What is Copy Trading?
Copy Trading - What is it?
A fairly new notion, copy trading changed the industry dynamic by allowing less experienced traders to copy professional traders’ actions into their account, replicating their performance, making money, and learning in process.
The appeal of copy trading is obvious. In the case of beginners - it saves you the share of money you are likely to lose in the first days of your trading journey, letting you observe professional trader behavior and learn from it, while in the case of experienced traders - it’s a valuable storage of new ideas and strategies.
How does it work?
Copy trading connects a part of your portfolio to the portfolio of the trader, whose actions you want to copy. Once you start copying a trader, all their currently opened trades, as well as future trades, are copied into your account.
Needless to say, you don’t have to risk your whole account balance - you invest a certain sum of your choosing with a typical ceiling of 20% of your portfolio. The sum you invested becomes a percentage of the trader’s portfolio. To observe a practical example of the mechanism:
If you invest $100 dollars, and the trader’s portfolio is $1,000, your investment is 10% of his portfolio. If he opens a trade for $100, you will copy this trade, but the money that will be invested from your account is $10, because that’s 10% of the money he invested.
The trader you are copying, in turn, can make money off so-called copy commissions for his followers.
You are always free to stop copying a trader if you feel his decisions aren’t beneficial for you, or in the contrary - increase your investment in him to up your gains.
Social, Mirror, Copy Trading - Same thing?
Technically, mirror trading is similar to copy trading, with the major exception that mirror trading involves Autotrading strategies not installed on the investor’s platform. Instead, they are hosted and run on the servers of the Mirror Trading provider company. The trader submits the Autotrading computer program to the provider company and the company then enables other traders to replicate the trades.
Truth be told, mirror trading has been around for a whole while longer than copy trading and has had its share of improvements over the years. With the birth of big data and artificial intelligence, mirror trading signals have gotten relatively more accurate and predictable, but it’s wise to remember another big difference: you have to mirror everything.
With mirror trading, a trader can’t pick and choose the signals he wants to follow - the whole process is entirely automated.
Indeed, mirroring trades is more similar to automated trading and is a hands-off approach, which isn’t really used for learning, but rather for leaving part of your equity to make money without your participation.
Copy trading, just like social trading, means communication. You remain in touch with your signal provider and are free to find out not only the choices they made, but also why they made them, which is a necessary step of learning the markets and upping your manual trading game at the end of the day.
Further, fact remains that trading involving algorithms is typically not beginner-friendly. It takes a share of market experience to even select your trading criteria (which mirror trading requires you to do).
Last but not least, some mirror trading algorithms are less proven than others. One that may work in a bear market, won’t do as well in a bull market, and vice versa. If you aren’t sure what you are going for - you may end up in a pickle.
Social trading, on the other hand, involves the observation of behavior of other traders. This includes trade discussions and peer-to-peer advice in groups and forums.
Considering the magnitude of the Fondex cTrader Copy community - it’s fair to say that you get both - copy and social trading in one!
Copy Trading benefits
Let’s face it, trading can be intimidating for a newbie. It takes a push to start and once charts and patterns come into play - it’s a whole new world, which leaves many paralyzed. Indeed, there is a lot to learn, and risking your investment when you don’t know what you are doing adds quite some psychological pressure.
Copy trading doesn’t require exorbitant trading knowledge, in fact, it is the perfect way to observe and learn by watching what experienced traders do, as well as to draw inspiration from other people’s successes and failures.
Additionally, it’s a way to save time when starting to trade. No matter how many trading manuals you go through and how many investopedia articles you read, there’s no better way to learn than to observe real-life examples. Practice makes perfect, and it’s much better to practice with an experienced signal provider, who limits your losses.
Furthermore, copy trading is the perfect way to diversify your investment. Copying different signals of different traders with different styles can not only help you check out different asset classes, but also help you understand which trading style you’ll be willing to adapt in your manual trading strategies. If copying a provider, who keeps his positions overnight, leaves you on edge - it’s likely intraday trading may be more your psychological trading style, same as if you don’t have the patience to wait weeks for your first profit.
Regardless of the amount of benefits that copy trading may yield, you must still consider your risks. If you are following the top signal provider, it doesn’t necessarily mean he will never encounter a loss. Luckily, at the end of the day, the decision to start and stop copying them is all yours.
Copy Trading & Risk Management
Just like any type of trading, copy trading bears its own share of risk. The main points to watch out for are:
1. Following erratic traders
Copying a series of bad trades can significantly damage your opinion of copy trading and your balance, which is why the main thing you look for in a trader to follow is their stability. Often, signal providers start off well with high-profit trades, but hidden in the background are a number of trades with high drawbacks, which come back to haunt them.
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