It’s no secret that the stock market can be a risky place.
It’s seen its share of ups and downs over the years, and there’s no telling which direction it will go next. For this reason, many people choose to stay away from stocks altogether, opting instead for less volatile investments like bonds or real estate.
Others, however, see the stock market as a place to make quick and profitable investments. These people are often willing to take on more risk in hopes of seeing a bigger payoff.
One way that some investors try to profit from the stock market is by copying the trades of other people. This practice, known as “mirror trading,” has become increasingly popular in recent years thanks to the rise of social media and online trading platforms.
While mirror trading may seem like a good way to make money, it’s actually a very dangerous strategy that can lead to big losses.
In this post, we’ll take a look at why copying other people’s trades is a bad idea and explain why you should never do it.
The Various Ways Of Copying Other People’s Trades
There are a few different ways that investors can copy the trades of others. The most common method is to sign up for a mirror trading service.
These services connect investors with successful traders and allow them to automatically copy the trades that these traders make. Some of the more popular mirror trading services include eToro, ZuluTrade, and Mirror Trader.
Another way some copy other people’s trades is to subscribe to and follow trading alerts. These alerts are typically sent out via email or social media and tell investors when to buy or sell a particular stock.
The Dangers Of Copying Other People’s Trades
There are several dangers associated with copying other people’s trades:
1. You Don’t Know the Person’s Strategy
The first and most important reason why copying another person’s trade is a bad idea is that you don’t know their strategy.
It’s important to remember that not all investors are created equal. Some people are very risk-averse and only invest in companies that they believe are almost guaranteed to succeed. Others are more willing to take risks and will invest in speculative stocks that could either make them a lot of money or lose them everything.
The problem is that you don’t know what kind of investor the person you’re copying is. If they’re taking on a lot of risk, then there’s a good chance that their trades will also be very risky.
2. Past Performance Does Not Guarantee Future Results
Just because someone has made money from their investments in the past does not mean they will continue to do so in the future. The stock market is an unpredictable place, and even the best investors can have a string of bad luck.
For example, let’s say that you copy the trades of an investor who has made a lot of money over the past year.
It’s possible that this person’s good fortune will continue and they’ll make even more money in the future. However, it’s just as likely that their streak will come to an end and they’ll start losing money.
3. You Don’t Have the Same Risk Tolerance
Investors have different risk tolerances, which refers to the amount of risk that they’re willing to take on. Some people are very risk-averse and only want to invest in safe, stable companies. Others are more willing to take risks and invest in speculative stocks.
The problem is that you don’t know the risk tolerance of the person you’re copying. If they’re willing to take on more risk than you are, then their trades could also be too risky for your liking.
4. You Could Miss Out On Other Opportunities
If you’re busy copying other people’s trades, then you’re not focusing on finding other investment opportunities. This means that you could miss out on potential profits from other stocks that may be a better fit for your portfolio.
5. It Can Be Expensive
Many online brokers charge commissions when you make a trade. If you’re constantly copying other people’s trades, then these commissions can add up quickly and eat into your profits.
6. You Might Not Have Access to the Same Information
The person you’re copying might have access to information that you don’t. For example, they may have inside knowledge about a company that is about to release a new product. This could give them an edge over other investors and help them make more money.
7. You Might Not Be Ready to Trade Stocks
Investing in stocks can be a very risky proposition, and it’s not something that you should rush into. If you’re not ready to trade stocks on your own, then you shouldn’t be copying someone else’s trades either.
8. It Might Be Too Late By The Time You Execute
By the time you execute the trade, it might be too late. The stock price could have already moved in the direction that the person you’re copying is predicting, meaning that you won’t make any money (or worse, you could lose money).
What To Do Instead
The best thing to do is to not copy other people’s trades at all, and learn to trade stocks on your own. This way, you’ll know exactly what you’re doing and you won’t have to worry about any of the potential problems that come with copying someone else’s trades.
Having said that, you can still derive ideas and inspiration from other people’s trades. You just make sure that you:
- understand that person’s strategy
- remember that past performance does not guarantee future results. Just because someone has been successful in the past does not mean they will continue to be successful in the future.
- look at the trades of people who have a similar risk tolerance to your own
- do your own research before making any decisions
That’s what I do for Blueprint students that are within my Inner Circle community.
On a weekly basis, I share with them what stock opportunities I’m looking to get in or out of. However, I never tell them what to do with their money. Instead, I let them know what my thought process is behind the trade and why I’m making it. And I always tell them to do their own research and assessment and make sure that they’re happy with the stock themselves before buying.
This allows them to learn from my experience and develop their own trading strategies, rather than just blindly copying what I do and relying on me forever.
The Bottom Line
Copying other people’s trades is generally a bad idea, as it can be risky and it might not lead to the results that you’re hoping for. If you want to trade stocks, then you should learn to do it on your own. This way, you’ll have a better understanding of what you’re doing and you won’t have to worry about potential problems that come with copying someone else’s trades.
If you’re unsure of how you can invest in stocks on your own, and you’d like to learn how you can do that, then here are two resources that can help you get started:
- The first is our FREE 10 Stock Criteria Checklist, which helps you identify what I consider to be the financially strongest 1% of stocks in the market at any time in less than 5 minutes. Click here to learn more.
- The second is our FREE 90-Minute Online Masterclass, where I’ll show you the 4 key financial criteria for every company I look at, and how I personally anticipate market crashes in advance and prepare for them. Click here to learn more if you’re interested.