What are the Risks of Copy Trading?

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Trading

This type of trading is a financial technique used to copy the trades of other traders. Recently, this trading has been popularized by the CMC Markets broker. However, it’s important to know the potential risks before investing your hard-earned money in this market trend. Here are the risks associated with this trading.

Fraud

This is often the biggest risk of any investment market, whether traditional or crypto. It’s quite common for scammers to use copy trading as a way to scam unwitting investors. All you have to do is find someone who seems reputable and trustable, let them copy your trades, and voila! This is how the crooks achieve their ill-gotten gains.

Leverage

Leverage is another major problem when it comes to this trading. Copy traders use leverage to increase the number of trades they can place at a profit. However, this comes with a downside that can easily turn into total ruin if you’re not careful enough.

Misunderstanding

The copy trader who doesn’t understand the stock market and fundamentals may get your money if he makes a mistake in his trading. On the other hand, if he understands the market well, you could lose your money simply because of his poor judgment of price movements and overall market conditions. It’s possible that he will be able to get a better deal in the market using his superior knowledge and skills.

Lack of concentration

As mentioned earlier, this trading is a form of gambling. Needless to say that most copy traders who are serious about their potential gain will want to stick with it for at least a year or two before moving on to some other investment opportunity. However, the novice copy trader might want to jump into the game without bothering about the stock market fundamentals and market conditions. After a couple of losing trades, this trader might walk away from the game.

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Lack of a knowledge-base

The Internet is full of information; however, some is outdated or just cherry-picked to confuse you about what’s truly going on in the stock market and economics. This lack of proper information can lead many copy traders and investors to make bad decisions regarding managing their investments properly. Without proper education, you might lose even your hard-earned money because you don’t have the right information.

Lack of self-control

Copy traders aren’t the only ones who can be at risk of their investments getting out of control. The investor has to know the risks and deal with them appropriately. One should not be tempted to use leverage and invest more than one can afford to lose. If you start copying trades with money you cannot afford to lose; then you’re on your way to serious financial ruin.

Lack of discipline

Copy traders often lose sight of their long-term plans and focus on short-term goals. After all, who wants to wait months to see the results of their hard work when they can see them immediately? This lack of discipline will often make the copy trader abandon their long-term plans, eventually leading to their downfall.

Lack of trading skills

Copy traders with sound market knowledge and well-informed about the stock market will often focus on a few strategies they know can make their money in the long run. On the other hand, a novice trader might copy trades without analyzing them properly before investing. The trick here is to take care of your trading skills before starting to copy trade.

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Market conditions change, and so do the values of assets

Many people never learn to adapt themselves to the changing market conditions. This is a problem, especially in the crypto world, where most crypto-assets have no intrinsic value and are only valued based on speculation or hype. The market conditions might change, and instead of exiting the trade at a profit, you might get stuck with an asset quickly being dumped. This is not a good thing to happen when relying on this trading to make money for yourself.

Lack of information

The crypto world is full of news websites, crypto magazines and blogs with different points of view on the market’s direction. However, this may not always be the best way to make money. For example, you might find some mislabeled investment opportunities because they can bring you down in the long run instead of bringing you up. It is also possible to fall for one of the many scams, such as trading websites that only want to put more money into your account. So be well informed about where you’re placing your trades and what kind of money you will earn from them.

Bull run

The copy trader needs to be aware of the risk that the market he’s trading on is going through a bull run. If this happens, then all the profits he makes will go straight into the pockets of other traders because most investment vehicles are pegged to stocks and have a defined amount of shares in circulation. In other words, if there are more stock market investors, everyone will pay higher prices per share.

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Lack of experience

New traders might not have enough experience to judge the market conditions. This might lead them to make wrong investments which will cost them in the long run. They should always be sure to trade in a market that is at least stable and not one that is going through huge changes. If the market is unstable or unpredictable, the best course of action is to exit the trade.

Conclusion

In conclusion, it’s clear that investing in the cryptocurrency market requires a lot of patience and determination. However, if you have the right attitude and skills, making crypto money would be no problem. Copy trading is only one of many ways to do this. If you want to make more and more profit from your investments in a short period, then you have to have the right tools and trading strategies for this. Do your research, get informed about the market trends, and find out what kind of investments you can make in the crypto market.            

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