“Copycat trading” is when a regular trader copies the trades of more experienced and successful traders. It sounds simple enough: copying someone else’s trades makes trading easier for you as it eliminates the need for you to do your own research. If you want to trade foreign exchange, for example, just follow the top performing foreign exchange trader; as he profits, you profit, too. You don’t have to study the foreign exchange market, master technical trading signals, or follow the economic news.

Don’t do it!

Just like your school teachers didn’t want you to copy on tests, reputable financial advisors wouldn’t advise their clients to blindly copy someone els’s trades. Your investing style should be personalized for your individual situation.

Ironically, the success of a copycat trader may also be his downfall. This is because, encouraged by profits, the copycat trader may increase his winning positions. Then, the market changes and the trader may begin to lose money. The copycat trader may sell and find another trader to copy rather than sticking with the original strategy. While flexibility in investing is important, following a clear strategy to reach your end goal is even more important. Active trading requires enough successes to profit once you take into account short-term capital gains taxes (in the U.S. they are taxed higher than long-term gains), and commissions. And frankly, most people fail at it.

What about copycat investing?

Copying a winning investor may be a smarter strategy. The most followed investor in the world is value investor Warren Buffett. Buffett is a long-term investor, not a day trader. Copycat investors may emulate his value investment style, rather than mimic individual trades. Buffett invests in stocks with strong fundamentals, measured by earnings, dividends, and “book value” (the value of a company after paying its debts). He looks for companies with strong fundamentals based on having built solid businesses.

Copycat investing may be a good way of gathering ideas on how to trade, but before you implement them, make sure the strategy is right for you. And, then, don’t invest more money than you can afford to lose.

To find out more about the risks of active trading and short-term investing and why it is a high-risk option for retirement savers, click here.

Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.

Published March 26, 2018. Updated on July 1, 2018.

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