What Do You Mean by Copy Trading?
Copy trading is a process that allows an individual trader in the financial market to copy trading positions opened and managed by other experienced individual traders. People often mistake it for mirror trading which is quite a similar process but, in mirror trading an individual trader copies the exact same position managed and opened by the master trader whereas, in copy trading strategy an individual can decide the amount he/she wishes to invest as well as the risk they want to take.
In simple words it refers to a process that enables one trader to copy others’ trade activity. This process is followed by less experienced traders who wish to gain a better understanding of the financial market and learn from experienced individuals.The process of copy trading is becoming significantly popular in the market these days as traders with less experience and knowledge are able to generate the same returns by following and learning from experienced traders. The process of copy trading is also used by some experienced traders who want to diversify or maximize their hold of profit in the market.
PROCESS OF COPY TRADING
Copy trading is no rocket science and can be started within minutes by following a few simple steps :
- Open a trading account: The first step is to open an account on a copy trading platform. You can create a demo or a real account. Once it’s done, you need to connect it with a brokerage account.
- Open the best traders tab: You can browse through a number of top traders on the platform and choose the one suiting all your requirements by going through their performance records.
- Selecting the trader: The next step is to choose a trader that fits in all your requirements by hitting the follow button. At this point, you can select the funds you want to invest with a particular trader.
- Starting the process: Once you hit the follow button one more time you will receive a notification acknowledging your follow request. Your copy trading has now started and you will follow the positions of the selected trader and receive similar outcomes.
WHAT ASSETS CAN YOU COPY TRADE?
There are a lot of financial assets that a trader can use for copy trading depending on their preference and risk appetite. A brief knowledge of these assets is needed before starting the process of copy trading. You can choose the asset that favors your requirements and has a potential to provide enough returns with minimal risk. Some of these assets include:
- Forex- Copy trading was initially started to make forex trading easier and widely accessible for forex traders, irrespective of their experience. Forex trading is a process in which one currency is exchanged for another with an aim to make profits from the interest rate differential of both the currencies. Currency trading is done in pairs. Examples include EUR/USD, USD/JPY, GBP/USD, USD/CAD etc. Copy trading forex is a highly effective method for those who don’t have the level of skills or experience that are required for manual trading.
- CRYPTO CFD- CFD Is a short form for ‘Contract For Difference’ and refers to a process where an individual can easily gain exposure to cryptocurrency trading without the need to buy or sell an underlying asset. Trading in CFDs is a method generally used by experienced traders. Copy trading for CFDs can easily be done by following strategies laid down by experienced traders.
- STOCKS- These are types of securities that give the stockholders a share of partial ownership in the company. They are also known as equities, some examples include Tesla, Apple, Infosys, Tata Consultancy Services etc.
- Indices- Stock indices are basically a statistical measure reflecting the changes taking place in the stock market. Examples include Dow Jones Industrial Average and NASDAQ.
WHAT ARE THE BENEFITS OF COPY TRADING
There are a number of advantages that come with copy trading, which includes:
- Accessibility and Transparency: In copy trading all the trading information can be easily accessed by investors therefore, providing transparency and less chance of error and bias. Due to this transparency users can place trust and confidence in copy trading platforms.
- Simple Approach: Copy trading is one of the easiest ways of trading. While professional traders put a lot of effort and time in watching charts, analyzing the market and upskilling their skills, copy traders can automatically copy their positions and make profits just like them.
- Shorten learning curve: Another benefit of copy trading is that it can shorten the learning curve for beginners. Many copy trading platforms also support social trading which means apart from observing the trader trading in real-time you can also connect with them, ask questions about their copy trading strategy or give them suggestions which eventually helps a beginner understand the idea behind entering or exiting a particular trade.
- Flexibility: The best part about copy trading is the flexibility it gives to the investors. They can leverage on an expert’s knowledge but at the same time have full control on their accounts. Investors can not only decide the amount they want to put in but also have the ability to modify trades, close them or unfollow a trader at any point of time.
- Time Saving: Copy trading can help traders in saving a lot of time as they are not required to spend time researching or experimenting different strategies. They don’t need to monitor the markets 24/7 or keep up with the news. All they have to do is set up a copy trading account and connect it with that of a highly-skilled professional trader.
DISADVANTAGES OF COPY TRADING
Advantages are always followed by disadvantages in all scenarios of life as well as copy trading. There are a few disadvantages of this technique which you might want to consider:
- Contradictory goals- You might end up idealizing an experienced trader for his/her success rate and trading activity but it’s certainly not necessary that your trading goals will match with their preference. This will lead to a lack of synchronization in trading activity and hence lead to certain consequences.
- Performance risk- It is certainly not necessary that the trader you are following will always experience profits and will never fail. Since humans are bound to make mistakes, you can not completely rely on one individual trader for helping you maximize profits all the time. If a trader happens to experience a bearish or a sideways market you will definitely experience the same repercussions as them. This might affect your decision to continue to follow them or move on for someone better.
- Hefty Commissions– Some traders might not charge you anything at all for their expertise while others might charge you a hefty commission for their experience and knowledge.
WHAT ARE COPY TRADING STRATEGIES?
Although copy trading provides a wide scope for a novice trader to learn and move ahead in the market by providing a platform for them to connect with expert traders, it still leaves room for some doubts. A systematic strategy is needed to figure out if an individual should continue following a particular experienced trader or which one to follow for maximum profit and when to stop or how much capital needs to be allocated. There are a number of strategies an individual can follow before entering the arena of copy trading:
- Grab The Opportunity – It is very important to know as to when you should enter the market and when you should exit. You should usually follow a trader when they are experiencing an upswing in the market and probably move on to the next when they start experiencing a downswing. This will help protect your capital and save you from potential losses.
- Stop When Needed – Most individuals end up getting emotionally attached to their traders as they usually idealize them too much or because most have had some form of personal interaction with them. Your loyalty to the trader is not more important than your hard earned money and therefore you should stop following them as soon as they hit a downhill trajectory. You can keep checks to see if they have done better and come back again once again when you feel they won’t be a threat to your investment.
- Diversity is must – Diversity is essential when copy trading as it increases your scope of profit. You should probably pick traders who cover various instruments like indices, stocks, commodities, currencies etc. Avoid putting all your eggs in one basket as it minimizes the scope of profit. Investing your money in a variety of assets can help you reduce overall risk to your portfolio.
So you now know how copy trading works and what strategies are to be kept in mind before you start. Aim at choosing a trader who has a high rate of success and a transparent track record over an extended period of time. Try to keep psychological factors like fear, doubt or uncertainty out of your copy trading decisions and never risk more if you can not afford to lose.