Here is a list of important concepts you should be aware of before venturing into social trading.
Slippage is essentially a trade execution delay. This can result in different prices for the trader and his followers when opening a position. This can have good or bad implications for the investors’ returns, depending on the price movement during the delay. This trade execution delay is almost nonexistent nowadays, and thus shouldn’t be a huge concern for investors.
For small time horizons (scalpers – traders operating in minutes, seconds, or even less horizon) , be aware that if the pip size of the gains is small, slippage can eat a big chunk of your profits and thus your returns be smaller than the ones from your signal provider.
3. Stop Loss (or Copy Stop Loss) and Take Profits
Even though about 90% of traders don’t use Stop Loss, Stop Loss is a crucial risk management concept. Stop loss closes your position once the losses reach a certain number you’ve set. This helps you prevent from “gambling” with your money, using a strategy and sticking with it, not being influenced by your emotions. It helps you think which amount of money you’re willing to lose. If you don’t use stop loss, you may be losing and think “well, maybe it will go up again, let’s hold the position”, and when you notice it you’ve lost a considerable amount of your capital. Stop loss helps you lose small amounts of capital. And when you make a profit, there is not limit! Remember to limit losses and maximize gains!
In copy trading, what you can do is limit the losses from a specific trader you choose to copy. Meaning, you can choose to stop following a trader and replicating his trades once he reaches a loss of, for instance, 300€, or 6% of the amount you’ve allocated to that trader. This is called the Copy Stop Loss, in eToro, but most social trading platforms offer similar functions.
Also, don’t use a Stop Loss too short. You want to leave some space for the traders to do their operations, it is normal if they experience a period of loss. If you don’t leave some space for losing positions to hold back, the stop loss will be activated and you’ll most probably lose money.
Take profit is similar to Stop loss, take profit lets you automatically close positions once you’ve reached a predefined profit amount. In copy trading, most platforms don’t have this function for the follower/investor, but you can still do it manually.