Copy trading
With copy trading you automatically take over other users' trades. The leaderboards you see are distorted by selection, and the people you copy have different interests from yours.
The idea sounds sensible. Instead of trading yourself, you copy someone who knows how. The platform shows you leaderboards with impressive results, such as 180 percent last year.
The first problem is selection. Out of ten thousand users, some will have several very good years in a row by chance alone. They're exactly the ones at the top of the list. They become visible through their result, not their skill.
The second problem is incentives. Anyone paid by the number of copiers has a reason to produce eye catching results. High risk leads either to a top spot or to disappearing from the list, and you can only see the first case.
The third problem is execution. If thousands take the same position at the same time, you get a worse price than the person you're copying. So you pay more for the same idea.
Leaderboards only show who's left. If enough people take part, some will have strikingly good results over several years purely by the laws of probability. As long as you don't know how many took part in total and how many dropped out, a top spot tells you nothing.
The pay structure distorts risk. If someone is paid by copied volume, that's economically like an option: they share in the gains when things go well but don't bear their copiers' losses. Acting smartly under such conditions means taking more risk, and that's exactly what's observed.
Also, everyone buys at the same time. If little is traded (market depth), the bundled volume moves the price against the copiers who come later. The more popular the role model, the stronger the effect. That's why copiers usually do worse than the person they copy.
Summary
- Top spots also arise from chance with a large number of participants.
- Anyone paid by copiers' volume is rewarded for high risk but doesn't bear the losses.
- When everyone buys at once, you get a worse price than your role model.
Did you get it?
Why are leaderboards skewed?
Because with many participants, some do strikingly well by chance alone, and those who dropped out can't be seen.
What incentive does compensation by copied volume create?
More risk, because the person copied shares in the success but doesn't bear their copiers' losses.
Why do copiers' results typically lag?
Because the bundled buying moves the price against them.
Does copy trading work?
Technically yes, the trades are copied automatically. Financially, copiers usually do worse than the trader they follow, because leaderboards are skewed by chance and bundled buying worsens the price. It is sometimes written as one word, copytrading.
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