One of the easiest ways to seize market opportunities is by emulating successful traders. Copy trading allows you to automatically replicate the strategies employed by more seasoned traders, eliminating the need for in-depth market analysis.
Copy trading serves various purposes for different individuals. For beginners, it provides an opportunity to generate profits while gaining familiarity with market dynamics. Conversely, busy professionals find it a convenient solution due to their limited availability for active market engagement. In both scenarios, copy trading proves to be a valuable asset.
Understanding Copy Trading
Copy trading is a popular investment method that involves replicating the trades made by other experienced traders. Many brokers now offer copy trading with a range of features.
In copy trading, you don't need to conduct extensive research. Instead, you find a profitable trader on a copy trading platform. Most platforms offer simple tools to filter and identify traders that align with your trading style and risk tolerance.
When a trader you follow opens a trade, the copy trading platform automatically replicates the same trade in your account. You can also control how much of your capital you allocate to a trader and set your risk per trade.
Copy trading comes in various forms, including mirror trading and social trading. Let's explore the similarities and differences between them.
Social Trading vs Copy Trading
Another popular type of copy trading is social trading. In social trading, you're not directly copying other traders' trades. Instead, you engage with like-minded peers to exchange ideas and market research, which can enhance your trading performance.
Social trading platforms offer a valuable opportunity to learn from experienced traders. You can gain insights into their trading strategies, market analysis, and trade management.
However, it's important to note that social trading is not automated. It's a platform for knowledge exchange, and you have to manually execute your trades.
- Time-consuming: Social trading requires more time and involvement compared to both copy trading and mirror trading.
- Educational: Social trading offers valuable insights into why professional traders make certain trades and the reasoning behind them.
Mirror Trading vs Copy Trading
Mirror trading is a subset of copy trading. Unlike copy trading, mirror trading involves replicating specific trading strategies, often in the form of automated trading algorithms.
Automated strategies in mirror trading may involve a group of professional traders, sometimes hundreds, who contribute to the creation of the algorithm. Instead of copying individual trades, you replicate the algorithmic strategy behind those trades.
- Automation: Similar to copy trading, mirror trading is fully automated.
- Diversification: Algorithmic strategies often provide diversification within your portfolio because they process multiple market inputs and trade across various markets.
Copy Trading in the World of Cryptocurrency
Copy trading is a versatile concept applicable to all financial markets, including Forex, cryptocurrencies, metals, commodities, and stocks.
Copy trading is a universal concept that works in all financial markets.
For those particularly interested in cryptocurrency trading, it's a logical choice. Cryptocurrencies are relatively new, and traders with deep technical knowledge often dominate this ecosystem. Copying the trades of experienced cryptocurrency traders makes sense, especially if you lack the necessary expertise.
Pros and Cons of Copy Trading
Copy trading offers automated replication of professional traders' trades, making it a seemingly effortless way to enjoy their trading results. However, it's essential to consider the pros and cons of copy trading.
Pros:
- Automated Trading: The primary advantage of copy trading is the automation of your trading by following successful traders. You only need to find a profitable trader with good results and periodically assess their performance.
- Finding Traders: Copy trading platforms provide tools to easily identify profitable traders by evaluating various metrics, such as trading results, profit and loss, trade size, risk per trade, reward-to-risk ratios, and more.
- No Emotions: Emotions can significantly impact trading results, especially for beginners. Copy trading eliminates emotional trading, as you don't need to analyze the market or make trading decisions on your own.
Cons:
- Limited Risk Control: Copy trading ties your trading performance to the results of the traders you follow. If they make a poor trade, it affects your account. Some platforms allow you to set allocation limits and pre-determine losses, but there is still a risk of poor trades.
Is Copy Trading Profitable?
In copy trading, your results depend on the trading performance of the traders you follow. If you choose traders with a history of success, your outcomes are likely to be positive. However, there are risks associated with copy trading that you should be aware of.
Market Risk
One of the most significant risks in copy trading is market risk. Market forces determine the outcome of every trade, and changes in prices, such as those in Forex, stocks, interest rates, and other assets, can impact your copied trades negatively.
Market risk is not specific to copy trading; it affects all live trades. However, professional traders aim to mitigate market risks by avoiding trades during volatile periods, such as major news releases.
Liquidity Risk
Another risk, often overlooked, is liquidity risk. In copy trading, you may not have control over when your followed trader opens or closes a trade, potentially leading to liquidity issues.
Liquidity risk occurs when you can't execute a trade at a specific price within a reasonable time frame. It's more common with illiquid instruments, like exotic Forex pairs or cryptocurrencies, or during market open and close times when the number of participants is limited.
Liquidity risk is the risk that you (or your followed traders) are unable to close a trade at a certain price, within a reasonable amount of time.
