What is Copy Trading? How Does it Work?

Trading concepts

Copy trading

Do you want to learn what is copy trading? Or, how does copying work? Then you are on the right platform because we are going to learn all about copying in this article.

  • Copy trading is a great innovation tactic for new traders to enter the scary world of trading.
  • Although copying doesn’t guarantee success and profits, you can diversify your portfolio and manage risks according to your risk management policy.
  • You can also make some money while continuing to learn from experienced traders you copy.

What is copy trading? 

Copying is a new innovative trading tactic. Copy traders do not give funds to the hands of others i.e. fund managers. They simply connect a part of their portfolios to portfolios of master players and copy their trades. It is a good methodology for new traders and investors with no or very limited knowledge of trading. For some critics, it is a case of belief and trust in other professional traders who are experts, knowledgeable and know the trading more than they do. Whatever you name it but the fact remains that copying is becoming more popular especially among the newcomers. 

Copying traders simply open personal trading accounts and then connect a part of their portfolios to other designated traders. Afterward, they automatically copy every move of their chosen traders and replicate those traders’ performance on their personal accounts. 

How does copy trading work?

There are two types of the account involved in copy trading. The guru who makes the trading decisions and the one who follows, the copy traders. Both the guru and the follower must be on a copy trading platform that provides copying services.

Copy traders basically rely on the actions of other traders who they think are masters of the art. For the copy trading process, you always need the platform’s automatic system to copy trade. The automatic system automatically copies all the open trades to your account. Then, you have to choose an amount to invest in a specific trader. However, the chosen amount should not exceed 20% of your portfolio. 

If you like the way your guru trader is making the trades, you can increase your investments. This is how you can invest more whenever a trade is copied. An increase in investment increases your profit but at the expense of more risks. Your losses will be equally high if a trade fails. However, you can diversify your portfolio to manage risk. You don’t need to invest all your funds in a single trader. Just copy trade various gurus when you can easily increase/decrease your investment.

What are the suitable markets for copy trading? 

All types of markets are suitable for copy trading. Stocks, forex, and all other markets are good for copy trading. However, the forex market is so large and offers uncountable opportunities. If you want to enter forex trading but don’t have enough time to learn and gain experience, copying forex is the best option for you. Moreover, it is seamlessly easy to trade in and out of a particular market when copying. You can try different markets to get more exposure and diversify your portfolio. 

The main players of copy trading

There are the following main players involved in the copy trading network. 

The market

It was first introduced and developed in the forex market. Copying stocks also became popular. Now, all other markets have joined the copying arena.

The broker

The indispensable trading partner, the broker, is your companion in copying as well. You need a broker to open a trading account on which you receive trading signals from the trader you emulate.

The trader

The trader you choose to follow is a kind of signal provider in your copy trading endeavor. All the copy trading platforms allow you to observe and evaluate the performance data of different traders. You can select the trader whose trading methodology impresses you.

The investor

You are the investor who follows the signal provider. However, your goals and risk management are the most important elements when selecting the signal provider. 

The copy trading platform

The copying platforms are the facilitators that facilitate copying. There are many platforms. You need to carefully choose a platform as each platform has its own advantages and disadvantages.

What are the pros & cons of copy trading? 

Copying has become extremely popular because of the numerous advantages it offers. 

Advantages of copy trading

  1. Copying is an interesting and easily accessible route to enter trading.
  2. Copying allows newcomers to start trading without gaining enough knowledge and experience. 
  3. It is a good source to learn from experienced traders you emulate while continue earning significant amounts from trading. 
  4. Copying allows diversification of your portfolio to manage risks while you can make money in different markets. 
  5. Copying also allows you to spare some time for other activities as you have someone monitoring your trades.

What are the disadvantages of copy trading? 

Copying is trading after all. As trading is a high-risk profession, the same risks are part of copying as well. Other disadvantages of it are:

  1. It is difficult to choose a reliable trader to emulate. It is up to a copy trader to do the homework before choosing a trader.
  2. Copying platforms sometimes cost too much. 

Final thoughts 

Copy trading is a great innovation tactic for new traders to enter the scary world of trading. It is a nice way to begin a trading career. Although it doesn’t guarantee success and profits, you can diversify your portfolio and manage risks according to your risk management policy. Moreover, you can also make some money while continuing to learn from experienced traders you copy. You can stop being a copy trader in the future but in the beginning, no other way is more suitable for beginners with paper trading

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