Copy trading - opening up a world of possibilities for retail FX investors

From being able to trade instantly without spending time as an apprentice retail trader learning the ropes for yourself, to improving trading and investment performance by watching what makes others successful, copy trading is popular and is becoming more so as Heather McLean discovers.

First Published: e-Forex Magazine 54 / Retail FX trading / October, 2013

Copy trading - opening up a world of possibilities for retail FX investors

A new generation of simple to use social investment networks and copy trading platforms is now reaching a far wider audience of retail FX traders and investors, who are taking advantage of the ability to copy and make money, fast. 

Dave Lemont, CEO at Currensee, comments on the phenomenon: “Trading FX on your own is hard going and requires tremendous discipline and time commitment, both to learn and to practice. Simply put, not everybody who wants to be involved in the FX market can handle all that. Copy trading gives people without the time or inclination to trade access to the market, and that opens things up enormously.”

Mariusz Potaczała, CEO of TMS Brokers, was responsible for introducing TMS Brokers’ copy trading platform, GO4X Social. He agrees that copy trading makes online FX trading accessible to a much wider audience: “What often keeps demo account users from opening a real investment account is their lack of confidence in their ability as an independent trader.”

“Social trading platforms give them a chance to confront their trading ideas with those of more experienced traders and minimise their anxiety over making first trades,” Potaczała continues. “It is also extremely easy to use, so entry level traders can still feel comfortable and in control of their trades.”

Copy trading is growing. For example, social investment network, eToro, has reached a major landmark of 50 million trades by its users, it announced in May this year. Altogether, 32 million (64%) of those trades were copied trades. 

Just like Twitter or Facebook, anyone can join eToro. The company applies the same concepts from social networks to its investment network so it is easy for everyone to engage in their community. 

Alon Levitan, head of product marketing at eToro, says that by allowing users to copy and follow each other’s trades while making affordable investments, it is opening up the financial markets to everyone. 

Levitan remarks: “With our network, those that would otherwise be wary of dipping their toes in the financial markets have an opportunity to invest in an open and transparent environment. eToro’s key advantage is that we remove the ‘complicated’ from the words trading and investing and make these accessible to every person. This now appeals to a much broader audience that would have otherwise averted the world of financial investments.”

Giving traders an edge

Retail FX investors are particularly attracted to copy trading, says Lemont. Yet according to the US Commodity Futures Trading Commission’s (CFTC) second quarter 2013 report on US retail FX client profitability, most retail FX traders lose money, quarter after quarter. 

During the second quarter of this year, the CFTC study showed that brokers stated 35% of US retail forex traders made a profit, with a massive 65% experiencing losses. 

In addition, that money-making figure of 35% was actually lower in the first quarter, as weighted averages were lower by 0.3%. However, despite this there was an increase of 1,336 active retail accounts in the US, taking the total up to 100,543, in a second consecutive quarter of customer growth, said the study. 

Lemont states that copy trading gives retail traders an edge when they step into the trading arena. It gives them the ability to access the strategies of more successful FX traders and tools to review their performance and risk before signing up. He adds: “Some FX traders are in it for the excitement, but at the end of the day, most would rather win than lose and see copy trading as a way to improve their chances.”

Mariusz Potaczała“What often keeps demo account users from opening a real investment account is their lack of confidence in their ability as an independent trader.”

Mariusz Potaczała

“What often keeps demo account users from opening a real investment account is their lack of confidence in their ability as an independent trader.”

While Levitan says of the trading technique: “Quite simply, it’s proven to provide better returns. Data from our network shows that copy trading is 30% more profitable than manual trading. And you don’t need a financial background or any trading experience to take advantage of this. By enabling users to see, follow and copy multiple users within the network, eToro has introduced the concept of the people-based portfolio as opposed to the traditional instrument-based portfolio.”

