How to Manage Risk While Copying Traders?

There are a lot of people who want to try forex or CFD trading, but are afraid of the risks or have little knowledge of the market.

What if they have an expert by their side?

Yes, that’s possible with copy trading. You can simply pick a trader to follow based on their past performance, and that’s it. Now, your account will mirror the trades automatically.

It sounds easy, and it is. But the thing is that even though someone else is doing the trading for you, the risk is still yours, making risk management equally important as it is in traditional trading. In this comprehensive blog, we will break down some smart and simple ways to manage your risks while using copy trading platforms.

Manage Risk in Copy Trading

No one is perfect!

Even experts can make mistakes. So, to minimise the risks, you should follow these golden rules:

Don’t follow just anyone

This is where most people make mistakes.

In the copy trading world, it is tempting to pick the traders who have a history of high returns. But you need to remember that past performance doesn’t guarantee future results. And, most importantly, the traders who take big risks often show big returns, until they don’t.

Thus, it is important to look for this checklist while choosing the trader to copy:

1. A consistent track record: To make sure that you are choosing the right trader, always check their performance over several months and not just recent spikes.
2. Low to moderate drawdown: Checking the drawdown will give you an idea of how much they typically lose during rough periods.
3. A risk profile that matches your own: Every trader has a particular risk profile. Some can risk big while the rest cannot afford such a risk. So, if you are a conservative trader, do not copy high-risk traders.
4. Transparent strategies: Many copy trading platforms allow traders to look at the trader’s approach and trading logic.

Note: Never miss any point as you are trusting those traders with your money. Choose wisely.

Start small and scale up

Wait!

Even if you have found an expert who goes through your checklist and looks perfect on paper, it is smart to start with a smaller amount first.

While starting, try this:

• Allocate only a portion of your trading capital (say 10-20%) at first.
• Monitor how the trader is performing over a few weeks or months.
• Gradually increase your allocation if they continue to build trust by performing well.

It is important to note that copy trading is there to let you learn and earn. Never rush and think of it as a dating strategy before marrying it.

Diversify across traders

One of the most effective forex risk management strategies is diversification. So, try to diversify capital among multiple traders. It can be helpful in limiting the risk.

Here is what you can do:

• Copy multiple traders with different strategies (e.g., try to copy one who is a trend follower and one who is a swing trader)
• Spread risk across different instruments (e.g., one focuses on forex, another on commodities)
• Mix risk levels (e.g., one low-risk, one moderate-risk trader)

In this way, if one trader has a bad week, your entire portfolio does not take the big hit.

Set risk limits

Mostly, traders forget to set limits. But this is non-negotiable, even if you are copying an experienced trader. Most copy trading platforms allow you to set limits and controls.

So, use them.

Here are some of the useful features that can benefit you:

• Stop loss: With this, you can automatically stop copying a trader if the losses reach a certain amount.
• Max trade size: This allows you to put a cap on how much capital should be used per trade.
• Investment cap: Limits how much of your total account is allocated to one trader.

Most traders forget that the existence of these tools is for a reason. They can help traders to stay in the game during sudden market dips, instead of wiping out their balance.

Understand what they’re trading

Even if you are not placing the trades of your own, you should try to understand what and why the trader is placing the specific trade. This will help you to have a basic understanding of how the trading world works.

For this, ask yourself:

• Are they trading major forex pairs or volatile assets?
• Do they trade during high-impact news events?
• How long do they usually hold positions?

The more you know, the more confident you’ll be in managing your copy trading choices, and that’s what the end goal is!

Conclusion

To conclude, copy trading is a great way to get the skills of experienced traders while you learn and grow. But the most important thing to know is that it is not risk-free. Just because you’re not the one placing the trades, it doesn’t mean you can skip risk management.

While copy trading, you need to be smart, set limits, diversify, and stay informed. In this way, you can enjoy the benefits while keeping your capital better protected.

I'm a passionate trading blogger with a focus on simplifying complex financial concepts for everyday investors. With experience in forex, commodities, indices, and copy trading.