In recent times, copy trading has become a very popular way for people to get involved with investing in financial markets without having extensive or in-depth knowledge or experience about them.

In fact, all they need to do is to get on the right copy trading platform, copy the trades of more experienced traders and they'll be on their way to taking in great profit. All done with minimal effort.

Just from everything you have read above, the idea of copy trading already sounds like a very exciting and lucrative idea and it is. But it isn't as straightforward as it looks.

Like every form of investment, copy trading comes with its own risks. Copy traders can make common mistakes that can cause substantial losses. And that's why articles like this exist – to clear out your doubts, answer your questions, and place you on track in the right direction.

In this article, I will highlight five common mistakes that most copy traders make and how you can avoid them.

But first, let’s examine a few questions.

What Is a Common Mistake Made by Traders?

One of the most common mistakes traders make, especially beginners, is starting trading without building a solid, foolproof plan. Many traders jump into the market without having a clear strategy or a set of principles to stick to. The consequence of this is that they end up making impulsive decisions influenced by emotions rather than logic and reality.

When you don’t follow a plan as a trader, you are bound to sell or buy at the wrong time at some point. The essence of a well-thought-out plan is to ensure that you make smart decisions consistently and stick to your strategy. It’s important to have a plan that helps you decide in advance how to react to different market conditions. With a plan, you can drastically improve your chances of success as a trader.

What’s the Hardest Mistake To Avoid While Trading?

Most traders can all agree that one of the most difficult mistakes to avoid while trading is keeping your emotions in check and ensuring that they do not influence your decision-making. Fear and greed are powerful emotions that can lead to poor decision-making. For example, being afraid can make you sell too early, missing out on potential profits. Greed, on the other hand, might push you to hold onto a losing position for too long, hoping for a turnaround.

Your emotions can influence you into chasing empty trends and making the wrong decisions without proper analysis. Of course, being disciplined and sticking to your trading plan can help. However, even experienced traders find it challenging to keep emotions in check, making this one of the toughest aspects of trading.

But then, the mistakes above aren’t the only mistakes that most copy traders make. Here are five common mistakes that copy traders make and how you can avoid them.

Following Unverified Traders

Experienced copy traders will tell you that at some point in their journey, they made the mistake of following the wrong traders. Most times, when you are new to copy trading, there’s every possibility that you’d get so excited at the idea of making so much money that you’ll end up following traders without checking their credibility.

This can be very problematic because not all traders are reliable or experienced. If you have made the same mistake, there’s nothing to feel bad about because most of us did the same.

However, avoiding the same mistake means doing the exact opposite: doing your own thorough research before following any trader. You want to make sure that the traders you follow have a track record of consistent success. I know it’s unrealistic to search for traders with all winning streaks and no losses.

By consistent success, I mean a history of more wins and fewer losses. It’s also best to go through their trading history and read through reviews, testimonials, and comments from other copy traders. Since most reliable copy trading platforms often provide performance data and risk metrics for each trader, you can use the information available to make intelligent, informed decisions.

Ignoring Risk Management

Another common mistake that many copy traders make is paying little or no heed to risk management. Most get so carried away by the prospect of making a lot of money that they forget that they can lose it, too. As a result, they end up raking in significant losses, especially during market downturns—a mistake that could have been avoided.

To ensure that you don’t make the same error, learn to use and stick to risk management strategies. Be sure to set stop-loss orders on each trade and diversify your investments across multiple traders to spread the risk. Understand your risk tolerance and adjust your trading strategy accordingly. As you approach and handle your risk with the right strategies, you can protect your capital and increase your chances of enjoying sweet long-term success.

Over-Reliance on a Single Trader

Most times, when you find out that something works and can be trusted, there’s every chance that you’d go back to using that ‘thing’ to ensure that you get the same results you’ve enjoyed in the past.

The same can be applied to copy trading. When you finally find a trader who has given you streaks of profit for a while, there’s that temptation to just cast all your burdens, worries, and investments on him and get to bed.

As sweet as it might sound, it is a terrible idea, and you need to make sure you avoid falling into the trap of over-reliance. Think about it for a second. What happens when you invest all your funds with that one trader, and it happens not to be your lucky day? Let me answer that for you: all your investment goes down the drain, never to be seen again.

To avoid making this mistake, diversity is key. Make sure that you have other reliable traders that you can trust and spread your investment on them based on their track record and expertise. In fact, choose traders with trading styles and strategies. This way, if one trader performs poorly, the others might still generate positive returns.

Forgetting to Monitor Trades

Some copy traders believe that once they start following a trader, they can sit back and relax. It might sound like a great idea, but it’s probably one of the worst mistakes you can make as a copy trader. If you have forgotten, permit me to remind you that copy trading involves a high degree of dependence on the traders you copy. This means that whatever decisions they make affect you and your investments directly.

Remember that markets change quickly, and traders will alter their strategies if necessary to adapt to those changes. What happens then when a trader makes a decision, and you aren’t aware because you weren’t keeping track? You don't even want to find out.

Be very vigilant about your trades to prevent yourself from becoming a victim of such a mistake. Stay informed about market conditions and any news that might impact your investments. If you notice a trader making decisions that don’t align with your goals, adjust your settings or switch to a different trader that you are comfortable with.

You can even create a schedule to help you check in consistently with your traders. Whatever method you decide to use, the most important thing is that you are constantly aware of your traders and the status of your investments.

Lack of Education and Research

You might not believe it, but there are copy traders who got involved with copy-trading without understanding the basics of financial markets or the strategies employed by traders.

Although copy trading does not require a deep understanding of financial markets and trading strategies, it is not an excuse to be ignorant. As a copy trader, it is expected that you stack up on everything involving your chosen system of investment, which is copy trading.

A lot of copy traders make the mistake of not learning consistently and it affects their ability to make a profit. To avoid this mistake, invest time in learning about financial markets, trading strategies, and the principles of copy trading. Many online resources, such as articles like this, courses, and webinars, can help you learn what you need to know.

Also, research the traders you plan to follow to understand their strategies and risk profiles. Continuous education and research are key to making informed decisions and improving your chances of success in copy trading.

Conclusion

Although copy trading can be a lucrative and convenient way to participate and earn from financial markets, it comes with its own class of challenges and risks. Being aware of the common mistakes above and taking the proactive steps suggested can greatly improve your performance as a copy trader.

But it begins with being aware of them, which you have already done by reading this article. Take further steps by reading my previous articles on other copy trading concepts, subscribe to the newsletter, and follow the blog. You’ll be doing yourself and your investments a huge favour by doing so! Sayonara!