Managing Risks In Copy Trading | Forex Copier Blog

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Managing risks in copy trading

Incorrect assessment of the psychological and technical risks are the main reasons for capital losses in the process of forex copy trade transactions. We offer several recommendations on how to deal with this problem.

How to organize risk control when copy trading forex

Let us remind you that copy trade forex is the ability to open positions (manually or automatically) based on trading signals that are generated and controlled by an external trader or an automated trading system. The main risks of such market behavior are ‘hidden’ in what we see as an advantage. What’s the catch?

Let's rank the main risks according to the degree of influence on the deposit:

  • There is no need for specialized knowledge.

  • Saving time for market analysis and transaction support.

  • A large ‘assortment’ of signals for copying.

  • The possibility of diversifying risks through investments in various projects.

We consider the first two arguments as extremely dangerous; the amateurish approach is the quickest way to leave the financial market forever. And, of course, with no money.

Let’s look at it in detail.

Risk #1: Lack of information and practical experience

Forex trading copy and paste services are actively promoted as an alternative to standard market transactions and an opportunity to ‘make a bundle’ without studying market theory and trading on your own. Alas, mistakes in choosing a strategy and trading conditions remain the main reason for losing a deposit when copying transactions.

Please note: in aggressive advertising, only insignificant, but ‘advertising-friendly’ information is always available to ‘catch’ your attention. As a result, most newbies do not study the market at all, do not seek to trade on their own, and sometimes do not even think about what strategy the trader, whose transactions are copied to their deposit, uses.

A beginner does not have personal trading experience, that is, it is too difficult for him to calculate the efficiency of transactions that are opened according to someone else's logic. Moreover, some trading signal services provide incomplete statistics, for example, they do not show an absolute drawdown. It is impossible to use such information without being confident about having knowledge and at least having had some minimal trading experience.

Copy paste forex signals may not be suitable for your trading style and psychological level of losses, but you may not realize it until it is too late. If your chosen signal provider does not meet your expectations, you can lose your capital much faster than trading yourself.

How to deal with this problem?

You must psychologically acknowledge the fact that the provider of copy paste forex signals is not responsible for your potential losses. You perform operations on the deposit on your behalf and responsibility for ALL the results of transactions, including those created by someone else's signals, is your problem.

It is necessary to conduct your market analysis before making any trading decision − you need to understand, at least in general terms, why the copy trader you have chosen acts in this way and not otherwise.

Without understanding the market mechanisms, a trader is unable to qualitatively assess and select an effective signal provider for copying. Also, for stable operation, it is necessary to compose a portfolio of several trading systems, constantly monitor the state of the deposit and periodically rebalance the portfolio. So you have to study all aspects of the financial market – there is no doubt about this.

Risk 1 Lack of information and practical experience

Risk #2: Dangerous Money Management

Reliable trading is usually not compatible with ‘hyper profits’. You must come to terms with the fact that all speculatively high-yield trading accounts use dangerous money management techniques. Believe me, the risk of participating in such projects is inversely proportional to the profit.

Copy paste trading with Martingale, a scheme which you do not understand, is unacceptable. Abnormally high profits and an uneven equity curve are the first signals of the financial instability of this method. Usually, owners of master accounts do not hide the use of Martingale and indicate this fact in the description of the strategy. But if you do not see anything but a quick profit in their statement, then the loss of your deposit is guaranteed.

How to treat the problem?

You should carefully analyze trading statistics for stability (we will tell you how to do this in the following articles) and choose signals for forex copy trade with stable profits and a large margin of reliability.

We recommend choosing projects that allow you to quickly disable automated copy trading and close a deal in manual mode, as well as allow you to independently change the TakeProfit/StopLoss parameters for an individual deal or a group of trade orders. If the trading copy system does not allow the client to interfere with the trading process at all, then it is worth looking for other options.

The choice of a paid or free copy of trades depends on the real profit. Paid services will not always be more profitable − choose the most stable option.

Risk #3: Incorrect copy scale

You should be prepared for the fact that the result of your transactions may differ significantly from the result for the source account. In addition to the market situation, the actual percentage of profit depends on many factors, for example, the amount of incoming account balances, the trading and technical conditions of the source account, risk management schemes, etc.

In copy paste trading, ‘scale errors’ are especially dangerous. The provider of trading signals − as a rule, an experienced trader with a large deposit − can operate with positions of 2-10 standard lots. When copying, you need to correctly calculate the lot for transactions on the receiver account, taking into account the leverage and the costs of the broker's commission. Otherwise, even a few points of the current drawdown will destroy your deposit. Depositing or withdrawing funds from a source account also violates the trade balance and affects the calculation of parameters for copying.

Risk 3: Incorrect copy scale

How to solve the problem?

Checking the copying scheme on a demo account will allow you to study and remove the most dangerous moments from the trading process. If the signal source does not allow copying to demo accounts, then you should look for other options for cooperation or manually check the deals of the trader of your choice on the price history. Without a steady profit on a demo account, we will not copy anything to a real deposit!

The copying process always takes place on some trading platform − on the broker's website or a social network, for example, Zulutrade or MQL5. Before opening the first deal, carefully study all trade and technical conditions, legal and regulatory documents − there may be many pitfalls.

Technical risks also include hardware and software failures on both sides. All problems with copytrade software must be resolved before trading. The correctness of prices also needs to be checked, especially if the source account and receiver account are open on different trading platforms. What this means is that due diligence is required on the licenses of the broker and the trader whose trades you intend to copy.

The result?

We believe that trading on other people's signals is only possible if you have personal, even if not very profitable, experience. This method of working in the financial market services is not for lazy people! You will have to constantly monitor the process and make trading (sometimes critical!) decisions in time.

Those who are already quite experienced traders and can conduct a deep analysis of the work of their more successful colleagues will be able to successfully invest in copy and paste forex trading. This requires a fairly high level of qualifications (practically − a portfolio investor!), adherence to trading discipline and clearly formulated goals: what you intend to get, and how and when you intend to get it, from the market.

You are free to make your final choice; let it be the right one!