Copy trading is a financial service that allows you to follow/copy trades of traders who have been successful. It is designed to provide novice traders with access to successful trading strategies and techniques, enabling them to potentially achieve success without the need for extensive knowledge or experience in the trading landscape.
Instead of relying on their own skills, new traders can leverage the expertise of those who have already demonstrated their trading prowess. This can save time and effort spent on researching and developing trading strategies, and allows new traders to potentially benefit from the success of experienced traders.
How to Get Started with Copy Trading
Copy trading is carefully designed to provide novice traders with access to successful trading strategies and techniques, enabling them to potentially achieve success. To get started with copy trading, you will need to follow these steps:
– Choose a copy trading platform that fits your needs and preferences. Some factors to consider when selecting a platform may include the types of financial instruments available, the fees and commissions charged, and the reputation and security of the platform.
– Create an account on the platform and deposit funds into it. You will need to provide some personal and financial information to open an account, and you may also need to pass certain requirements, such as identity verification, proof of address and a minimum deposit amount.
– Search for traders to follow using the platform’s search filters. These filters may allow you to find traders based on their performance, risk profile, and other criteria.
– Review the trading activity of the traders you are considering following, and decide whether you want to copy their trades. You can typically do this by clicking a “copy” or “follow” button on the platform.
– Monitor your copy trading activity regularly and adjust your portfolio as needed. Some platforms may allow you to set limits on your copy trading, such as maximum trade size or loss threshold, to help manage your risk.
Who is this form of Trading Suitable for?
Copy trading is suitable for a wide range of traders, including those who are new to financial markets and those who have some trading experience. It can be particularly useful for traders who want to create diverse portfolios that they are unfamiliar with, as it allows them to potentially benefit from the expertise of more experienced traders without having to invest the time and effort required to learn about these markets themselves.
Some other benefits of copy trading include the ability to profit from proven strategies, the convenience of being able to trade on-the-go, and the opportunity to learn from the best traders.
Copy Trading Advantages
Some of the main advantages of copy trading include:
Novice Traders can learn from More Experienced Traders
By watching and copying the trades of experienced traders, novices can learn from their mistakes and successes, and potentially improve their own trading skills. Some copy trading platforms also offer social features that allow traders to interact and share information, which can be a valuable resource for learning about technical analysis or unfamiliar instruments.
Information can be shared for the Benefit of all Traders
Experienced traders who are successful in certain asset classes can share their knowledge and strategies with others, which can be a valuable resource for traders who are copying them.
Copy Trading can be more Time-efficient than other Forms of Trading
Because the trades are executed automatically, traders can continue to make trades even when they are not actively watching the markets. This can be particularly useful for those who have busy schedules or other commitments that prevent them from spending hours in front of a computer screen.
Proven Strategies can Increase the Chances of Success
When you follow the trades of expert traders who have proven strategies, you have the chance to increase your chances of success compared to trying other techniques. This is especially important given that a study found that a massive percentage of traders lost money, highlighting the importance of following successful traders.
Potential Problems with Copy Trading
Here are some of the problems traders could face when copy trading:
Traders who allow others to Copy their Trades may Demand Compensation
This compensation may take the form of a percentage-based commission or an annual subscription fee. Additionally, the broker may charge a higher spread (the fee per trade placed on the platform) for those who are copying compared to the “master trader”, which could affect the profitability of the copied trades.
You Could Copy Bad Decisions
When copy trading, your success is essentially in someone else’s hands. This means that you need to be careful about how you select your copy traders, and it may take a lot of time and effort to find ones that are suitable for your needs.
Copy Trading can provide a False Sense of Security
It is easy to assume that profits are almost guaranteed when copying “proven strategies”, but this is not always the case. Markets can be unpredictable and even successful traders may experience losses.
Researching more Experienced Traders can be Time Consuming
While you don’t have to research trading strategies when copy trading, you will still need to spend a significant amount of time researching potential copy traders to ensure that they are suitable for your needs and risk profile.
Past Results are not always Indicative of Future Results
It is important to keep in mind that traders who have been successful in the past may not necessarily be successful in the future. Markets can change rapidly, and strategies that worked well in a bullish market may not be as effective when the market turns bearish.
Final Thoughts
Copy Trading can be an attractive option for traders of all levels, as it can provide access to successful trading strategies and techniques. However, it is important to understand and manage the risks associated with copy trading, such as the risk of copying bad trading decisions made by others, and to carefully research and evaluate the traders you want to follow.