Copy trading is a tool in the financial markets that enables traders to copy positions opened and managed by another investor in the market. This type of trading provides an irresistible allure for new and armchair investors as it holds the promise of great wealth and independence. Copy trading permits traders, regardless of their level of expertise to enter the market by allowing them to mimic the moves of seasoned traders who know the ropes. The chances of winning when partaking copy trading may be considerably higher. However, a win is never guaranteed.
How does copy trading work ?
The general idea behind copy trading is quite simple. Al you need to do is choose a best trader you want to copy, decide on the amount you want to invest and copy everything they do automatically and in real time. In essence, copy trading lets you benefit from the knowledge and experience of better traders. Still, it is important to understand that trading it is quite tricky. How copy trading works may vary greatly depending on the site you choose. However, there are some basic principles that remain the same.
With copy trading, the copying trader invests a part of their portfolio in a preferred trader which is then traded in a percentage based way. First, the trader is asked the amount they would like to invest. If, as an example, they allocate $1000, this means that the other trader needs to have $1000 at their disposal. Therefore, if the trader executes 10% of their equity that exact trade is copied into the copying trader’s account.
However, most sites will only allow you to invest 20% or less of your copy trading portfolio on a single trader. This helps minimize your risk of loss since some traders usually seem better on paper than they actually are or they may simply hit a losing streak. In such a case, investing too much on them can lead to huge losses.
Choosing the right people to invest in
Just like normal financial trading, smart copy trading requires you to analyze graphs and statistics. However, in copy trading, instead of observing market movement, you will be looking into actual people. It is crucial that you take the time to look into a trader’s portfolio, before opting to copy their trades. Check to see their strategy, their success rate, the risk management tactics they exhibit and more.
Once you choose and link your profile to another trader, you will start automatically copying their current positions on the market, and any other action they make henceforth. If they open a new trade, your account will automatically open a new trade. If they close, you close, if they win, you win and if they lose, you lose. However, you will retain the ability to cut off copied trades so that you can manage them on your own. Also, copied traders are compensated by a flat monthly subscription fee by the trader looking to copy their trades.
Which are the best platforms to invest in copy trading?
Although most of the copy trading platforms available today are new, we highly recommend sticking to market leaders that are already proven and have a huge user base. This enables them to offer more valuable data, and a vast array of traders to choose from compared to a newer platform.
Copy trading is based on people. Therefore, the first thing you need to look at when choosing a platform is the size of its user base, which is why a bigger platform is always the better option.
Is copy trading a good investment?
Several studies have been undertaken to determine the success rate of traders who opt to use copy trading. According to these results, people who take their time to carefully decide on the traders to copy based on portfolio and statistics are 10% more successful than those who choose to trade manually or based on their own knowledge or preferences.
Overall, copy trading provides a great way for new traders to venture into financial markets and make some money while at it. They also get a chance to see what decisions these traders make and see the statistics they see and learn from that. What’s more, you will still have some level of control over your trades, meaning you do not have to rely entirely on a trader.