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Ask Your Advocate: Is a Forex Trade Copier Right for Me?

17 Years ago | June 24, 2014 10/1/22, 12:00 AM

Ask Your Advocate:

What do you think about a trade copier as a way of investing in forex trading?

Your Advocate Says:

I personally have no experience with a trade copier but this seems no different than evaluating any trading investment. So it is hard for me to speak from experience and the easiest way for me to answer this is with a series of questions you should be asking to see if this is suitable for you. Before I go on, when evaluating a trading investment, especially a leveraged one, pay attention to your potential downside risk.

What is a trade copier?

Copy trading enables traders in the financial markets to automatically copy positions opened and managed by a selected investor, usually in the context of a social trading network.

Unlike mirror, a method that allows traders to copy specific strategies, copy trading links a portion of the copying trader's funds to the account of the copied investor.[2]Any trading action made thenceforth by the copied investor, such as opening a position, assigning Stop Loss and Take Profit orders, or closing a position, are also executed in the copying trader's account according to the proportion between the copied investor's account and the copying trader's allotted copy trading funds...(Wikipedia)

Questions you should ask

- Did you evaluate the performance of the account (I.e. calculate % winners vs. losers and average profit vs. loss)?

 - Have you looked at the drawdowns? In other words what is the biggest drawdown (loss) incurred and how wide are the swings in profits and losses? If you enter in a down cycle, then you may see your performance diffrer as you would be trading with reduced capital due to drawdowns.

- Are you comfortable with the risk being taken by the master account!

- Are you comfortable giving up control? In other words, are you planning to override trades or willing to let the master account do all the trading?

 - Can you control your leverage?

- How long is the track record? Be careful judging performance based on only a few months.

 How does the trader get compensated?   

-- Is it performance based or subscription based? In the U.S., it is my understanding that it has to be subscription based (e.g. monthly fee). If performance based, then the master trader is acting as a money manager.

- Does the master trader get rebates on each trade?

In other words, can the trader make money even if you lose (i.e. collect rebates and/or monthyl fee)? In this case, keep in mind that the master trader's incentive is not the same as that of the investor.

Trade copiers, from what I can tell, are a back door way of acting like a fund manager without the reporting and regulations, including audited track records and full disclosure. I am in a position to make a judgment on trade copiers other than to point out you need to do your due diligence as you will likely have less information than if evaluating a regulated fund manager.


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