Why People Lose Money with Copy or Social Trading
A recent poll of people utilizing copy or social trading revealed that almost 7 out of 10 had suffered monetary losses. Further research showed there are multiple good reasons why. Below, we explore each one in depth to help you avoid making the same mistakes that so many others have already.
Expecting too much from copy or social trading
For many people, the main draw of cryptocurrency social trading and copy trading is the opportunity to generate huge profits with small investments. When trading standard stocks, you would buy shares that interested you and pay the total amount immediately. For example, if you wanted to earn $2,000 on an investment and predicted that the share’s price would increase by 10 percent, you would need to put up $20,000.
On Contracts for Difference (CFDs), Forex, or spread bets, you have the opportunity to leverage invested funds. So, if you only put $200 in you could end up generating $2,000 sooner than you realize.
Crypto social trading and copy trading brokers or networks tend to draw attention to the potential for massive revenue in their marketing. Anyone who studies the achievements made by the most high-ranking traders across the majority of networks will notice that they earn ROI exceeding 100 percent or even higher.
All of this combines to make people think they can expect to enjoy incredible outcomes too, and their expectations become unrealistic. This sets them up for disappointment and means they may invest more than they should, increasing their potential monetary losses.
Putting no work into the process
As with many things, you have to put effort into copy and social trading to reap the rewards. Yes, there’s automation involved to streamline the trading process, but it’s not a guaranteed shortcut to wealth.
Some promotions for brokers and networks would have you think you can rake in thousands of dollars without having to lift a finger with social or copy trading. But it’s not that simple.
First of all, you have to put time into researching your options before laying any money down. You might find high-performing traders are leveraging a strategy with a high amount of risk, which is probably not the right move for you. Their returns might be impressive, but the potential monetary losses they could suffer should be enough to warn you off.
Even when you identify a trader with solid returns, you still have to put effort into monitoring their activities and avoid copying every single investment they make. They’re only human: just because they make a few good decisions doesn’t mean they’re right 100 percent of the time. They could blow all of their money on a few poor trades.
Educate yourself on the basics of cryptocurrency trading and research the best crypto social trading platforms available. Look to see which traders other people using copy or social trading strategies are following. A little bit of research here can go a long way over time.
Failing to diversify trades effectively
One common piece of financial advice you may read is to keep your investments diversified, to avoid putting all of your proverbial eggs in one basket (as the cliche goes). If you can spread your money across multiple traders, this helps to reduce the level of risk you face overall. This works with cryptocurrencies just as it does with standard stocks and shares.
The best networks offer a robust selection of traders for you to choose from and to copy, so don’t be afraid to explore multiple networks either. Each has its advantages and disadvantages, and platforms appeal to different trading preferences too. Diversifying investments across several networks can help you experiment and copy varied trade types.
For example, open platforms which allow all users to become signal providers typically appeal to traders taking bigger risks than those platforms which undergo active monitoring and require traders to operate with pre-set criteria related to risks.
If there aren’t multiple traders you want to base investments on, don’t put too much on any one individual. It’s best to leave yourself funds for investing in other traders as opportunities emerge.
Too eager to rush into decisions
Certain people using cryptocurrency social trading and copy trading are under the impression that those traders they copy or follow are incapable of making losses. Even the smartest, most well-informed traders are bound to lose at one time or another (if they’re playing the game honestly). It’s generally unavoidable.
Nobody has the power to see the future, and some choices will always leave you wishing you’d made a different one. But impatience can prompt some people to rush into decisions without thinking them through properly or doing their research.
You shouldn’t follow or copy a crypto trader who hasn’t proven themselves to be reliable. Give them between a few months and a year to demonstrate that they know what they’re doing and can make sensible choices. Overall, though, if you have worked out your risk settings properly, you’ll be able to handle a moderate number of losses early in your copy or social trading career.
Failure to manage risks right
A bad approach to managing risks can lead to serious financial losses in any type of trading, including cryptocurrency markets. It’s often surprising when beginners invest their funds into trades without knowing what key terms or events mean. This only increases the level of risk they face, which is a shame considering that most platforms offer a good range of features for managing risk.
You can usually take advantage of a virtual account for trying the platform out and acclimating to the process. This may last for a brief period only, but is a big help in mitigating risks. Use them to get a feel for how investments may fluctuate over time.
When using social trading, there’s a chance that profits will accumulate quickly, as can losses when traders keep making bad decisions. It’s important to set a limit on the amount of capital that traders can lose on an individual basis, to make sure you don’t copy a lot of bad trades which cost you more than you can spare.
Take care to invest a healthy amount in each trader, too. If you’re willing to put around half of your funds into just one trader, even those with jaw-dropping historical data, you could end up with just half of your capital left. That’s a lot of unnecessary risk. Drawdown is inevitable, but a lot of people believe all traders with a good record are guaranteed to make them rich in next to no time.
Always take drawdown risks under consideration for all traders or systems you decide to copy. Do your research and make sure that you keep building your knowledge of cryptocurrency trading. The more you know, the more likely you are to make smart decisions with your money over time. Research any traders you think about copying or following carefully before committing capital.