One of the simplest ways to use the trade market opportunities is to copy top traders. Copy trading allows you to execute trades by automatically coping experienced traders without market analysis.
Some traders use this strategy in the Forex market to make money while learning because analyzing the market could be difficult for new traders. Some other traders use copy trading due to lack of time. Whatever the reason, copy trading could be helpful for different traders.
What is Copy Trading?
Copy trading, as the name suggests, is to duplicate the trading strategies used by other traders. It was first offered by Tradency in 2005 and later eTor and Copy trader services added to its popularity. Nowadays, many Forex brokers offer copy trading with a variety of features.
What you need to do in copy trading is discover a top trader in the desired broker; someone whose past trades have proven profitable. Most platforms provide a simple way to filter trades to make it easier for you to decide on what trading style you prefer, and your risk tolerance.
When you follow a trader, your account will make the same trade automatically by the platform. You can also choose the amount of your investment and tolerance risk. For example, if a trader opens his position in the gold trade for 5 percent of his account, the platform opens the same trade for you. However, you can limit your risk level as you wish.
There are a couple of copy trading types, including mirror trading and social trading. There are some similarities and differences between them, which will be discussed in the following sections.
Mirror Trading
Mirror trading can be considered as a type of copy trading. Unlike copy trading, mirror trading allows coping with specific strategies, which are often displayed as trading algorithms.
There might be a large group of traders contributing to an automated trading strategy. In some cases, hundreds of professional traders have contributed to the automated strategy you are following. In this method, you follow and copy an algorithmic trading strategy.
Mirror trading is as fully automated as copy trading. As the algorithmic trading strategies are designed to follow a large number of inputs, process them in milliseconds, and create a trading signal, they could lead to your portfolio diversification. Moreover, many of the algorithmic strategies could be used in more than a trading market.
Social Trading
Another common type of copy trading is social trading. In this method, you do not copy automated trades but you exchange your ideas and market research with peers that could help you improve your personal business performance.
Social trading platforms could be helpful if you wish to learn from more experienced traders. Using this method, you can grasp the experts’ trading strategies, and learn how to analyze the market. To put it differently, you see how the top traders manage their trades by observing their trading behaviors.
Despite all the pros, this method has a big problem; it is not automated. Although a useful platform for exchanging ideas and research, social trading is manual. It makes social trading more time-consuming compared to copy trading and mirror trading.
How does Copy Trading work in Cryptocurrency?
Copy trading is a universal concept applied in all financial markets. Copy trading can be used by traders in various financial markets, including forex, cryptocurrencies, and stock markets.
Cryptocurrencies are relatively new in the financial world; professional traders who follow the crypto ecosystem possess high technical analysis knowledge in this regard. Coping traders in cryptocurrency trades seems reasonable, especially when you lack sufficient experience to trade on your own.
What are the pros and cons of Copy Trading?
Copy trading is considered a profitable method, in which you copy expert traders automatically in real time and enjoy the results. However, it has some disadvantages too.
Copy Trading Pros
Some copy trading pros are summed as follows:
-Automated Trades: The main advantage of copy trading is that it enables automated coping of top traders. In this method, you only need to find a trader, whose trades have been most profitable and check his performance periodically.
-Finding experienced traders in the shortest possible time: Another advantage of copy trading is that you can simply find top traders by applying some filters like trade results, profit, and loss, win/loss ratio, average risk per trade, risk/award ratio, etc.
-Free account opening: Most brokers with copy trading offer free trading accounts.
-Less emotional decisions in trades: Novice traders are more vulnerable to making emotional decisions in trading. Not being required to analyze the market, they are less affected by their sentiments.
Copy Trading Cons
One of the main disadvantages of copy trading is limited risk management. In this method, your trade results rely heavily on what the other traders do. However, copy trading platforms allow you to determine your investment and stop loss. You can also manually close a trade if you feel it won’t be well-profitable.
Best Copy Trading Brokers
The best copy trading brokers and platforms are as follows:
Fortuna Markets:
Fortuna Markets, as a popular and professional Forex broker, enables traders to start trading and develop further skills in this area by copying other professional traders.
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eToro
It is a simple platform and traders can copy trades in 1900 different fields.
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FXCM
The markets offered in this platform are limited but different traders can use it.
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Ava Trade
It provides poor customer service, and the number of commodities to trade is less than 1000.
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Darwinex
It offers a unique copy trading ecosystem for Forex traders.
