The trading world has changed tremendously thanks to technological advancements. Traders can now join online communities and share their experience, helping novices improve their skills and proving the trading world is not entirely made out of stone-cold, money-driven investors.
Soon enough, traders found a way to support each other and develop a system where both sides have something to gain: copy-trading. The principle is quite easy to understand: you copy a trader’s strategy to an extent and pay them a fee for sharing their knowledge. The technique gained a lot of popularity in the forex trading world because it helps beginners discover, learn, and understand trading strategies while also making some money in the process.
If you are a beginner trader, copy-trading is a good strategy to learn the market, but before you decide to give it a try, there are some things you need to know. We have put together this guide to help you understand what copy-trading is and how you can use it to your advantage.
Copy-trading – a short definition
Copy-trading is quite easy to understand and, as the name suggests, it means copying another trader’s strategy. To put it simply, what you are copying is the trader’s position on the market and their moves. This is done through a platform that is provided by your broker if they allow copy-trading.
Your portfolio is linked to the account of the trader you want to copy and their actions are instantly applied to your account as well. If they open a trade, your profile will open the same trade; if they make a move, your profile will be making the same move.
This means if they win, you will make a profit, but if they lose, you will be losing as well. This is why it is important to choose a trader you can trust and has experience in the market. Otherwise, you will just be putting your money out there for someone else to spend.
How does copy-trading work?
There are two techniques traders use to mimic another trader’s actions: follow or copy trade.
Following another trader means receiving information about their actions on the market and manually mimicking those actions yourself. This can be useful for people that are just looking for hints on their next move and don’t want to fully copy a trader’s activity.
If you choose copy-trading, then all the actions performed by that particular trader will be copied to your account as well.
When you start using a copy-trading platform, you will be presented with the option to either copy all open trades of a particular trader or just the selected ones.
Not all traders have the same amount of money on their account, so you will also have the flexibility to choose whether they want to copy trade proportionally based on their account balance, or on a 1:1 ratio. This again depends on your preferences and capital, so be sure to think this through before making your decision.
What are the benefits of copy-trading?
Copy-trading may not be suited for everyone, but investors benefit by copying top-performing traders a lot. To help you decide whether you should start copy-trading or not, here are some of the benefits it provides:
Saves traders a lot of time
There is no secret that manual trading takes a lot of time. Not only do you have to close and open trades, but you also have to analyze the market, stay up to date with the news and changes, and learn a lot of mechanics and strategies. For beginner traders, this takes a tremendous amount of time and can cost them significant money. Getting started with copy-trading will take out some of those risks and can save traders a lot of time and money.
Enhances the learning experience
You can’t be a successful forex trader if you don’t learn everything there is to learn about the market. They say the most effective way to learn how to trade is by practicing it, but mistakes in the trading world can cost you significant money, why it’s not exactly an option for everyone. Copy-trading can help beginner traders observe and about various trading techniques, as well as how to apply them successfully.
Allows traders to explore the market
Forex trading allows traders to invest in a number of commodities, but not everyone is willing to experiment as much at the beginning, which is perfectly normal. Copy-trading can launch you into a new world of possibilities, experimenting with commodities and discovering which market appeals to you more.
Are there any risks?
Correct me if I am wrong, but there is no such thing as trading without risks. Each trading market and each strategy that applies has its own risks, and copy-trading is no different. The major risks traders face when it comes to copy-trading are:
Market risk
The goal of any trader is to generate gains when an asset increases in value, but assets are always at risk of losing their value, which is what represents the market risk. To prevent this, traders need to allocate capital to multiple trading strategies, a technique called portfolio diversification. Before choosing a trader to copy, make sure they perform well during challenging market periods as well, not only when things go smooth.
Systematic risk
Emerging currencies are the ones most exposed to systematic risks, so keep that in mind when looking for a trader to copy. An example of a systematic risk would be if a country gets overthrown and capital gets locked down. This could prevent a trader from exiting a position. Although these situations are very rare, they need to be taken into consideration as well.
Liquidity risk
When looking for a trader to copy, take a look at their maximum historical drawdown and decide if you are comfortable with losing that amount of money if the market takes an unexpected turn. Each instrument has its own liquidity level, so you may want to deepen your knowledge before choosing one.
Leave a Reply