Copy Trading: The Ultimate Guide
Suppose you want to start trading in stocks, indices, or other assets. It can be challenging to know where to begin, especially since you lack experience. Gaining relevant knowledge takes time, effort, and, ultimately, money.
Thankfully, there’s a path, even a few, you can take to bypass the gap separating novices from experienced traders. It is called copy trading.
The Definition of Copy Trading
This trading strategy allows you to invest in financial markets by copying the trades of other, more experienced investors. You’ll need to find a seasoned trader whose style and risk tolerance match your preferences.
You can learn from skillful traders and make profits in the markets without having to do all the research and analysis yourself.
A copy trader is an individual copying the positions managed by another, usually a professional, trader on a copy trading platform.
When an experienced trader you follow opens a trade of their own, the same trade is automatically opened in your account. All the same conditions apply, so when the copied trader’s position becomes profitable, so does yours. If you aren’t comfortable with the associated risk, you can set a lower amount or close your copied trade at any time.
The most common trading strategy you should consider taking involves these steps:
- Choose the market with care, whether trading CFDs, forex, or something else
- Evaluate how much risk you’re willing to take
- Choose a trader in line with your investment goals and risk tolerance
- Do your market analysis to make adjustments if needed
- Don’t leverage more than you can afford to lose
Copy trading is legal under the condition that the CFTC (Commodity Futures Trading Commission) regulations are followed when you trade forex. The SEC’s (Securities and Exchange Commission) regulations apply if you trade stocks.
The Copy Trading Process
It’s never been easier to start investing, and nowadays, many brokers offer copy trading services. Let’s look at financial markets, copy trading signals, and other important terms before you embark on your copy trading journey.
Browsing Suitable Markets
You can copy trade in various markets, including FX (foreign exchange or forex), stocks, indices, commodities, and cryptocurrency markets. The FX market is the largest, and most people trading forex conduct transactions involving major currencies, such as USD, EUR, and GBP.
Opening Your Account
Before you make your first trade, you need to choose a copy trading platform that best caters to your needs. Then you’ll complete the registration form to provide the necessary personal information and wait for your chosen provider to approve the account. Lastly, you’ll be able to fund your account and start trading.
Researching Professional Traders
You must check traders’ profiles and stats to find the one most suitable to copy. The things to pay attention to when choosing a trader you’ll follow are:
- The investor’s profit/loss balance
- The number of their satisfied followers
- How long they’ve been trading and whether their profit rises consistently
These factors will give you a good idea of your risk exposure in case you decide to copy them. When you find successful traders, choose the Follow option.
Interpreting Trading Signals
You must also learn and understand how to interpret the trading signals that providers send. You’ll receive these signals from traders you follow.
Trading signals will look like this:
BUY BTC/USD @ $100.00, TP: $102.000, SL: $99.500
They may seem complicated or like something you need copious amounts of knowledge to decipher, but in reality, this signal simply instructs you to buy Bitcoin at $100.000 with a take-profit (TP) of $102.000 and a stop-loss (SL) of $95.500.
You can get copy trading signals via email, SMS, or directly on the trading platform. These signals include all the information you need to open a trade and make a profit, including when to enter and exit the trade and what take profit and stop loss orders to implement.
Copy Trading Profitability
The truth is that profits depend on how much you’re willing to risk, how good the trader you follow is, and the overall trading conditions. The critical factor is choosing experienced traders with consistent winning records, whether you are trading CFDs, forex, or something else.
Even expert traders can have periods of bad luck, resulting in rapidly losing money. Let’s review the main risks associated with copying trades.
Market Risk
Market risks encompass interest rates, stock, forex prices, and other market changes impacting trading.
That’s why following the best traders and learning trading strategies from them is paramount to avoid the high risk of losing money. Skilled traders conduct a thorough market analysis and avoid high-risk trades during volatile times. Illiquid market hours in forex trading or significant news releases tend to impact the market.
Systematic Risk
Systematic risk is the most unpredictable because it involves natural disasters, terrorism, and political instability, among other crises.
An example of systematic risk is the Swiss National Bank’s abandonment of the 1.20 EUR/CHF peg in 2015. This move took forex traders by surprise, caused havoc on financial markets and made many lose money.
Liquidity Risk
Since you don’t directly influence the trades you copy, there’s a possibility the trader you’re following won’t close a position at the right time.
This could happen if there are no buyers when the trader wants to sell or no sellers when they want to buy. Liquidity risks typically occur with exotic cryptos, forex pairs, and low-cap stocks.
Copy Trading Strengths and Weaknesses
Let’s review some of the most significant pros and cons of this trading approach.
Benefits
- Emotions can’t get in the way
- Traders can exchange ideas and trading strategies
- You can make a profit without spending a lot of time and effort
- Copy trading doesn’t require any experience
Drawbacks
- Lower risk control as you’re not the one placing trades
- Finding the right platform and trader can be difficult
Alternatives to Consider
Mirror trading and social trading are the best known alternatives here.
Mirror Trading
Mirror trading entails copying a particular trading strategy created by another trader or a group of traders. Mirror trading often means copying algorithms of automated trading.
This approach allows for high-frequency trading, reduced transaction costs, and the ability to place multiple bets quickly. Another significant benefit of an algorithmic strategy is that you can trade in various markets.
Social Trading
Unlike mirror trading, social trading isn’t automated, and it comes down to sharing ideas and trading strategies. Social trading platforms allow traders to interact with each other, ask questions, and further develop their trading skills.
Conclusion
As you can see, by copying the trades of veteran successful traders, you can make a profit and, by learning the ropes of the financial markets, open the door for future investments.
However, copy trading also involves risks, as you do not control the transactions.
It’s best you choose expert traders with a consistent winning record and constantly monitor your copied trades.
For years, the clients I worked for were banks. That gave me an insider’s view of how banks and other institutions create financial products and services. Then I entered the world of journalism. Fortunly is the result of our fantastic team’s hard work. I use the knowledge I acquired as a bank copywriter to create valuable content that will help you make the best possible financial decisions.