Systematic Risk
Systematic market risk, inherent to the entire market, is a significant concern. This risk, such as unexpected news, cannot be mitigated through diversification and can lead to substantial losses.
"Black swan" events, like the Swiss National Bank's 2015 decision to abandon the EUR/CHF peg, are impossible to predict and can cause severe damage to a trading account.
How to Get Started with Copy Trading
Anyone can begin copy trading by opening an account with a copy trading provider, selecting a trader, and clicking "follow." Here are some tips for a smooth start:
- Open a Trading Account: Start by creating a live account with a copy trading provider. The registration process is straightforward: complete the form, make your initial deposit, and once your account is approved, you can begin following profitable traders.
- Choose a Trader: Selecting a trader to follow is a crucial step. Many copy trading platforms allow you to quickly filter traders based on essential metrics, helping you find the best traders.
When choosing a trader, don't focus solely on their performance. Consider other factors like their risk levels, traded markets, average trade outcomes, winning percentage, and more.
- Follow the Trader: Once you've found an appealing trader, simply click the "follow" button to replicate their trades.
Some copy trading platforms might allow you to determine how much of your funds to allocate to a specific trader, enabling better risk management.
What Are Trading Signals?
Trading signals are indicators that specify which market to trade, the entry price, and where to set take-profit and stop-loss levels. These signals offer more flexibility than automated copy trading but require you to enter the trades manually.
A typical trading signal might look like this:
BUY BTC/USD @ $44.750, TP: $46.500, SL: $44.250.
This signal instructs you to buy Bitcoin at $44.750, with a take-profit at $46.500 and a stop-loss at $44.250. Trading signals provide the flexibility to adjust entry and exit prices or choose not to enter a trade.
Who Are Trading Signals Providers?
Trading signal providers are traders who offer trading signals to followers. These providers can be individual traders or groups who distribute their signals to followers, who must manually execute the trades in their own accounts.
Followed traders on copy trading platforms are essentially signal providers, with the main difference being that their signals are automatically copied to their followers' accounts. When selecting a trading signal provider, examine their track record and trading style to ensure they align with your goals.
Copy Trading Strategy
With copy trading, you don't need a personal trading strategy. However, having a copy trading strategy can help you choose the best traders to follow. Here are the key points of an effective copy trading strategy:
- Tradeable Markets: Every trade made by the trader you follow will be copied into your account. It's important to know what markets the trader primarily trades and whether they align with your goals and trading style.
For instance, if a trader mainly trades tech stocks, they may be exposed to risks associated with the technology sector. Traders focusing on cryptocurrencies may experience greater volatility in their performance due to crypto price swings. Choose a trader whose preferred markets match your own.
- Risks: Determine how much risk you're willing to take with copy trading. Many platforms let you set a maximum loss or allocate a specific percentage of your account to a single trader. In semi-automated or social trading, you have even more risk management control.
- Market Analysis: While copy trading removes the need for independent market analysis, it's wise to monitor your copied trades and make adjustments if market conditions change. This is especially important if your followed trader lacks experience.
- Leverage: Consider whether you want to trade with leverage. Leverage can amplify both profits and losses. Never invest more than you can afford to lose.
Why Choose profitxbt for Copy Trading
profitxbt is an award-winning broker and copy trading provider that welcomes traders of all experience levels. The broker's Copy Trading module allows you to follow successful traders, learn, and gain experience simultaneously.
Copy trading with profitxbt is quick, easy, and requires no prior trading experience. Simply open a live account, choose a profitable trader, and you're ready to start. The platform provides powerful filters to help you narrow down your search for successful traders, displaying total profits, assets under management, and the number of followers.
profitxbt offers access to a wide range of markets for copy trading, including Forex, cryptocurrencies, stock indices, and commodities. For traders on the move, profitxbt's mobile app allows you to access your account and monitor your trades from anywhere, at any time.
Is copy trading a good idea?
Copy trading is ideal for traders who don’t have the time to trade on their own, who don’t have the necessary experience to trade profitably, or who simply want to learn and gain experience while copying some of the most successful traders on the market.
Is copy trading illegal?
In most countries, copy trading is fully legal.
Is copy trading good for beginners?
Copy trading is ideal for beginners. It allows traders without trading experience to follow profitable traders and learn best trading practices along the way.
How much can you make from copy trading?
Your copy trading profits depend on the performance of the traders you follow. Many traders have achieved triple-digit-percentage profits. However, past results are not indicative of future performance.
Is copy trading really profitable?
When following the right traders, copy trading can be extremely profitable. There are many professional traders with multiple years of trading experience who have mastered the skill of trading and risk management. Following those traders can have a significant impact on your bottom line.
Does copy trading really work?
If you’re following a trader who has a long-term track record of good trades, you’ll probably do well.
