This is part 2 of a three-part series on the history of copytrading, and its evolution to automated trading ecosystems such as GStar.AI
Click here to read Part 1
Click here to read Part 3
Copytrading is a brilliant concept which leverages on the combined wisdom of the community, allowing investors to put their capital to work with minimal effort. However, existing copytrading platforms are not without their flaws, and tweaks still have to made before copytrading is fully reliable.
The copytrading concept is a social construct and is highly reliant on members of the ecosystem to regulate and police each other. However, this may not be entirely possible, given that many newcomers to the copytrading scene are individuals with little to no trading knowledge simply looking to make a quick buck.
1) Inability for ecosystem to police itself
The knowledge difference between the people with strategies and those looking to copy them may be huge, resulting in the average copytrading investor unable to differentiate between a truly successful strategy and a strategy that simply struck lucky. This is further exacerbated by the fact that many investors only have 12 months worth or less of investing history for reference on the platform due to them joining the platform recently, or worse, the copytrading platform does not provide sufficient information on the trader (eg. not revealing the open positions deep in the red that the trader refuses to close in the hope of it rebounding).
2) Lack of accountability
Furthermore, certain platforms allow individuals to open multiple accounts under different names, and this arises to certain traders opening hundreds of strategies with the hope that one will be wildly successful, then proceeding to sell that strategy to unknowing investors, only for the strategy to crash shortly after because it was not based on thorough market research and strategy. It is also difficult to verify the background of these traders, with many claiming to have “multiple years of specialization in certain industries”, leveraging on individual’s want for “professional” advice. There have been multiple stories of “traders” and “hedge fund managers” in the past impersonating professionals to selling investment advice; and copytrading may simply be another medium for them to do so.
Given the potential for misuse, copytrading platforms must ensure high levels of transparency when showcasing their traders, and also ensure clarity in their terms and conditions (eg. no hidden fees) in order for the entire concept of copytrading to gain credibility. After all, the strength of any social platform is dependent on the amount of trust an individual places in the credibility of the community, and copytrading platforms will need to go out of their way to convince individuals on their trustworthiness.
