Much like Twitter and Facebook, social trading has grown exponentially in the last 5 years. In the past, traders relied on forums and discussion groups as their key source of trading ideas. These days, most decent traders would have their performance displayed for the world to see, and better yet, for anyone to copy. There are 2 main groups of forex traders, the first are those who like to attend forex trading seminars and attempt to trade currencies manually on their own. The second group are those who just want to make money with as little learning as possible. For the latter group, trade copying, or mirror trading, is the perfect solution.
Popular trade copy websites such as Zulutrade, eToro and FXbook allow anyone in the world to copy the trades of successful forex traders. With the rise of social media and internet connectivity, finding profitable trading systems is the least of anyone’s concerns. There are holy grails all over the internet which are accessible to everyone via trade copy services. Traders simply have to open a forex trading account with the trade copy providers, and can copy trades in an instant. This allows anyone to really easily gain access to forex trading and investing.
Having explored various trade copy services, we identified some key challenges when utilizing such websites:
1. Lack of information for strategy selection
You will realize that many of the traders on such sites are punting and betting that their trader is successful once they begin copying their trades, and have absolutely no idea how or what the trader is trading. There is abit of a herd mentality with the assumption that a trader with many followers should be good. There is often insufficient information on such sites for anyone to make an informed decision as to whether or not to invest in such systems. Here’s an example of some comments we chanced upon on eToro:
2. Limited Screening Facilities
The screening mechanisms can be very primitive. For example, eToro only allows for very basic screening based on the following:
3. Selection Bias is Rampant
Fxbook greets users with messages such as “our top 3 traders have made last month a total return of +158.24%.” There is nothing wrong or inaccurate about this, but among a large group of traders, it is easy to pick out the profitable ones at any one point in time to boast the potential returns. Traders cannot and should not expect their performance to be as good as these top performers since drawdowns are part of every strategy. In other words, the best traders today will probably not be the best systems next year, so there is always that hindsight or selection bias risk, where only the good ones remain – so the traders remaining tend to look good all the time, as long as they remain.
4. Limited Customer Support
While most forex brokers have live chats and phone numbers to dial in case there are trading emergencies, only Zulutrade has a live chat function, while eToro’s openbook and FXbook do not. If you have an urgent question or request, you will have to rely on google for answers, or the investment community on the respective websites.
5. Trader Specific Risks
At the end of the day, it is still a human at the other end managing trades. Even if you are copying an expert advisor, there is a person who is ensuring the EA stays online. Since the person you are copying is often half way around the world, there is always the chance that he or she makes a mistake which wipes out the account. In other words, you can’t really know who you are investing with. Perhaps we will see traders posting their CVs and personal bios online soon!
While the above are some challenges and risks in mirror trading, this channel of alternative investing does have it’s place in the investment community, just exercise care when selecting who or what to copy. In fact, this group of trade copiers may even be trading better than the other group of manual traders, who statistically wipe our their trading accounts!