If you have heard about copy trading but did not have time to explore the topic thoroughly, this is your chance to fill the gap in your knowledge and probably to consider including this strategy in your toolkit. This review will cover the basics of copy trading, from its essence to legal matters, and will then dig deeper into the practical field. Risks, benefits, starting tips, and advice on platform selection will be explained in simple terms so that you can dive into the process with confidence and attention to important details.
The First Acquaintance: What Is Copy Trading?
Let’s start with some clarifications. Copy trading highly resembles mirror trading and social trading, but there are some differences to keep in mind. They all are useful and workable strategies, but in this overview, we will talk about copy trading in particular.
So what is copy trading, after all? In dry financial terms, copy trading in the financial markets is the exact copying of specific trading decisions and steps currently performed by other traders deemed to be more successful and experienced. In simpler words, a copying trader opens and closes the same positions as a trader who is copied. If a copied trader makes profits, a copying investor reaps the benefits, too. If a trader who provides instructions fails, a copy trader loses the assets as well, unfortunately. So, be very careful about whom you choose to copy. That’s the first secret of success.
The Mechanics of the Process of Copy Trading
Now let’s look at the technicalities of the process. How exactly are you supposed to get signals and trade in synchrony with another trader?
Initially, operations of copying one’s trades, i.e. setting market-entry, market-exit, and stop-loss positions, were conducted manually. A copying trader received specific signals to use via email or phone, implemented them manually, and waited for the results. You can do it even today, by receiving signals in messengers and entering them manually in your account.
But the most convenient and lucrative way is to perform it automatically, where you do not have to follow the signals and enter anything manually (thus increasing the chance of a mistake). Instead, the dedicated online platforms offer the option to connect a portion of funds in your account to the account of another trader, whom you want to copy. Money is not given directly to that chosen trader. Rather, every operation performed in that account by a copied trader is automatically replicated on this allocated sum. However, you retain the option to manage the performed trades manually or to cancel the copy trading connection altogether.
Remember, that your funds are managed proportionally to the funds employed by the copied trader: if a trader allocates 2% or 3% of his money to the given operation, the same 2% or 3% of the funds you invested into copy trading will be allocated to the same operation.
Copied traders either sell their expertise for a fixed monthly fee or ask for a portion of profits gained through copying. In such a way, a copying trader gets assistance in trading and profits, and a copied trader gets a fee.
What Markets Consider First For Copy Trading
Since copy trading is usually recommended for short-term trading operations, it is best applied in markets with high volatility. Such markets are Forex markets, futures markets, and other markets where prices fluctuate frequently and which are subject to a complex of direct and indirect impacts. Stocks and bonds are instruments that require significant time to grow in price, so these markets are less lucrative for copy trading. Copy-trading stocks is a good idea if you plan to gather a solid portfolio for mid-term or long-term investment and want hands-on guidance in it.
Since copy trading is usually recommended for short-term trading operations, it is best applied in markets with high volatility.
That’s why copy trading is often implemented in the day trading strategy and swing trading, where copying a reliable trader can bring significant profits in a short-term perspective.
Making The First Steps In Copy Trading
Now due to understanding the principles of how to copy trade, you can start actually practicing it. To launch your trading career, you need to take several simple steps:
- Pick a platform that offers tools for automated copy trading (doing it manually can be very cumbersome);
- Set up an account;
- Upload funds;
- Pick a trader to copy (check the success history, ROI, performance over time);
- Clarify the payment conditions;
- If everything is OK, allocate a portion of your funds to copy trading with this particular trader. It means, that allocated funds will be automatically invested into operations copied from the trader’s account;
- Keep an eye on what’s going on in the trading periodically.
The Inevitable Evil: Risks of Copy Trading
As with any other strategy, copy trading carries risks that you need to consider.
The main risk is picking a trader who is inexperienced or too prone to risk-taking. So check in advance how the trader’s operations ended in the past, what the profit-making level is (desirably, it is above average), and what other people following the trader said.
Other risks are connected to the nature of markets and assets.
- The risk of asset volatility is what makes any kind of trading, not only copy trading, an uncertain endeavor (although profitable one). At any given time the price of assets you invest into may drop unpredictably, and you will lose your investments altogether. The most solid solution is to diversify your portfolio and never invest all you have into a single asset.
- The risk of illiquid assets is connected to lack of liquidity for the currency pair you trade. When you explore what is copy trading in Forex, always remember about this risk. It means that for currencies of countries with unstable economies, at a given time point, the market may lack the liquidity for closing the position urgently. So while your asset loses in price, you can only watch and wait till the demand will boost the liquidity lever to let you exit the trade.
- Systematic risk also relates to emerging markets and counties with unpredictable political and economic environments. In case of the default event or some kind of political unrest, the assets are automatically locked within the financial system with unclear prospects of a future release. So you may bid them farewell for good.
The Silver Lining: Benefits of Copy Trading
The benefit of copy trade is access to the experience and practical skills of traders who have a long record of trading and the feel of the market. In such a way, you can start performing plausible trading operations without spending too much time studying. Definitely, you need to educate yourself, but you can do it simultaneously with growing your portfolio and earning money.
The benefit of copy trade is access to the experience and practical skills of traders who have a long story of trading and the feel of the market.
Besides, while observing the operations made by other traders, you can learn some tricks and later use them in your own trading.
Choosing the Playing Field: Copy Trading Platform
To copy successful Forex traders who deliver on their promise and really help you earn money, you need to pick a reliable platform, a playfield, so to say. It is an automated system that lets you connect to other traders and then observe in real-time what happens to your money (and intervene, if necessary). It should have a convenient and easy-to-use interface and an ample toolkit for trading and watching the process, with charts and all.
Such a copy trading system can be a dedicated standalone instrument, or it can be created as an add-on to be integrated into the known multipurpose trading platforms, like MT4.
Learning the Rules of The Game: Copy Trading Terms
As with every financial activity, copy trading incurs obligations that should be fulfilled by all parties involved.
- The platform provides access to trading tools and connections to copy traders "as is," without any guarantees that these traders will obligatorily bring you profits.
- Traders whom you copy take the obligation to provide you with accurate signals and not to falsify any data they share with you. However, they also do not guarantee that their activities will make you rich no matter what. All they can do is conduct trading operations in good faith and in accordance with the best market practices and inform you about the steps that they make.
- You carry your own share of responsibilities, but if everything goes right, it will be worth every minute of it. When you start performing trading operations, you accept the risks of losing your investments "by default" and agree to comply with rules and the legislation of the platform. Yes, the platform guarantees the security of your funds when they are in your account, but when you invest them by opening positions, the market forces define the game. So the platform cannot be held liable that you copied the wrong trader or invested more than you could afford to lose.
All in all, copy trading is a good strategy for beginners and for those who do not want to spend the day peering into the monitor. When done right, this trading strategy is profitable and safe (as much as trading can be safe in general). So expand your knowledge, pick a trader to copy, and enjoy the ride. JustMarkets will be your trusted partner and supporter in this endeavor, making it safe and easy.