What is copy trading?
Copy trading is whereby a trader copies the strategy of another successful or experienced trader in a financial trading platform. The copy trading strategy often widely used in forex trading. The trader who is copying can use the copied trades in real-time. Copy-trading primarily influences by Mirro trading.
The strategy which came into play around 2005 was a result of online trading platforms and automated trading. Copy trading is similar to mirror trading; the difference is that the former executed on a smaller scale. Additionally copy trading is quite more straightforward than mirror trading, and the beginners can do it without having challenges.
How does it work?
A copy trader must identify his or her favourite trader in a financial trading platform. Then the copied trader can decide the amount that he or she wishes to invest—the amount influenced by the trading platform that the copier is using. For instance, a copy trader can put a minimum amount and a maximum amount that the copiers can invest in doing copy trading. The trading platform also puts a maximum number of people that the copier can follow and copy.
The copy trader will be copying everything that is done by the chosen trader in real-time. The trading platform also sets terms and conditions used as a guideline between the copier and the copied trader. There are various online trading platforms of forex brokers that offer copy trading. Some of the best forex brokers include Zulu Trade, eToro, Trade360, FXPro, Pepperstone, and many more.
Who to follow
Copy-trading involves copiers who are less experienced in trading following a master or an experienced trader. The activities of the master also affect the copier. If the master makes a loss or a profit, the copier might be changed. The copier must be careful when choosing a master to follow. These are some of the examples of the masters developed in a copy trading platform.
- Buy-and-hold managers
A buy-and-hold manager might be a long term trader. Copiers must take advantage of such managers who have a long term plan instead of investors who are short term traders. The buy and hold managers can keep a stable portfolio over time, and this might benefit a copier which is trying to learn and make money.
- Follow and experienced and successful manager
An experienced successful manager might worth your while. The manager will give the copier good experience that can be simulated and have a high probability of success. In U.S money managers from institutions with more than $100 million assets are required to file the Security and Exchange Commission’s Form 13F detailing the company investment holding.
- Activist Investors
Following activist investors can make the stock increase value if their involvement in the company becomes public. Some investors may publicise their investment move, making it easy to make an informed decision quicker.
When you are choosing investors to follow you may check the trader’s history, rating by followers, total profit, and percentage of winning trades, current ranking, and the number of copiers who are following the investor. These may make you make an informed decision when choosing an investor to follow.
Tips on implementing copy trading strategy
Follow a credible investor or professional
Following a successful investor can help you learn and gain valuable experience in the trading industry. Successful institutional managers give the copier a high chance of coming across a successful stock that brings juicy returns.
Be patient
When trading, you must be patient and put aside your emotions as you make decisions concerning the stock. If a heavyweight has taken the capital that you have been eying, you must wait and monitor until the stock comes to your buying range. If it fails to go to your buying range, you may abandon it and move on.
Follow different investors and professionals in various sectors
Avoid the following investors in the same industry. If you follow different investors in the same industry and the industry become affected by news that lowers the stock value may result in massive loss.
However, if you follow different gurus in different sectors, you might not encounter a one-off loss. Industries do not get affected similarly but differently. For instance, a mining sector might thrive when there is low rainfall, and on the other hand, the farming sector may fail dismally. Diversify your masters according to the industries.
Look for accumulation
As a copier, consider large capitalisation stocks with managers who have accumulated significant positions and may show that they have confidence that their shares will turnaround in future.
Be an active and responsible copier
As you are following great managers, make your research and trade responsible. Acquire stock that is suitable for your investment objectives and risk tolerance.
Benefits of doing copy trading
- Newbies can employ the copy trading strategy and benefit from the experienced trader
- Inadequate knowledge of trading, copy trading might be a good strategy of entering the forex trade platforms and gain by simulating an experienced investor.
- Copy-trading saves time. When you are trading online, you must be actively doing it manually or automatically while tracking the graphs and performance of your trades. However, with copy trading, you don’t have to te hard work. The hard work is done by Signal Providers who invest on behalf of the copier or copy trader.
- Copy-trading offers an excellent learning environment. We are seeing professional and experienced trading may give the copiers first-hand information about successful strategies. The copiers will be learning from the best forex trading practices.
- Copiers can have a wide range of investments. The trading platforms offer copiers a certain number of successful investors that they can copy. When the copiers are choosing the investors to replicate, they can choose from a pool of investors with different characteristics and portfolios that offers the copiers diversified signals to follow. For instance, the copiers can have a mixture of investors who specialises in shares, cryptocurrency, and more.
- Signal providers and copied traders can make money. The signal providers give the copiers trends of the best performing traders to replicate. If the copier makes money or profit from a signal, the signal provider get returns and benefit. The copied traders can receive a commission if the copier makes profits.
- The professional copied trader can benefit from unlimited or multiple numbers of copier followers and make profits.
- Copy-trading takes place on an international platform, and the funds of a copier would be safer.
- Copy-trading gives the trader time to do other things instead of spending the whole day watching the markets. The automated trading strategy allows traders to make money while doing different jobs. Traders can also trade in various time zones; the computerised system never sleeps.
- Copy-trading can be best for the traders who quickly get emotional why making their decisions when trading. Traders can assign portfolio management to be responsible for trading. Therefore the copier will not have to worry about making trading decisions
Risks
- Copy trading is risking capital money. Every copied trade is not guaranteed that it will result in a profit.
- Profit-making depends on the master or the copied trader. If the master makes a loss, all the copiers who are simulating him or her may also be affected likewise.
- Copiers may make profits by simulating the experienced trader or investor. The copiers have to part ways with some money as a commission of following and trading using the strategies of a professional investor. The commission percentage might be excessive, and some copiers might be greedy to part ways with their profits.
- Copy-trading involves automated trading, where traders buy and sell assets online. This mechanism depends on the internet connection, computer, power, servers. If any of these technologies is interrupted, the trading can also be affected.
Final thoughts
Copy trading is a forex trading platform that offers beginners a chance to learn from the ropes from experienced traders. Success might not be guaranteed, but if the copier follows the successful investors and different professional managers in various sectors, successful trading might be realised. The copier must be patient and avoid being emotional when making trading decisions. Assess multiple platforms that provide copy trading services and choose the one that meets your trading requirements.