Copy trading is an increasingly attractive tool in the retail traders’ arsenal. Potaczała comments one reason that copy trading has become such a popular tool is because it saves time. “Traders can rely solely on copying trades and can just monitor the general performance of signal providers, instead of being engaged in every single trade,” he explains. “Copy trading can also be used to diversify traders’ investment portfolios by selecting to copy trades on instruments they might not follow closely enough to trade on their own.”

However, Lemont warns that in the relatively new world of copy trading, retail traders do need to be cautious about what they do and use careful consideration before trading. He explains: “Potential investors have to pay attention to the fine print and choose who they want to copy wisely.  Smart investors can use copy trading to build customised portfolios of FX trading strategies that have the potential for lower risk than individual trading. Instead of deciding what trade to make on a given day, investors can decide which of a menu of traders to copy.”

Making the most of functionality

On how traders can better leverage the functionality of these new trading platforms to capture investment opportunities in FX in ways that have never been possible before, Levitan comments that one of the biggest advantages a social investment network has to offer is making the financial world global instead of local. That way, an investor from Japan who’s interested in the price of the NZD can consult with a popular investor from New Zealand and vice versa. 

“When copying or following investors from all over the world, the investor is opening himself to new ideas and knowledge, that is being shared by informed people who experience the financial world every day. More than that, the fact that an investor can tap into the wisdom of the crowd enables them to make an informed decision based on the sentiment of hundreds of thousands of investors in our community,” explains Levitan.

GO4X

GO4X

Social networks encourage engagement between novice traders and experienced traders and investors, says Levitan. He adds that they allow users to tap into the knowledge and performance of other traders and copy their trading activity without having prior understanding of the markets, giving everyone the opportunity to view information on users’ trades. “Experienced traders can also learn from each other and expand their investment skills and knowledge,” he says. 

Experimenting and learning

Copy trading platforms can provide an ideal experimental environment for retail traders who wish to develop and deploy their own trading strategies, says Levitan. “Before you start trading you can follow and review other users’ trading strategies. By getting to grips with other users’ trading activity and understanding how they generate returns, investors can begin to develop their own strategies based on what they like, while also taking into account the things they don’t like from observing other users.”

Alon Levitan“Data from our network shows that copy trading is 30% more profitable than manual trading. And you don’t need a financial background or any trading experience to take advantage of this.”

Alon Levitan

“Data from our network shows that copy trading is 30% more profitable than manual trading. And you don’t need a financial background or any trading experience to take advantage of this.”

“Our network allows people to interact with each other and by connecting them, we empower them. With this approach users can take a step-by-step approach to developing an individual and personal trading strategy,” Levitan adds.

Potaczała agrees that social trading  enables people to learn: “Social trading platforms allow traders to review detailed statistics of other traders’ performance and analyse their trades, with open/close rates and pending orders. With a little inquisitiveness you can analyse the patterns of other traders’ behaviour to learn from their mistakes. On the other hand when you find something inspirational in someone else’s trades, you might improve your own strategy by replicating it.”

Lemont, however, says, “We disagree that copy trading platforms create an ideal experimental environment; copy trading does not necessarily provide a good experimental or educational environment. With copy trading you get to see the trades of a more experienced trader, but you probably don’t learn why that trader made those trades, and that would be essential to developing your own strategies.”

eTORO

eTORO

“For education on trading, a better route might be coursework on social networks where one can interact with more experienced traders,” says Lemont. “As far as experimenting goes, a live money trading account, be it your own strategy or someone else’s, is not without risk. The only no-risk experiments are backtesting and demo accounts, and those don’t always simulate the real world as well as we’d like. Copy trading is primarily an investment vehicle for people who want to trade forex but don’t have the time or skill.”

Delivering a compelling proposition

Lemont states that to truly innovate and deliver an attractive service, copy trading providers have to do two things: first, they must vet, recruit and retain traders worth copying; and second, they must offer more than just perfect replication of trades. 

On the first, he says: “Traders worth copying are those with meaningful track records in real accounts with more than a trivial amount of money in them. Why would I want to invest my real money to copy the trades of somebody with nothing at stake? ‘Worth copying’ also means avoiding traders with certain seemingly attractive but ultimately unsustainably dangerous strategies, methods like Martingale and Grid, for example. These can look good on charts until the day they fall apart.”

