Forex Copy Trading
Forex trading signals are primarily designed to provide an entry in the market based on technical or fundamental analysis. There are various forms of trading signals, manual signals and automated signals. Automated signals often mean executing the trades in the followers’ trading accounts (commonly in the MT4 or MT5) or in other words copy trading.
The signal provider determines when to close the trade, change the stop or take profit order etc. The followers however have the ability close the trade when they wish and limit the potential exposure of any future trades. Manual signals means the followers have a choice whether to execute the trade in the market and exit when they wish based on their trading experience.
Many new forex traders tend to favor automated signals as it requires less monitoring and place their full trust in the signal provider. The MetaTrader4 and MetaTrader5 provide countless of trading systems that may be followed and many other services such as myfxbook utilize those features of the trading platform. Forex copy trading is popular but is it really profitable?
Profiting from Copy Trading
As we discussed in other articles related to copy trading, copying signals without understanding what is the strategy for the signal is similar to head diving into a pool without knowing its depth. It is essential to fully understand the risks and potential return (Return on Investment) before allowing any signal providers from executing trades directly in your account.
Forex traders that neglected this research were victimized by the infamous Martingale systems. Martingale trading in simple words is to continuously increase the trade size after every loss in order to reclaim the lost profit. By increasing the size of the position the pip’s value increases and should the trading system will face an inevitable streak of losses a margin call is only a matter of time
We suspect countless amount of forex traders were scarred by Martingale systems, which is why we do understand the regulators (CYSEC and FCA) desire to impose a tighter leverage. That however will not prevent forex martingale systems from increasing, drowning the followers as we head to 2017.
One of the greatest failures of such systems is the reluctance to accept a loss. Forex trading is composed of profits and losses. If you attempt to profit on every trade or signal you will be emotionally driven by the desire to succeed on every position. As soon as one trade fails to succeed anger and vindictiveness are brought to the surface. From that point the forex trader’s odds from posting heavy losses are significantly high.
Understanding Copy Trading
A good method of filtering signal providers in the mirror trading world is the average profit in pips. The signal providers are often commissioned by a certain portion of the spread. In other words, the more they trade the greater the commission is.
Morality and decency often corrode when a large commission is on the plate. Some signal providers will do anything they can to execute as many trades as possible in the market to increase their profit from the spread. A popular trading strategy that will guarantee a profit for signal providers is scalping.
Scalping is a famous trading strategy where the trader only targets anywhere between 5 pips to 15 pips per trade. As intraday time frames are used the trader is likely to have dozens of entries per day. If you do wish to copy trade in an automated manner we suggest refraining from scalpers as the urge to boost their commissions will always be present, especially in underperforming months.
The second important matter is copy trading is the drawdown. The reluctance to accept a loss will often lead to the trader that followers are synced to copy his or her trades to cling onto traders in a hefty drawdown. Due to the countless amount of forex systems nobody wants to show a loss.
Pushing the trades into an unnecessary drawdown is again an indication the signal provider favors commissions over the growth of the account. Accepting the loss will often allow the trader to recoup the losses in future trades but nobody wants to lose in forex. These actions have consequences.
If the drawdown increases the pressure on the trader will lead to radical decisions in the market and in most cases a margin call. Another decent indication are the stops. Stop loss orders that are derived from technical analysis will vary from trade to trade.
Setting a fixed amount of pips per trade means the trader is again seeking to avoid a loss rather than focus on growth. It may also suggest the signal provider is unable to derive the stops levels from the chart, which questions his or her ability to successfully analyze the market.
Safe Copy Trading
If you have already experienced what we described above perhaps we should have published this article a year ago. If you are considering copy trading in the Forex market we hope you have benefited from this article.
We at Digital Derivatives Markets (DDMarkets) been providing trade alerts since 2014. We do not automate our signals and provide the technical or fundamental structure for every signal, which we have fully documented on the website.