What are the risks of copy trading?

Hi everyone,

I have just started doing copy trading of MetaQuotes signals on MetaTrader 4. So far I'm having good results, but I'm concerned about the different risks of copy trading. For this reason, I have compiled a list of all the risks of copy trading that I could think of. Maybe I have overlooked some risks, and, if so, what are they?

I know most of you are going to say why don’t I trade on my own instead of copying others. The reason is that the return to risk ratio of the best signals can be achieved by almost no one. I have searched through more than 36,000 signals, and I have ruled all of them out except 3. If you think you are a better trader than the best signals, then prove it. Send me a link to your trading history and I can compare you side-by-side to the best signals in terms of Sharpe ratios, win rates, wining weeks, max drawdowns, monthly growth, and length of trading history.

If you don’t think copy trading is a good idea, I would love to be proven wrong so I can come up with ways to mitigate every possible risk you can think of. Below is my list of risks of copy trading. I also have a second list on how to mitigate every single risk on this list.

The Risks of Copy Trading:

Improper settings

1. Follower’s account allocation to the signal is too high per the follower’s allowed leverage, which could cause a premature stop out.

Lack of Diversification

1. Insufficient diversification among signals.
2. Returns of different signals are too correlated in the same direction.
3. Insufficient diversification across different asset classes.

Lack of Due Diligence

1. Inaccurate or manipulated statistics on the copy trading network could make risky signals look better than they really are.
2. Following a signal purporting to be manually traded that is really a bot, which runs without human supervision. Big news events or programming bugs could lead to substantial losses.
3. Survivorship bias could lead to inaccurate analysis of signals, which erroneously makes the surviving signals look better.
4. Following a real account that is really a demo account (or too small to matter to the trader) overexposes the follower to risk.

Market Risk

1. A big news event, such as central banking intervention, could cause sudden, rapid, and massive change in the currency markets, which could cause a stop out or a negative account balance (e.g. The Swiss National Bank intervention in 2011 triggered by the Greek sovereign-debt crisis.)

Offshore Risks

1. War or political instability in the home countries of the trading signals.
2. Lawsuits from the CFTC against the foreign broker who accepts U.S. residents.
3. Insufficient diversification across offshore brokers to mitigate the effects of offshore broker failure.

Selection of broker

1. The follower’s broker minimum lot size is too high, which could cause malfunction on some platforms.
2. The follower’s broker maximum open trades limit is reached, which could cause malfunction on some platforms.
3. Subscribing to signal that trades instruments you can’t trade, which could cause malfunction or result in insufficient hedging of your portfolio.
4. The follower’s broker margin call and stop out percentages are too conservative, which could cause a premature stop out.
5. FIFO/hedging restrictions of the follower’s broker could cause malfunction or insufficient hedging.

Signal Trader Risks

1. The signal trader discontinues his signal without notice and you don’t have a backup plan.
2. The signal trader later changes his trading strategy or becomes too aggressive, which could mean riskier trades.
3. The signal trader could get stopped out by his broker because of a large drawdown.

Technical Risks

1. The signal disconnects because of forgetting to renew the signal subscription or paying the monthly VPS fees.
2. The VPS goes down or MetaTrader closes without restarting.
3. Follower’s account gets out of sync with the signal without knowing it.
4. The copy trading network servers (MQL5, ZuluTrade, etc.) go down during trading hours.
5. Your VPS or trading account gets hacked.

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hey jt...... for some reason i prefer to be proven right.....

probably enivid would be able to answer best..... his experince goes beyond simple trading..... or so it appears to me.......h

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http://www.forexfactory.com/enivid

i think copying trades is great while you try to learn yourself but you should always keep in mind the ole saying , give a man a fish he eats for a day, teach a man to fish he eats for a lifetime.

if you can't copy all entry and exist must be exactly at the SAME time all the time, then you will fail to copy the "winner result".

Why can't you copy 100% right all the time? well some system don't have set tp and set sl, the author time zone is different from your sleeping time zone etc...

Ego is probably the biggest reason most traders oppose copy trading. They may disguise it as something else, something more rational, but everyone wants to be the biggest dick in the room. No matter how smart or how good you are, there will always be somebody better. If you can accept that idea - I mean really accept it (most people can't, they pay it lip service before ego takes hold again) - then copy trading makes sense. Anything that legally puts $$$ in your account is OK by me, that's the ultimate reason we're here isn't it?

With most mirror trading systems I think you can copy 100% regardless of timezones. Be careful of position sizing though, if a trader is with a broker offering smaller lotsizes than yours, or if you can't get the same leverage from your broker, you could have problems with rounding etc.

