pot” so to speak.
Copy Trading Advantage over PAMM
As briefly said before, Social Trading Platform for Copy Trading offers many investment opportunities other than Forex, including Copy Trading Stocks, Precious Metals, Indices & Options etc, while at this moment in time majority of PAMM is Forex (Managed Account generally offers various tradings, but unlike PAMM it requires big minimum investment), so from perspective of diversification, Copy Trading looks better.
Appendix – Alternative Passive & Own Trading
Other 2 Passive Tradings
Copy Trading belongs to Social & Copy trading that is the 1st of 3 Passive Trading, the others are;
If you’re skeptical about trading Forex PASSIVELY, then suggest you first read the below report;
【 3 Practical & Safe Ways To Succeed In Passive Forex Trading 】 , which gives you good insight on how it works.
Forex Own Trading
For those who still would like to pursue self-trading, strongly suggest you go through:
These reports comprehensively explains how you can evolve Forex Trading successfully by using world top class tools & the full list of them. It includes the introduction of Trading For A Living: Lucrative Trading Business, Travel the World, And Work For Less Than 20h/week.
Not all Forex brokers nowadays are regulated by appropriate financial regulators in their countries. It’s important to pay attention to your broker’s regulatory status, as it’ll determine the level of security and protection of your investment. However, don’t think that unregulated brokers should not be used. There are many Trusted Unregulated Brokers that intentionally being unregulated in order to provide better & more economical trading conditions, see some of them in Latest List Of Offshore Forex Brokers Accepting US Citizens Reasons Why;
Forex Regulation & Forex Regulatory Bodies By Jurisdiction
Anyhow, we are listing the Regulators for Forex Trading in each countries for your reference;
UK / Europe
- Anguilla: Anguilla Financial Services Commission
- Antigua: Easrnte Caribbean Securities Regulatory Commission (ECSRC)
- Australia: Australian Securities and Investment Commission (ASIC)
- Azerbaijan: State Committee for Securities (Azerbaijan)
- Belgium: The Financial Services and Markets Authority (FSMA)
- Bulgaria: Financial Supervision Commission of Bulgaria (FSC Bulgaria)
- Croatia: Croatian Financial Services Supervisory Agency (CFSSA)
- Cyprus: Cyprus Securities and Exchange Commission (CySEC)
- Czech Republic: Czech National Bank (CNB)
- Denmark: Danish Financial Supervisory Authority (Danish FSA)
- Estonia: The Financial Supervision Authority (FINANTSINSPEKTSIOON)
- Finland: FIN-FSA in Finland
- France: Autorite des marches financiers (AMF)
- Germany: Federal Financial Supervisory Authority (BaFin)
- Greece: The Hellenic Capital Market Commission (HCMC)
- Hungary: Hungarian FSA (HFSA)
- Iceland: The Financial Supervisory Authority (FME)
- Ireland: Central Bank of Ireland
- Isle of Man: The Financial Supervision Commission (FSC)
- Italy: Commissione Nazionale per le Società e la Borsa (CONSOB)
- Latvia: The Financial and Capital Market Commission (FKTK)
- Lithuania: The Lithuanian Securities Commission, Bank of Lithuania
- Luxembourg: Commission de Surveillance du Secteur Financier (CSSF)
- Liechtenstein: The Financial Market Authority Liechtenstein (FMA)
- Malta: Malta Financial Services Authority (FSA in Malta)
- Norway: The Financial Supervisory Authority of Norway
- Poland: Polish Financial Supervision Authority (PFSA)
- Portugal: Comissão do Mercado de Valores Mobiliários (CMVM)
- Romania: Romanian National Securities Commission (C.N.V.M.)
- Russia: FFMS in Russia (FCFR)
- Slovakia: National Bank of Slovakia (NBS)
- Sweden: Swedish Financial Supervisory Authority (Swedish FSA)
- Switzerland: Swiss Financial Market Supervisory Authority (FINMA)
- United Kingdom: The Financial Conduct Authority (FCA)
- EU Commission
Africa / Middle East / Persian Gulf
- Dubai, UAE: Dubai Financial Services Authority (DFSA)
- Israel: The Israel Securities Authority (ISA)
- Kenya: Capital Markets Authority (CMA)
- Kuwait: Ministry of Commerce and Industry in Kuwait
- Lebanon: Banque Du Liban
- Nigeria: Securities & Exchange Commission Nigeria
- Seychelles: Seychelles Financial Services Authority (FSA Seychelles)
- Tanzania: The Capital Markets and Securities Authority (CMSA)
- Turkey: Capital Markets Board – SPK
- Vanuatu: Vanuatu Financial Services Commission (FSC)
Asia / Pacific
- Bangladesh: Securities and Exchange Commission (SEC)
- China: China Securities Regulatory Commission (CSRC)
- Hong Kong: Securities and Futures Commission (SFC)
- India: Securities and Exchange Board of India (SEBI)
- Indonesia: Commodidity Futures Trade Regulatory Agency (CoFTRA)
- Japan: Financial Services Agency of Japan (FSA Japan)
- Malaysia: Securities Commission Malaysia
- Mauritius: Financial Services Commission of Mauritius (FSC Mauritius)
- New Zealand (limited regulation): Financial Markets Authority (FMA)
- Pakistan: Securities and Exchange Commission of Pakistan (SECP)
- Philippines: Securities and Exchange Commission Philippines
- Singapore: Monetary Authority of Singapore (MAS)
- South Korea: Financial Supervisory Commission
- Sri Lanka: Securities and Exchange Commission of Sri Lanka
- Thailand: Securities and Exchange Commission, Thailand
- Canada: Investment Industry Regulatory Organization of Canada (IIROC)
- United States:
Commodities and Futures Trading Commission (CFTC)
Financial Industry Regulatory Authority (FINRA)
National Futures Association (NFA)
Central America / Caribbean
- Belize: International Financial Services Commission (IFSC)
- British Virgin Islands: BVI Financial Services Commission (FSC of BVI)
- Cayman Island: The Cayman Islands Monetary Authority (CIMA)
- Dominica: Financial Services Unit (FSU)
- Nevis: Nevis Financial Services
- Panama: The Securities Market Superintence (SMV)
- St. Vincent and the Grenadines: The Financial Services Authority
Hope these will be of some help to start selecting the right Forex Brokerage.
Joshua Walker (bio)
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