Basics of Copy Trading

It’s fascinating how the world of finance has evolved to include copy trading as a popular investment strategy. With the rise of this approach, we’ve seen the emergence of a new concept known as the “people-based” portfolio, which is simply a portfolio made up of traders investing in other traders or investors instead of conducting trades themselves.

The idea behind copy trading is relatively simple – you replicate all the trades executed by a particular trader. Essentially, when they win, you win; when they lose, you also lose. However, the process of copying trades is more complex than it seems. Trades are made percentage-based, meaning you only link a portion of your portfolio to a specific trader, not your entire investment.

This approach allows investors to diversify their investments across multiple traders, thereby reducing their overall risk. You get to spread your investment across different signal providers, thus mitigating the impact of a potential loss from any one trader.

Let’s Understand How This Works Through An Example:

You’re a beginner in forex trading and interested in investing in the market. However, you must gain the experience or knowledge to make profitable trades consistently. That’s where copy trading comes in.

You find a successful and experienced forex trader on a copy trading platform; let’s call him Ray. Ray has a proven track record of making profitable trades and has attracted a large following of copiers.

You copy Ray’s trades by linking your trading account to his. Now, your account automatically makes the same trade whenever Ray makes a trade with the same parameters. If Ray makes a profit, your account will also make a profit. If Ray makes a loss, your account will also make a loss.

But don’t worry; you’re not blindly following the copy trader’s every move. You can set parameters for how much you want to invest per trade, and you can choose to stop copying Ray’s trades at any time.

Things To Keep In Mind While Copy Trading

• Find the right trader: When it comes to copy trading, the thrill of the ride is finding the right trader to follow. It’s like searching for a needle in a haystack, with many traders to choose from and numerous factors to consider. But fear not, as there are key indicators that can help you identify the right trader. Look for a trader with a proven track record, consistent returns, and a steadily increasing historical performance graph. It’s also wise to follow traders with many real-money followers, indicating trustworthiness. Checking the risk level of a trader’s trades and analysing historical drawdowns are additional steps to minimise risk and maximise success. With these variables in mind, hunting for the right trader becomes less daunting and more exciting.
• Diversify your investments: Spreading your risk by following multiple traders is essential. Copying a single trader can be risky, as their trading style may only be suitable for some market conditions. By copying several traders with different trading strategies, you can mitigate your risk exposure and increase your chances of success. But don’t just copy any traders randomly. Make sure you choose traders that use different trading strategies. This diversity will help balance out your portfolio and provide a hedge against any one trader’s underperformance. It’s like building a diversified investment portfolio with different asset classes. For example, you might copy one trader who specialises in fundamental analysis, another who uses technical analysis, and a third who focuses on news and sentiment analysis. By copying traders using different approaches, you’ll have a broader range of expertise. But be careful not to overdo it. Copying too many traders can be overwhelming and counterproductive. Stick to a manageable number of traders, ideally between three and five, and ensure you understand each one’s trading style and strategy.
• Notice how the trader behaves after a win or a loss: While past performance is essential, it’s also essential to look at how a trader handles adversity. Observe how they behave during and after a bad trade. Do they stick to their tried-and-tested system or panic and make impulsive decisions? A trader who sticks to their system during a rough patch will likely be disciplined and experienced. They understand that losses are part of the game and that sticking to their system is the key to long-term success. On the other hand, a trader who panics during a downturn may be a less experienced trader prone to emotional decision-making.
• Reinvest the profits earned from copy trading: It’s understandable to want to take out your profits as soon as you see them. After all, you worked hard for it. However, taking a step back and looking at the bigger picture may be more beneficial in the long run. Reinvesting your winnings into larger trades can generate even more profits, thanks to the compounding effect. It allows your account to grow faster and reach new heights. Of course, investing comes with risks, and you should always set a stop loss to protect your capital. But by taking calculated risks and reinvesting your profits, you could see huge future rewards. So instead of immediately withdrawing your winnings, consider using them to fuel your next big trade.

Is Copy Trading Profitable?

Copy trading can be profitable and risky, depending on the traders you follow. Researching and analysing their trading strategies, past performance, and risk management practices is essential. Keep in mind that higher returns don’t necessarily equate to better trading decisions.

When choosing a trader to follow, pay attention to how they handle losses and their ability to let profits run. Emotionally-driven traders who fail to cut their losses or lock in profits can quickly erode your investment. In contrast, traders with a disciplined approach to risk management and sticking to their trading plans are more likely to generate consistent returns over the long term.

Remember that no trading strategy is foolproof, and there’s always a risk involved in any investment. Therefore, managing your risks and investing only what you can afford to lose is crucial.

Copy Trading Forex And Crypto

In Forex, copy trading has become a popular way for beginner traders to enter the market, allowing them to follow experienced traders and learn from their strategies. Many copy trading platforms offer a range of features, such as real-time performance tracking, advanced filtering tools, and social interaction, to help traders make informed decisions.

Cryptocurrencies have also led to the emergence of copy trading in the crypto market. With a highly volatile market and often difficult to navigate, copy trading can provide a valuable tool for investors looking to capitalise on the potential gains of cryptocurrencies.

Copy Trading Methods

Copy trading offers various methods to replicate trades of other traders, and each method offers its own unique benefits and caters to different trading needs and styles. Thus traders should choose the one that best suits their trading goals.

• Signal copy trading: This allows traders to copy the trading signals of other traders, which are automatically executed on their trading account.
• Social trading: It offers a more interactive approach, where traders can follow and copy the trades of other traders in a social network-like environment.
• Mirror trading: This method allows traders to copy trades from a selected group of expert traders based on their trading strategies. Usually, mirror trading is completely automated, with trades being replicated with the same conditions and parameters as of an expert’s account.
• Automated account copying: It is a comprehensive way of copying trades, where traders can copy the entire trading account of another trader, including all trades and positions. However, it’s crucial to choose a reliable trader for account copying.

FAQs

What is Online Copy Trading?

Copy trading is when one investor automatically copies another investor’s trades through a platform, typically an experienced trader.

Is a Copy Trading Strategy a Safe Investment Strategy?

Copy trading can be safe if done carefully by choosing traders wisely, researching, investing only what can we afford to lose, diversifying the portfolio, and monitoring and adjusting the strategy as necessary.

Is Copy Trading and Social Trading the Same?

No, copy trading and social trading are not the same. Copy trading automatically replicates another investor’s trades, while social trading involves interacting with other investors to discuss trading strategies and ideas. Social trading can also include copying trades, but it is more focused on the social aspect of trading and sharing information rather than simply replicating trades.