Trading signals, copy trading and bots: the risks and the red flags

Sooner or later every trader meets an offer to skip the hard part: copy a profitable trader, join a signal group, or let a bot trade for you. Some of these services are legitimate tools. Many are sold with claims that don't survive scrutiny, and some are outright fraud.

Signal groups

A signal service sends trade ideas, usually an entry, stop and target, through apps like Telegram or WhatsApp. The problems:

• Results are rarely verifiable. Screenshots of winning trades are easy to select or fake, and complete, independently checked records are rare.
• Your fills will differ. By the time a signal reaches you, the price may have moved, and your spread and slippage aren't the provider's.
• Incentives can point the wrong way. Some groups earn from subscriptions or broker referral commissions whether members profit or not, which rewards trading volume rather than results.
• Many are fronts for scams. A free group often leads to a private "account manager" and a request to deposit with an unregulated platform (forex scams: warning signs).

Copy trading

Copy trading platforms automatically mirror another trader's positions in your account. Offered by a regulated broker, it can be a legitimate product, but:

• Smooth returns can hide large risks. A trader may be using high leverage or adding to losing positions, a style that looks good until it causes a large loss (drawdown and recovery).
• Small accounts copy imperfectly. Minimum position sizes can make your risk different from the provider's.
• Rankings reward luck. League tables based on short periods favour high-risk traders who happened to do well recently.

Trading bots and "AI" algorithms

In January 2024, the US Commodity Futures Trading Commission issued a customer advisory warning that fraudsters were exploiting interest in artificial intelligence to promote automated trading bots, signal services and schemes promising unreasonably high or guaranteed returns. It stressed that AI can't predict the future or sudden market changes. The CFTC pointed to the case of the chief executive of a South African company who was ordered to pay more than $3.4 billion over a fraud built on claims that an AI trading bot would return at least 10% a month.

Genuine automated strategies exist, but like any method they lose money in some conditions, and no legitimate provider guarantees returns.

Finfluencers

In the UK, the Financial Conduct Authority published finalised guidance FG24/1 in March 2024 on financial promotions on social media, which must be fair, clear and not misleading. It explains that influencers who promote regulated financial products without approval from an FCA-authorised firm may be committing a criminal offence.

Red flags

• guaranteed returns, or a win rate close to 100%
• pressure to join quickly or pay before a "price rise"
• requests for your trading account password or remote access to your computer
• being steered to a specific, unfamiliar broker
• conversations moved to private messages
• performance shown only as screenshots

Questions to ask first

1. Who runs the service, and are they authorised by a financial regulator? Check the register yourself (how to check a broker is regulated).
2. Is there a complete track record, including losing periods, verified by an independent third party?
3. How does the provider make money: subscriptions, broker commissions or a share of profits?
4. What was the largest drawdown, and could you live with it in your own account (risk-reward and expectancy)?

For these reasons, the FTC forum doesn't allow selling signals or posting trade calls for others to copy.