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Pepperstone
Although there are a few tradable products on this platform, it enjoys competitive pricing and good customer service.
Is Copy Trading Profitable?
In copy trading, the results you achieve depend entirely on the performance of the traders you follow. It means that if you follow and copy a trader with a good trade record, you might execute more profitable trades. The risks related to copy trading will be addressed in the following section.
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Market Risk
Market risk is one of the threats to copy trading. Different factors in the market could inevitably affect any trade; the results depend to a large extent on these factors. In copy trading, the market risk is the same as the price risk, which can negatively impact the trade result.
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Liquidity Risk
Another risk associated with copy trading is liquidity risk which is usually taken for granted. As you don’t have a direct influence on the trades, you need to be prepared to avoid it.
Liquidity risk occurs when you (or the trader you follow), in the case of copy trading, cannot close the trade at a certain price and at a reasonable time. Liquidity risk usually happens in trading nonliquid assets, which are difficult to convert to cash. Moreover, liquidity risk might occur immediately after the market opens or before it closes because the number of participants is still limited.
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Systematic Risk
Systematic risk can influence your trades negatively. An example of systematic risk is the sudden and unexpected news that shocks the market.
How can you do copy trading?
Copy trading is a great method if you consider making a good profit out of your investment. To do so, you need to take some simple steps:
1. Open a Trading Account
the first step is to create a trading account on a copy trading platform. It is a simple step, and what you need to do is fill registration form, make an initial deposit, and wait for your account to be confirmed. That is all. Now you can start copy trading.
2. Choose a Trader
it is the time to choose a Forex trader to copy and follow. It is usually the most important step and takes time to do. Fortunately, most trading platforms offer their clients the opportunity to choose and filter their trading criteria quickly and pick the best traders from the database.
3. Follow the Trader
having decided on the trader fits your needs and trading criteria, you can choose an option called “follow” to start duplicating his trades.
What are Trading Signals?
Trading signals are the indicators that show different things, including what market to trade in, at what price to open the trade, and how to determine “take profit” and “stop loss” levels.
In comparison to copy trading, trading signals offer more flexibility. Although using trading signals, you should enter the trade manually into your trading platform, they are more flexible in deciding on entry and exit prices or even stopping the trade.
Who are the Trading Signal providers?
The traders offering trading signals are called trading signal providers; a trading signal provider can be an individual or a group of traders who share the trading signals with their followers. The traders followed in a trading platform are substantially signal providers, and their trades will be copied automatically into their followers’ accounts. The trading records and styles should be taken into account when you decide on trading signal providers.
Tips to make more profit in Copy Trading
Although you won’t need your personal trading strategy in copy trading, you should choose the best traders to follow to increase your chances in the market and make more profit. Here are some of the most important tips to follow in copy trading:
- Trade Markets: when you follow a trader, all his trades will be automatically copied into your account so you can check them to ensure they match your trading goals and styles.
- Risks: most trading platforms allow you to choose a stop loss level or allocate a certain amount of your asset to a specific trader. Moreover, partly automated copy trading and social trading offer you more control in terms of risk management.
- Market Analysis: the main advantage of copy trading is that it does not need expert knowledge in market analysis. However, if the trader you follow lacks sufficient experience, you might incur huge losses. To avoid probable losses, you should keep track of the trades and, if required, make adjustments in the case of a change in the market.
- Leverage: using this instrument can increase your profit or loss, so you should be cautious while using it in copy trading.
Final Word
One of the simplest trading methods is copy trading, in which you can follow and copy the positions of the top traders automatically in real-time. In this method, you copy the most experienced traders’ strategies without any market analysis on your own. This method was first introduced by a trading service called Trandency. Copy trading consists of mirror trading and social trading.
FAQs
1. Is copy trading profitable?
It is a helpful method for traders who do not have the required experience and time to execute the trades. They can also use it to gain experience.
2. Is copy trading illegal?
In most countries, it is considered entirely legal.
3. Is copy trading appropriate for beginners?
It is ideal for beginners. Copy trading allows novice traders to follow top traders and learn the best trading methods along the way.
4. How much can you profit from copy trading?
The profit you make in copy trading depends on the traders you follow. Even though many traders have made huge profits, it does not guarantee their future success, so you need to be cautious.
5. Can copy trading be profitable?
If you follow experienced traders, copy trading can be quite profitable. As professional traders with several years of experience in trading are more skilled and more capable of managing market risks, following them, you can make more profit.