Copy trading: The best part of social trading

Michael Stark

Financial content leader

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Are you curious about how copy trading lets you leverage expert traders' strategies without doing the research yourself? In this article, trading expert Michael Stark explains how this form of social trading enables traders to automatically follow proven trading strategies and learn which traders to copy.

Imagine an investor with millions in equity but no trading experience or time to do research. Typically, these investors entrust their capital to a professional fund manager who conducts due diligence on market opportunities, and then informs the investor. 

Now, imagine a professional trader doing all the research, and presenting their trades on a platform where you can directly copy whatever they do, all at a level within your budget. Too good to be true? Let’s deep dive into copy trading and uncover if it’s right for you.

What is copy trading?

As the name suggests, this type of trading falls under the broader concept of social trading. It is an investment strategy that automatically copies transactions performed by other investors or professional, successful traders.

 Copy trading has become attractive because it enables others to emulate the insights and experience of expert traders, without conducting detailed market analyses themselves to make decisions.These traders have conducted their necessary research as they pursue profits by buying and selling assets, allowing you to benefit from their insights. 

Copy trading has gained popularity in recent years as it opens up a plethora of possibilities for those new to cryptocurrencies. Moreover, it's a tool that can be employed by those who don't have time to actively trade in financial markets.

However, it's essential to note that profits are not always guaranteed with this method of executing trades. So, where does success or failure lie? The answer is simple: in the experienced traders, you have chosen to copy.

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How does copy trading work?

Copy trading provides access to the expertise of experienced traders, letting investors replicate their trading strategies. It also allows for portfolio diversification by introducing a range of products you might not be familiar with.

The effectiveness of copy trades is based on the choice of trader. This is possible thanks to software that reviews the traders' movements, creating parameters that identify their successful strategies over time. Bear in mind, the number of people who can copy a trader is limited, so you must ensure their quota hasn’t been filled.

Copy trading is configured based on your investment options. If you are a conservative investor, the amount you invest will be limited. If you have a higher risk appetite, you can allocate more capital, increasing your chances of a higher return. You can also opt out if you lose money.

But how does copy trading work exactly? Each time the trader executes a transaction, the same operation is performed in the investor's account, reflecting the same position size and direction. For example, if a trader invests 50 USD to buy currency X, the platform automatically spends 50 USD from your account.

Traders chosen by other investors receive a small commission, which varies according to the platform and can range from 7% to 10%. This way, everyone benefits from good results or, conversely, is affected by losses.

How to copy trade?

To engage in this trading method, you need a social trading or copy trading app that provides the full service. Once your account is set up, you are ready to trade. First, an investor chooses a trader who appears successful or reliable. This choice can be made using the platform's metrics, such as return on investment (ROI), trading history, and other relevant data that aids informed decision-making.

Take note of the details, like the days the trader operates, how they trade, and their long-term results. Trader selection is crucial but does not determine the success or failure of your investment.

Once you’re ready to automatically copy the trader's operations, the next step is to determine your objectives and how much money you want to invest. When setting this parameter, you can also define the size of the operations you wish to copy and the risk limits, giving you more control as an investor.

Remember, the less you invest, the smaller your gains, but your losses will be lower. Conversely, if you invest a generous amount, your profits could skyrocket, but so could your losses. These details must be evaluated before performing any copy trading operation.

After choosing the trader and configuring your investment parameters, the platform will start copying their operations automatically. From this point, you can monitor and manage your investments in real-time. This step is crucial because it lets you adjust or stop copied trades based on the performance of other traders, market sentiment, or market changes.

In summary, the steps for engaging in copy trading are:

  1. Choose a copy trading platform.
  2. Select a trader based on relevant data.
  3. Set the investment parameters.
  4. Automatically copy the operations.
  5. Monitor the results.

Copy trading, social trading, and mirror trading: What's the difference?

Although they might sound similar, copy trading, social trading, and mirror trading have some key differences:

Copy trading

Copy trading is the automatic copying of other traders' operations in your trading account. It occurs in real time, and the investor has total control over the copied operations. This way, investors can adjust the parameters at their convenience or based on the partial results reflected.

Social trading

This is a broader concept that includes copy trading. In social trading, there's more interaction, as traders can engage with other traders on a social investment network or platform. These social trading platforms are used to share ideas, share strategies, and discuss techniques through chats, comments, forums, and other forms of interaction, hence the name social trading.

Mirror trading

In mirror trading, investors automatically replicate the trading activity of other investors in their accounts. Unlike copy trading, where retail traders have significant control over individual trades, mirror trading involves following an automatic execution strategy hosted on a broker's server. The investor has less control over individual trades compared to copy trading.

Pros and cons of social trading

Benefits of social trading:

  1. Access to expert trading strategies: Social trading allows less-experienced investors to follow and copy trades from seasoned traders, providing access to successful strategies without the need for deep market knowledge.
  2. Insight into market sentiment: By observing the trades and discussions of experienced traders, investors can gauge broader market sentiment and adjust their trading decisions accordingly.
  3. Reduced time commitment: Investors can save time by copying trades from experts, eliminating the need for continuous market analysis and research.
  4. Diversification of strategies: Social trading apps and platforms allow users to follow multiple traders, enabling a diverse range of trading strategies to be incorporated into their portfolio.

Shortcomings of social trading:

  1. Risks of blindly copying trades: While copying trades might simplify the process, it also involves risks, especially if the selected trader's strategy is not well-suited to changing market conditions.
  2. Dependence on others' trading decisions: Investors relying on copy trades relinquish control over their trading decisions, which can lead to missed opportunities or unexpected losses.
  3. Uncertain market sentiment: Social trading or copy trading platforms may not always reflect accurate market sentiment, as traders may base their actions on speculation or short-term trends.
  4. Potential for financial losses: As with any form of trading, there are inherent risks, and copying a trader with a poor performance or high-risk strategy can lead to significant financial losses.

Conclusion

Before using any of these strategies, consider all aspects. While copy trading allows you to leverage the experience of other investors, it does not guarantee investment success. Like any strategy, it involves risks and must be properly studied and analyzed first.

One way to avoid beginner's mistakes is not to base your evaluation solely on whether you earned or lost money from your chosen traders. This approach will provide more significant learning opportunities. The key is to study what worked and avoid repeating mistakes, thus allowing you to conduct a more mature analysis and integrate this tool as part of your resources for success as an investor in financial markets.

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