What is Copy Trading, and how does it work with pros and cons?
Trading in financial assets requires knowledge, continuous market monitoring, analytical and research skills, and many other qualities. However, it is not possible for traders who are working or have businesses to learn all these. For such traders, copy trading can be a good option. In this article, you will learn what copy trading is and how it works.
What is copy trading?
Copy trading is a method of following the trade ideas derived by expert traders or generated using algorithms software. By using this technique, traders can directly copy the positions used by another successful trader.
The scope of copy trading is increasing and becoming popular among traders. The strategy is also known as social trading or method trading. The main aim of this technique is to facilitate novice and part-time traders with powerful trade ideas & signals.
A quick glance
Copy trading is a method of following the trade ideas derived by expert traders or generated using algorithms software.
- Manual Copy Trading
- Automated Copy trading
- Social Trading
- Select a platform
- Fund your account
- Get trade ideas
- Copy the trades
eToro, DupliTrade, Vantage Markets, ZuluTrade, NAGA, Darwines are some popular social trading platforms
Methods of copy trading
Manual Trading: Traders generally follow the signals provided by advanced traders and place their trade accordingly. The signals are generated by experts or researchers by continuously monitoring the market. In this method, you are keeping your faith in human knowledge.
Automated trading: As the name suggests, copy trade software and algorithms bots are used to generate trade signals under this method. Also, trade is placed automatically without traders’ intervention after analyzing the signals.
Social Trading: It is a way where you can connect to a community or groups of traders. Under this, experts and followers are connected on a platform, and from there, you can follow your mentor by analyzing performance and risk metrics.
Identify your risk: For making a proper currency trading strategy, it is important to determine your risk factor. A trader needs to define how much he is willing to lose on each trade. The amount a person is willing to lose is different for each person. It will help you with proper money management.
Determine exit and entry points: A trader needs to find out his entry or exit position in a trade in order to get maximum profit. Traders need to develop rules regarding the buy or sell position of a given currency pair. These guidelines will help them to find out about their long or short position.
Formulation of Strategy: After determining all these factors now, a Trader needs to develop some rules for buying and selling currency pairs. A trader needs to identify the right technologies and platforms to execute their trade. For making an effective currency strategy, a trader needs to analyze platforms like MetaTrader. This will enable a trader to compare strategies and have a look at past performance.
How does copy trading work?
Select a platform: Many forex brokers and trading platforms offer free and paid apps. The first step is to select an authentic and credible platform.
Remember, there are many scammers in the market. So it is essential to read the reviews and previous performance before subscribing. Also, do not go for free services, as the accuracy of freebies is questionable. You are placing the trade with your hard-earned money, so go for quality trade ideas.
Fund your account: Once you have selected a platform, fund your account to start trading. It is very important to determine money management and risk management points.
You can make or lose money in the financial markets. However, you can manage your losses by putting in the amount you afford to lose. Also, do not put a big amount in one trade. Diversify your investment and allocate your funds to different trade ideas.
Get trade ideas: As soon as you have registered for the platform, you will start getting automated and expert general trade signals on groups, emails, or another platform.
Remember trade copier will get many trade signals or recommendations, but there is no 100% chance for success. Even knowledge is required for copy trading. Selecting the most effective trade ideas or signals is also essential for copy traders.
Copy the trades: Once you have received an effective trade, you can place the trade and make changes accordingly as per your mentors, or if you are using automated software, the trade will place automatically.
Also, analyze the performance of the copied trades to find out the overall profitability or losses from all trades. If your win rate is good, you can continue with the provider, and if not, then look for other options.
Best Copy trading platforms
We have understood what copy trading is and how it works; now it’s time to learn about some popular platforms. Many signals providers and brokers offer these services to their clients. Based on the quality of their services, community, pricing structure, and features, we have prepared a list of platforms most suitable for copy trade forex.
- eToro: Most popular platforms
- DupliTrade: Great for forex & CFD traders
- Vantage Markets: Advanced & comprehensive tools to copy trades
- ZuluTrade: Extensive Features
- NAGA: To access a large community of professional traders
- Darwines: To turn your successful strategies into financial products
- Ava Trade: Best mobile software
- Tickmill: Good choice for professional traders
- Mirror Trader: Excellent Algorithms trading strategies
- IC: Most suitable for US traders
Advantages Vs. Disadvantages of copy trading
Copy trading can be a good option for beginners or traders who lacks market understanding. Using these strategies, you can trade in gold, forex, cryptocurrencies, stocks, indices, energies, and other financial markets.
However, to find out whether it is suitable for you. It is essential to analyze its drawbacks and benefits.
Advantages of Copy trading
Beginner friendly: Copy Trading is a useful strategy, especially for beginners or part-time traders. Trading requires a lot of knowledge, analytical and other skills to make the buying and selling decisions.
However, copy trading does not eliminate the need for learning, but it decreases the complexity of the process so that even a beginner can place profitable trade using expert suggestions.
Logical Trading: Traders tend to make trade decisions based on emotions such as instinct, fear, overconfidence, or greed. However, trade recommendations are generated in copy trading after a detailed study of market conditions using automated tools. So the trade decisions are more logical and accurate.
Community Access: Copy trading is also known as social trading because, under this process, traders can access the trading community, groups, or people with similar interests.
You will connect to different successful professionals who have been trading in markets for years. It will develop your overall knowledge and learn how these professionals work in the market.
Time saving & Learning: Trading is a very complex task. You have to select a currency pair, formulate a strategy, monitor technical analysis indicators, and many other things. However, with copy trading, all these will be done by another professional or automated bots. You have to monitor the overall activities.
Also, when you use these trade ideas, you will understand the working of the market. So it is also helpful in learning, and soon you can make & use your own strategy.
Diversification: It is a way to invest in different financial assets and markets. You can diversify your investment portfolio into forex, cryptocurrencies & stock markets with little knowledge by following the successful traders in that particular market.
Disadvantages of Copy trading
Risky process: With the chances of making a profit, the chances of losing money are also in financial trading. In copy trading, you are putting your hard-earned money based on the suggestions of other persons or robots.
The trading & risk management conditions of every trader are not the same. Also, these copy-trade forex ideas are not always accurate. As a result, both recommender & trade copier may suffer loss.
Costs: You can receive paid and unpaid trade ideas from different sources. However, with free copy trading, the quality is not that good, and the cost of paid platforms can be very expensive.
Scams & difficult selections: Many forex scammers are in the market. One wrong recommendation, and you can lose a significant amount. So, it is very difficult to select a reliable copy trading platform.
Also, there are several automated robots and professional traders out there. Selecting a consistent mentor can be stressful.
Dependency & lack of control: Copy trading can be a good choice but remember, you will become dependent on automated systems or recommendation providers. Also, as you are not completely aware of the trading strategy, you will lose control of your trade.
Understanding what copy trading is and using the method in real life are very different things. Copy trading has many benefits, like significant income with passive involvement, community access, & portfolio diversification.
However, it has some drawbacks like trading cost, risk amount, dependency, etc. Every method has pros and cons, but effective use may result in extra benefits.
Copy trading is served as a beginner’s guide; you can access trading tips, recommendations, risk management tools, and many other useful resources. However, do not blindly trust the trade recommendation; first analyze it and then place the trade for overall good results.