You also mentioned survivorship bias in post #1. If you take a look at any leaderboard you see at the top the traders with the best past results. Remember though that a few months ago, those guys probably weren't there, and a bunch of other traders were at the top who aren't there now. You can't just follow the guys at the top of the ladder and expect them to stay there - but if you keep switching traders when the leaderboard changes, you basically collect every traders drawdowns but miss out on their highs. The best strategy IMO is to read the market conditions yourself, then copy the traders who you think will succeed in those conditions. To do this you obviously need to be a trader yourself, I very much doubt somebody who knows nothing about the market could copy trade profitably.

Good luck

Can't be more agree with this ...

I am sure everyone have already heard of the proverb "Give a man a fish he eats for a day, teach a man to fish he eats for a lifetime."

But sometime being helpful blind people.

I wasn't going to say anything to "ShanghaiMoon" because I was hoping no one would pick it up...

Then ... another person .. rockrobb think it's great to requote...

Because of you two, I now have to point out... the " " about the proverb.

I never say those thing like "teach a man to fish" it make you "sound all noble and savior" is ok
but the problem here both you didn't "teach the person anything" in fact you told told the person to learn himself.. how nice of you.

I just want to point out this so that way in the future if you going to say something like "it's better to teach the man how to fish" please do post teaching...

Trading traders like stocks is a bad idea for this reason. You have to wait until the trader recovers from a large drawdown before you stop following that trader.
I correct for survivorship bias by studying the traders who failed, but who were initially very successful. After I did that analysis, I was able to fine tune my filtering criteria.

This is actually very important. Since you wrote this, one of the signals I'm following started experiencing a large drawdown despite having great historical statistics. Some traders later experience large drawdowns in tame market conditions because they became too aggressive. In other words, these traders experience large drawdowns from mild volatility because their trade sizes in lots were too big. The aggressiveness of the trader isn't readily shown in the statistics. It's best shown in the equity vs. balance charts, which show past drawdowns. I will add this to my list of risks.

hi, i am also on my way to use copy trade as one of my way of trade. my broker said u can get 100% untill 1000% per month, i do think its too extravagant. is it true u can have about 100%/ month constantly?

My top most concern is the danger of becoming totally dependent on others. You might be able to generate huge profits by integrating others ideas in your own game plan. However, there is no guarantee that these strategies will work infallibly on a long-term basis.
Copy trading poses a greater threat as even newbie traders, without the prior knowledge of forex, are allowed to replicate the trading behavior of successful traders. So, they are basically rendered helpless in the event of the “leader” failing.
Copy trading is advantageous but I would say Education and practicing is the key!

Agree. A lot of traders in my trading group copy trades from other, and they are still quite profitable in the long term. I know this because I literally observe how they trade in the same trading room. But it's more like, they copy and incoporate ideas of other like you said, rather than copying exact trade signals from other.

Hello members,
Personally I feel that social trading is a proficient platform for the new as well as the experienced traders. The new learners can follow the ace traders and signal providers while the experienced traders can be an asset where they share their trading strategies and others follow them. The advantages are countless but I think some disadvantages are associated with copying traders:
1. The difficulty of choosing the best copy trading platform. If you have reached it then you are on the right path baby.
2. New traders might not able to follow profitable signal providers due to their lack of knowledge due to which they can incur losses.
3. For yielding higher profits, some traders follow highly ranked signal providers without knowing about their strategies which can also be a reason for the losses in the formers' accounts.

I had less experience of copy trading .If you copy your trades may be you not get same results..It can be possible you may loose in both of the accounts or when you are doing copy trading market is totally different . So never expect the same or perfect results .

Some traders get burned by the blind signal-following. That’s like putting away the whole responsibility for your actions to someone else. That may sound cool, but in reality you end up with the huge losses. Learn to rely on your own knowledge and skills.
Definitely it wall takes some time & a lot of effort to be a good trader , but believe me , it will be far better than following some one signals ......
wish you green pips

Once you begin copying someone's trades, you have no idea how or what the trader is trading. There is a bit of a herd mentality with the assumption that a trader with many followers should be good.

It’s all about reliability! Using others trading strategy/system or any automatic trading service means, you are depending on others! So, if they lose money then you’ll do automatically! Unfortunately, scammers are available here and there! Besides, all of successful Forex traders trade here manually! This is way, I have no plan with automatic trading service, I am happy on manual trading result!

Quite informative.

I note, though, that the inputs are mainly from the perspective of followers or those copying trades.

What I'd be interested in is getting insights from those who allow their trades to be copied . Are there risks there, too? What are the so-called best practices for signal providers in social trading sites ? What makes for success? In other words, how does a leader attract a sizeable following?

Would appreciate everyone's thoughts.

Yeah, it is quite an informative and useful article, it could help us a lot, Thanks for sharing this here and keep sharing such an informative articles in here.

Hi traders,

Just asking whether anyone has been using this service provider and whether it's legit.

https://www.signalstart.com/search-signals