A short guide on copy trading

Categories: Copy Trading | Published by: fxstadium
13/06/2022

Introduction

Over the years, the popularity of the financial market is pushing everyone to try  their “sheer luck” in trading. However, this doesn’t turn out as expected, not for all. People are scared to take risks and search for shortcuts. But is there a shortcut?  The answer is NO. There are no shortcuts to becoming a profitable trader immediately, but there are ways to become profitable. Copy trading is one such popular method that has gained popularity among traders.

What is Copy Trading?

Copy Trading is a trading strategy which allows traders to copy the trades of other traders. It is a type of portfolio management where you search the trading methods of a much experienced trader so you can mimic them and make profits. The trader who is copying the trades of another trader is called a “copier” and the trader whose trades are being copied is called a “trader”. It’s a great way of making money for traders who are on a tight schedule or who are new to the market. Copy trading strategy is applicable to a variety of assets, including cryptocurrencies, forex, and other volatile markets. This strategy can be very beneficial; however, there are certain risks associated with it. Before understanding its pros and cons, let’s see how this strategy works and what are the requirements for copy trading. 

How does Copy Trading Work?

Copy trading works very similar to trading on your own. You open and close a trading position. However, instead of doing it on your own, you rely on someone else. You can  apply copy trading strategies on a myriad of instruments, including FX, Commodity, Stocks, Indices and Cryptocurrencies.

Copy trading is available in three forms –

  • Manual: like regular trading, the manual way of copy trading involves following trading recommendations by experienced traders. There are master traders who new copy traders follow. Traders receive the entry and exit points for their trades in manual copy trading.
  • Semi – automated: in this form of trading, you select the trader  you want to copy. You can then choose which to copy and trade yourself, or which to automatically follow, in which case your preferred trader takes the lead.
  • Automated:  this form of trading is fully automated. You select your strategies and master traders. In return, all positions and successive trading are automatically replicated.

Benefits of Copy Trading 

Copy trading can be very lucrative for traders. Let’s see how it can benefit you as trader –

  • Enhance your trading knowledge:  – when you choose copy trading, you get to copy strategies of traders who are more experienced than you. This helps new traders in understanding the market as they get to know how strategies are implemented.  
  • Make money with limited capital –  nobody likes to lose in forex trading. But you are more likely to lose as a beginner due to lack of trading knowledge. However, it is not the case when you copy trade since the outcome of your trades are in the hands of experienced traders. This increases, not guarantees, the likelihood of you winning the position.
  • Diversification of portfolio –  a trader can diversify its portfolio with help of copy trading. Rather than putting all of his capital in one asset, a  trader can distribute its capital across different assets and take help of copy trading to make profits, though it would require different trading strategies for each market and different master traders. Thus, traders should be careful when copying strategies.  

Limitations of copy trading –

Like all trading strategies are not risk-free, copy trading is not different. Hence, traders should understand both and then proceed. 

  • Financial markets are unpredictable. Regardless of how good your copied strategy is, you could experience loss. 
  • Are you copying a genuine strategy? Which platform are you signed up with? There are plenty of ways to do copy trading. If your source is not genuine, you have already lost your trade. Take your time to research and then choose your resource.

Conclusion

Copy trading is a way to make profit from the trading market without having any complete knowledge. Copy trading platforms allow you to copy trades made by other traders and have a chance of making profit. But remember: copy trading is not a clear-cut method to become a profitable trader. There is no guarantee that trades you copy, will yield 100% results. Thus, go ahead with proper research and a pinch of salt.