What is copy trading?

So, you might have heard about some people popping money into a copy trading platform, with no prior stock market experience to try make a quick buck.

And who could blame them? In theory, copy trading sounds like a win-win situation. But like many things, the reality doesn’t always follow the theory.

So let’s dive into the world of copy trading and explore how it works, how Alec Baldwin fits into it, who the so-called “expert traders” are, and finally, the risks and costs involved.

What is copy trading?

Copy trading, also known as social trading or mirror trading, is when you copy the real-time trades of another investor. The idea is that anyone can be a stock trader with little experience simply by “copying” a professional trader’s moves. So, you buy and sell when the trader you’re copying does, through online trading platforms like eToro, AvaTrade or FP Markets.

Copy trading isn’t just limited to the foreign exchange (FX, FOREX) market, but also cryptocurrencies and other complex or volatile markets.

How do Alec Baldwin and a sock puppet fit in?

Of course, featuring any Hollywood actor in your ads is a clever marketing device and that’s exactly what popular copy trading platform, eToro has done with Alec Baldwin.

In the eToro ads that are doing the rounds on social media, Alec and his sock puppet tell everyone how easy copy trading is, “even a hipster food blogger who knows nothing about the market can make trades.”

Clearly aimed at young people, the ads highlight how easy copy trading is but don’t warn about the potential pitfalls.

Who are the “expert traders”?

Well, this is where it gets murky. The so-called “expert traders” that people are copying don’t actually have to be licensed financial service professionals and could be just about anyone. And what’s worse, is that in Australia copy trading platform ads don’t have to display the rate of customer losses (which can be as high as 80%), like in Europe and the UK.

So, what are the risks?

Automating something that’s complex is always risky.

And this process becomes even riskier when it’s based on so-called “expert traders” (that may not be accredited) making decisions that could potentially cost novice traders their entire investments and then some.

The Sydney Morning Herald recently reported an example of this very risk stating that “an estimated 1200 mostly young Australians, some in their teens, had been caught up in a copy trading disaster when a copy trader they were following went rogue and wiped out their investments in 48 hours.”

Then there’s also the concern that copy trading can be done with a non-regulated platform, which means traders can be susceptible to scams (like the cryptocurrency/investment scams that are costing Aussies millions of dollars each year).

Lastly, there’s concern over the “success rates” traders advertise to entice novice traders as past success does not guarantee future performance (like many claim).

Transaction costs and fees

Copy trading is a business, if you aren’t paying an upfront fee then you are paying more for the spread. Always read the fine print, no matter how boring.

Final verdict

We don’t want to deter anyone from copy trading. We just want to help people understand the risks involved. Just like any investments you're considering; the most important thing is to do your research and have clear investment objectives. Speaking with an independent professional or financial advisor is a great way to get some solid advice.

And always remember, if it sounds too good to be true… it probably is!