In the first 2 articles we talked about the more technical aspects of copytrading, the first focusing on the difference in platforms and the second concentrating on what to look out for as we choose a master trader. Today we will talk about the situations and emotions which we will face as a copytrader, something which we must take note of in order to make copytrading a successful venture. No point walking the first 2 steps well and fall at the very last mile.
I Can Do It Better
The market is unpredictable, and precisely because we cannot trade well ourselves, that we become copiers. However often on hindsight, we look at those open trades with large losses and wonder what on earth is happening? The market is obviously trending up, why did he short? The news by the Fed today obviously indicates a bear market, why did he go long?
Everyone is a genius on hindsight. But the failed trades are especially glaring because copiers often conveniently forget and did not even take note of the winnings. When the master trader makes winning trades, copiers do not go in to look at the graphs to see if they have done well against the market or by predicting the market. It is only when we see red numbers (losses) that copiers go in and analyse the graphs and suddenly become experts.
After a while people may start to think they can actually do it themselves, and that being a master trader is not that hard. I had that thought once and tried it myself. Nobody copied me in the end but luckily I managed to earn $500 in 3 months. My achievement was simply not losing any money. Another copier I knew tried that and sank in 30k USD.
What is most important is that the master trader you follow has more wins than losses, and the overall net gain is positive. If you feel uncomfortable with the way the master trader handles his trades, simply jump to another one until you find someone suitable for your needs. Finding who to copy also takes trial and error. Of course, if you believe you really have the skills to be a master trader, do proceed but with caution.
Some of the copiers cannot take it when they see paper losses, and there will be many times when the floating losses get big. While there are certainly times when we have to manually close a losing trade, some of them cannot stomach even a little paper loss for a short while, choosing instead to manually close them because they start to panic. In the end due to market fluctuations, the losses soon become winnings. The master trader then closes the trade at a profit while the copier suffers a loss. Yes the paper losses can range from a few minutes to even a few months, nobody can predict what will happen in the future. Even if you have to decide to manually close a losing trade, be sure that you are not acting on emotions.
Keep calm, be logical, know the risk you can take and work within the range you are able to stomach. I thought I should be clear here: while we can predict to a certain extent the long term trend of the market, in which case we do long term investing, nobody knows whether the market will go up or down the next moment, unless you are one of the invisible hands behind manipulating the market. Trading in this case will largely depend on one factor – your reflexes. How quick you are to capture the trend and how fast you can turnover each transaction.
There are also times when we find a good master trader. After copying for a while, we realise that the master trader is doing good and we become greedy. Originally I may copy a master trader at 10x copy proportion on OctaFX with 5000 USD. But in my greed I may decide to copy 20x at the same 5000 USD, since I have observed the floating losses are usually capped at a lower amount. This is unnecessarily stretching your leverage, and as mentioned in the earlier articles, sometimes the master trader may get complacent and make bad decisions, sometimes the market is simply volatile. If one stretches the leverage unnecessarily, even if the first 9 trades are winning trades and the copier earns a good profit, the 10th failed trade could wipe everything out.
I have talked about the aspect of copiers preferring to follow master traders who make many trades a day, rather than follow one who has a higher accuracy but with lesser trades. I will not repeat that aspect here.
Copytrading, like other forms of investment, requires patience. Accumulating our profits and slowly letting it snowball is a time consuming process. Those without patience would often follow multiple master traders instead of focusing on that one or two consistent ones, or would stretch their risk in order to get rich quick.
Whenever I talk about copytrading, I would always be careful to say, perhaps earn 500 dollars a month first, to either pay for transport or small bills, then slowly let it grow. Those who eventually try out copytrading often find the idea of earning small amounts of money passively to be a good idea. But just as equally often, within a week or two, they lose their patience and start doing dangerous things to get rich quick despite my advice. From the intent of earning 500 dollars a month and slowly letting it snowball, the idea now becomes to earn 500 dollars a day or even higher.
When that happens, one will inevitably slowly but surely increase his risk in order to earn more profits. If the risk is managed poorly, then instead of profits, there will be losses instead.
Be it greed or impatience, the underlying logic is always the same – the desire to get more money. As much money as possible in the shortest possible time. That is why many who earn profits do not want to cash out, choosing to let the snowball roll infinitely. From a simple 5x copy it snowballed to a 20x copy as profits add to the overall pool, to a 50x copy and eventually a 100x copy or even more.
But shit happens, as mentioned repeatedly in this series.
Floating losses are not actualised losses until you close them. Similarly, as long as you do not cash out your winnings and see the actual numbers in your bank account, you are just as equally vunerable to losing everything. One logical approach to this would be to set a realistic profit target which you will achieve by snowballing your profits, perhaps an earning of 500 per week. Anything beyond that, cash out your initial capital first. This is so that even if your existing trades burn and crash to the ground, you do not lose any money.
Beyond that, divide up your profits into 2 parts. Cash out half and snowball the other half. As your actualised profits slowly accumulate, you know that even if one day the existing trades crash to 0, you still have the profits sitting outside ready to go in for another round, after things calm down a bit. But as your money pool gets bigger, it is more important to reduce the leverage as it gradually becomes more important to ensure the safety of the pool.
The main reason why people do copytrading is to get a passive income while doing the bare minimum. That is why we find a supposedly professional to trade for us. That is why we only put in money and copy them. What they do, we do. However, people often find themselves frequently looking at how well their trades are doing or even waking up in the middle of the night to monitor the status. Although it is necessary to monitor more closely at the start while testing out new master traders, it should not be a case where your time is tied up trying to see if all is well in the long term. That defeats the purpose of making it a passive, or semi-passive income.
If you cannot sleep well at night or stop seeing the status frequently, you are doing something wrong. Or if copytrading is not for you, there are also many other options available.
Managing your psychology is an important aspect in trading and investment. Remaining calm and logical may not grant you 100% success, but it will weed out all the unnecessary risks and pitfalls which you would have otherwise fall into.
Of course, reading theories is one thing, putting it into practical is another. But if you do intend to go into copytrading, do remember this series of articles. Because in the end, we want to win.
I will be taking a short break of 1 month in March as I am busy with certain things, taking up much of the available time I have. See you again in April.