The pitfalls of ‘trade following’
This is an area of the business which we have been studying for the last 3 years, so you can’t say we haven’t been thorough 🙂 Here are some basic observations.
- There are a lot of less-than-ethical operators. They run multiple accounts under different pseudonyms and promote the strategy which happens to be good at the moment. They make declarations regarding their risk-management practices but don’t stick to them.
- Slippage and latency are real problems.
- There are not very many good traders in the market. Finding a really good trader who will allow you to follow his/her signals for $50 pm; REALLY?
- Not all traders are profitable all the time. Good traders will have periods of limited draw-downs but will maximise profits once the tide turns.
My experience has taught me the following:
- Retail traders are better off finding professional help rather than trying to become expert traders themselves;
- Good professional help isn’t all that easy to find. Get to know your service provider and be sure that they are indeed capable and professional;
- Finding 1 trader to follow at 1 point in time involves a degree of luck. Consider a portfolio approach. Increase/decrease the risk associated with each trader according to their live performance;
- You get what you pay for. If you want to gamble, go to the casino. If you want to trade in the FX market, you need to have a properly funded business plan.