On the second, Lemont notes: “’More than just replication’ means that a smart copy system can do more than just give you the trades of another trader. Innovative copy trading platforms give investors the ability to customise the trades they copy to meet their individual investing agendas, from basics like limiting leverage or choosing currency pairs, to advanced features around the treatment of pre-existing open positions, dealing with opposite positions entered by different traders, and building portfolios by copying the trades of several traders. In short, the copy trading platforms that will win are those that turn copy trading into a customisable investing experience that’s accessible to traders and non-traders alike.”

Currensee Leaderboard

Currensee Leaderboard

Commenting on other specific  innovative features used to attract clients, Levitan comments: “We’ve recently added stocks to our offering in order to enable users to connect with and invest in the brands they’re passionate about. Altogether, 60 well known stocks are available to trade including Apple, Amazon and Coca Cola. We will expand the number of stocks by manifold over the next weeks and months.”

“Users have access to various educational resources,” continues Levitan. “We have our blog and ‘etoropedia’, which provide users and non-users with educational tools to explore and learn about the world of investment. All of our features can be accessed cross-platform through our mobile website and various mobile apps, available both for Apple and Android devices.”

Levitan adds: “As part of our commitment to responsible trading, eToro also has certain built-in features to set limitations so users can only trade within certain thresholds. It’s like a safety net to ensure users don’t fall victim to their emotions when trading.”

The ability to copy trades automatically, autocopy, is an innovative feature in itself and its smooth running is essential for any platform, but with the increasing popularity of social trading platforms among brokers other features gain in importance, notes Potaczała, “It is, however, for marketing purposes more than anything else, such as reverse copying of losing traders’ activities,” he adds. 

Dave Lemont“‘Worth copying’ also means avoiding traders with certain seemingly attractive but ultimately unsustainably dangerous strategies, methods like Martingale and Grid, for example. These can look good on charts until the day they fall apart.”

Dave Lemont

“‘Worth copying’ also means avoiding traders with certain seemingly attractive but ultimately unsustainably dangerous strategies, methods like Martingale and Grid, for example. These can look good on charts until the day they fall apart.”

Improving the experience

Providers are upgrading their existing platforms to improve access for retail traders, including working on copy trading applications and the connectivity pathways between users.

Potaczała comments: “First and foremost the mobile and web applications are becoming increasingly similar to the full desktop versions of the platforms. Internet connections are already more than capable of supporting full functionality of browser-based platforms, while mobile devices today are increasingly powerful and can support sophisticated software.”

“There is also a trend to switch web and mobile applications from Flash to HTML5-based, making them much more accessible from smartphones and tablets. As for the connectivity pathways between social trading platform users, we can see a continuous effort from developers to build global networks of signal providers,” continues Potaczała. 

These days, says Lemont, a website is barely a website if it does not have either a mobile version or a responsive architecture that automatically adjusts to the user’s device. Likewise, apps are de rigueur, he notes, while connectivity between the copy trading provider and the client is critical, but is always subject to the vagaries of the public internet. 

“Providers are already investing in good backbone connections,” Lemont says. “Connectivity between the copy trading provider and the brokers – both the leader’s and the investor’s – is where smart providers will be investing soon. Investing in improving broker connectivity can speed execution for customers of all types and sizes.”

Levitan remarks: “We have an open dialogue with our users and are regularly examining ways to improve the trading experience. We include their inputs in our platform updates and we also have several mobile apps that offers the same capabilities as our website, this means you can trade anytime, anywhere. In addition, users can link their eToro account to their Twitter account. This gives them the capability to tweet their orders via Twitter and their trades will be shared with all their followers.”

“That’s just one more example of how we’re making it easier for everyday people to invest in the most liquid markets, and one more example of how copy trading is opening the door to FX and stocks for more people every day,” he concludes.