The forex trading space has undergone significant expansion over the years and this growth has also been accompanied by notable technological advancements. Copy trading is one such innovative tool that is making financial trading more accessible to beginner traders. However, it is not an impeccable feature as it has its cons too.
In this article, we have explored what is copy trading, including how it works and the potential benefits and risks associated with it.
What is copy trading?
In one line, you can say that copy trading is a way to “copy” the trades initiated by other traders. It is a method whereby the positions from your selected trader can get automatically replicated on your trading account in real time. The two parties who make up the copy trading cycle include:
- Provider/Lead Trader: The one whose trades are being copied. Providers are usually skilled and experienced traders with good figures to show on their track record.
- Copier: The ones who copy the trades of lead traders.
Using copy trading does not require you to have a deep understanding of financial markets and strategies. In fact, the auto-copying feature does all the work, duplicates the orders actively, and offers you identical results as your selected lead trader. However, you have to pay a commission to benefit from this service.
Essentially, this tool is ideal for novice traders who want to leverage the knowledge and expertise of traders who have been in the game for many years. Though some expert traders also utilize copy trading for portfolio diversification or if they have less time to manage every asset themselves.
Getting started with copy trading: How does it work?
To begin with copy trading, it is essential to choose a broker offering this service with a reliable platform, accurate tools, and a seamless execution system. You should also research the terms on which a broker extends the auto-copying tool. Some give the copiers more control over their funds while others maintain a fixed system.
After selecting the broker and opening an account, you must decide on a reliable provider. The majority of the brokers arrange all the lead traders according to their statistics, win ratios, total profits made, and commission rates among other parameters. By scanning the board, you can easily select one or more providers according to your preference.
Next, you would have to allocate an investment amount for copy trades, deciding how much of the capital will be utilized per trade. In most cases, you can choose all your terms and conditions – like how much money you want to allocate per trade, what is your loss threshold, and how long will you hold on to a position.
Once you have specified all these settings, the copy trading platform will be able to replicate the positions of your chosen trader in your own account automatically.
What are the advantages of copy trading?
Now, let us look at some potential advantages of copy trading:
1. Lowers the trade entry barriers
One of the most prominent benefits of copy trading is that it allows anyone to dip their toes in the financial trading sphere.
The biggest challenge faced by most new contenders is their lack of trading and strategist skills. But with this tool, you do not need to be a market expert or have extensive knowledge about it as the providers make all trading decisions.
Despite the potential benefits of copy trading and lowered entry barriers, it is important to follow proper risk management techniques to protect your capital. This is a critical rule to follow regardless of whether you are trading on your own or using copy trading strategies.
2. Requires less attention and time
Copy trading simplifies the entire trading process by automating it. This means that you do not need to manually place trades or constantly monitor markets to look for opportunities. Instead, the lead trader conducts all market research, and the copy trading software automatically replicates their trades in your account as they happen in real-time
Ultimately, you won’t have to devote a lot of time to trading or continuously keep track of price movements.
3. Opportunity to learn from professional traders
If you are keen enough, you can also build up your market analysis skills via copy trading. Carefully observing the trading decisions of professional providers can offer valuable insights and help you learn more about trading.
Most copy trading platforms allow traders to adjust the settings of the trades they are copying. For instance, you can specify a certain lot size, set the stop loss & take profit limits, and control the volumes of your trades. In this way, you can exercise a degree of control over your personal trades.
What are the risks of copy trading?
Here are some downsides of copy trading:
1. No guarantee of results
The biggest risk of copy trading is that you are not the driver of your trades. Even if you carefully choose the most successful provider, there is no guarantee of future profits or that everything would go smoothly. Hence, there is an equal risk of loss as of potential profits.
Although you may also incur losses when trading personally without using auto-copy, here you could have to bear the brunt of the decisions made by another trader. In other words, with copy trading, you completely entrust your money to another trader.
2. Enhanced costs
If you decide to rely on copy trading, you will have to pay a percentage of your profits to the provider. So, you should always consider factors such as the costs of using the service and whether all the fees are already deducted from your published returns.
Copy trading is undoubtedly the epitome of technological transformation in the financial trading realm. This intuitive feature allows trading enthusiasts to earn potential gains with minimal effort and knowledge. However, remember that trading is not a game and even if you are a copier, you should strive to strengthen your trading acumen as well as study markets. Ultimately, whether or not you go for copy trading is your call, but always weigh its pros and cons as per your specific circumstances before reaching a decision.