What is copy trading is a question that confuses many traders and investors of the financial markets? To get the facts and techniques for executing a smooth trade, traders need to be aware of the terminology of copy trading.
Copy trading is a trading style where traders follow other individual or professional traders of the markets to get the desired results. They select the traders they want to copy and then trade accordingly.
A different style of market investment that is highly popular among traders and is a good option for beginners in the financial markets. To understand it better and have great trading experience, let’s analyze it further and earn high profits.
What is Copy Trading?
In copy trading, users get the chance to automatically copy positions opened in the market and that too managed by other individuals. The traders of the copy trading strategy have the opportunity to copy specific strategies.
The goal of copy traders is to have the same position as the investors they copy. However, in the process of copying, traders do not have a layout of the trading strategies, but they follow blindly. This is the point that makes it stand different from mirror trading; a trader gets actual strategies to follow.
The style of copy trading was developed from mirror trading in 2005 and has evolved over the years.
Copy traders use it for portfolio management as they copy trade investors they find to have the same trading goal as theirs. Traders can easily copy trade the professional they find appropriate and have the best results.
How to Copy Trade?
Copy trading is a useful trading technique for novice traders and for those who do not have time to follow the market. Such traders usually go for short-term trading and could be executed with various trading strategies.
It helps traders focus on assets of various markets and have the best trading platforms for successful investments. Although, it could involve certain risks. But, taking it as an overall copy trading strategy, here we have the process that traders can have to go through to trade.
Copy-trading has several ways; traders can copy all the transactions of the investor they are copy trading or could have notifications of the trades and manually follow them. Traders can carry out the trade either via spread betting or CFD trading accounts.
Here are the steps that copy traders can follow:
- Creating a trading account with reliable trading platforms or brokers online. These trading platforms offer the option of copy trading fellow traders with a lot of options available. They can select the trader based on various measures.
- The second step of copy trading is to decide on the amount to be invested in copy trade. Traders have to be prepared to take the high risk involved with the investment. It is advisable that traders begin with a small amount initially.
- The third step of copy trading is to watch the trader’s move in the market. Even traders can use automatic copy trading with the software available or go for manual copy trading. Manual copy trading gives a chance to watch the portfolios of the investors and what they are buying and selling.
- The process of copy trading is simple and does not involve many efforts from the traders. But the high risk of losing the funds invested is also there as past trades of the investor cannot define the future prospects.
Suitable Markets for Copy Trading
Copy-trading works for all the financial markets; it could be forex, stocks, commodities, indices, cryptocurrencies, or metals. Although, most traders that use copy trading prefer it for forex and stock trading.
The trading technique solves the problem of traders that cannot regularly monitor their investments and market. Traders with no advanced skills and basic knowledge of the trade can go for copy trading in any market and get the desired profits.
Copy traders can have good market exposure and can use copy trading platforms or tools to invest. So, copy trade is not specifically for one particular market and could be used by all the market traders to follow experienced traders and have successful investments.
Forex Copy Trading
Copy trade in forex is important as most of the trading is done in this high-volume trade market. The traders utilize the strategy to invest in the currency pairs and get high market profits due to market volatility.
Moreover, the market is highly liquid, which attracts most traders. There are many softwares or trading platforms in the market that traders use for copy trading. Traders copy the trades of successful traders with the hope of making a profit.
The market has a high risk of losing money which is a concern for several forexes or other market traders. Thus, it needs good research and preparation before executing the trade with the best copy trading platform.
Mirror Trading vs Copy Trading
Mirror trading and copy trading are mostly similar in their trading but have a slight difference which makes them stand apart. While mirror trading is mirroring a strategy, it could be for trading CFDs, forex, or any other market.
Traders mimic the strategies or styles of other traders. The initial trading was based on algorithm trading, which was developed. The traders of the style shared their trading history in the market.
When traders find strong market returns for an algorithm, they follow and get the results. However, they ask for permission to follow the strategy.
Copy trading is a part of mirror trading as it came out of it, but copy traders do not have the layout to follow. Copy traders blindly follow the trade of the traders without knowing the strategy used.
Social Trading vs Copy Trading
Social trading is another type of market investment that looks similar to copy trading. In social trading, investors get their trading ideas from the social trading networks. Traders share their trading ideas with other traders in the market and allow traders to develop new strategies.
Traders of social trading can even replicate the same strategies and tools in the market. But copy trading replicates the trades or positions of the traders they follow.
The similarities of the two are that they have their own research, trading tools, and thought processes for trading in the market.
Copy Trading Platform
Copy-trading platforms are many in the financial market, but traders of the strategy should choose the one that supports their investment. One of the best copy trading platforms is eToro, which is known for its copy trading and social trading services to clients.
Not only this, the broker has many other services that make it a suitable fit for traders. A copy trading platform should have the following features:
- Allows own trading strategies
- Trading signals
- Regulated broker
- Proper system
- Copy-trading legal
- Has manual investment
- Risk management
- Technical analysis
eToro is properly regulated by the Cyprus Securities and Exchange Commission. It has demo account services and copy trading services: trading CFDs and other complex instruments. Traders can consider the broker for copy trading as it comes under excellent copy trading platforms.
Advantages of Copy Trading
Copy trading is a great style and offers a lot of benefits for market investors. Here we have the most significant advantages that copy traders can enjoy:
- It helps traders or beginners in the market to build confidence by following more experienced traders and understanding the market.
- Another important benefit of trading with style is it familiarises traders with the markets.
- Copy-trading platforms make it easier for traders to invest and use tools such as technical analysis, automated and semi-automated, etc.
- Traders can invest with any of the markets or assets such as CFDs or other complex instruments.
- Helps in gradually making money in the market.
- Traders can make a strong network in the market with the experts of the trades.
- It is a good way to earn passive income as it helps diversify the funds.
- Creates a community of traders and investors that can learn from expert traders of the market.
Risks of Copy Trading
As the markets are volatile, it becomes difficult for traders to invest in the markets.
They have to analyze the risks associated to have the best experience. Below are the risks of the trade:
Market fluctuations are a common thing in trades which calls for a high risk of losing money rapidly. The price of assets changes due to various market factors. To have an investment, they can go for risk strategies or other techniques for desired results.
Asset allocation is a good strategy that traders can use to manage the high risk of losing their funds. They can invest in small amounts in various assets and have stable investments.
Liquidity is another risk factor of the trade where traders are not able to exit the position at the required level. It is, therefore, important that traders check the history of the traders they follow.
They’ll be able to understand the way they are investing in the market and know their technique. If the market is not liquid, traders can lose money when investing as the opportunity won’t be available for traders to exit the market.
Money getting locked up in the market is what is called systematic risk of the trade. The trader will not be able to exit the market and have a high risk of losing money rapidly due to market irregularities.
Right Trading Platform
It is a drawback for the traders to have the most suitable copy trading platform. They find it difficult to get the best from the market and if they find one the charges of use are high.
Another risk of copy trading is choosing expert traders for long-term investment. It is not easy as traders select traders based on their trade histories and thus increasing the risks of the trade.
Copy trading is an excellent trade opportunity for market beginners; they can trade in any market and have profits. Traders have to open a trading account to access the market. The article discusses various aspects of the trade in the market.
Traders can know advantages, risks, the process of investing with copy trade, comparisons with other techniques, and make their best trades. However, traders need to focus on the risks involved with the trade.