Copy Trading: What it is and How it Works
Copy trading was first developed almost 15 years ago from automated trading, also known as algorithmic trading. Traders could share their trading history in this automated system, and others could follow. These systems were developed very fast so that soon after the traders were allowed to connect their trading accounts directly on the platform. Some years after that, copy trading became popular among online trading brokers because it allowed them to learn from more experienced brokers. Here are some key notes on what copy trading is…
What Is Copy Trading?
It doesn’t take a genius to figure out that copy trading stands for exactly that. The idea is to pick a more experienced trader that you can follow to copy their trading movements. If they sell, you sell exactly what they did, if they buy, you do the same thing. This can either be done automatically or manually which is up to you to decide which style suits you better. Sounds simple enough?
The key to copy trading is to choose the right trader to follow. A rule of thumb is to pick a trader whose end goal and investing style align with yours. Copy trading can be done through a trading platform, or you can do it on your own, however, going through the trading platform will allow you to mimic a certain trading activity. Trading platforms also invest in your place leaving you with fewer things you need to pay attention to. However, it’s important to note that you still need to pick an investor to follow on your own.
There are a few crucial things you must do before you start copy trading. One of them is to make sure that you have enough money in your trading account to cover the trade activity, and the other one concerns analyzing the market. Carry out your analysis on a particular market or a position before you invest money in it. Be sure to remember that if you’re following even the most experienced trader in the world, there is still a risk that you might lose your capital, or not make any profits.
Part of a Bigger Picture
Social and copy trading essentially have the same end goal, however, they are not that alike. Copy trading can, in many ways, be seen as a branch of social trading by some people. The key difference is that social trading is focused on sharing trading information through a social trading platform. These dashboards serve for the investors to share trading ideas, analysis insights, market news, and they allow them to have discussions.
On the other hand, as it was mentioned before, copy trading includes an automatic mechanism where an investor can copy the trades of a more experienced one. This is made possible by a connection of your account with that traders’ account. Now it’s more obvious that copy and social trading are different, however, there is a good basis for associating them because copying trades is an essential part of a social trading network.
How Does It Work?
Now that the idea of copy trading has been explained in detail, and all the aspects that need to be considered before even beginning have been emphasized, it’s time to shed light on inner workings. Copy trading on its basis works through social trading systems and social networks. Traders can broadcast information on their open position to the rest of the traders on this network. Other traders can then decide if they want to open the same position. Another option is to let their automated trading system do it for them.
The trader which is broadcasting their position usually has more experience in the given market, and the copy traders are either completely new to the trading world, or they have very little experience. Copy trading is a very popular choice when it comes down to forex trading because it requires constant monitoring since the movements are frequent, however small they are. This means that a trader can simply copy another traders movement, and not go through the usual trouble of scanning the ever changing forex markets themselves.
Copy trading is very beneficial because you get more expertise and experience in a market which you wouldn’t usually trade in. It’s important to state that before you commit a serious capital using the advice of another trader, you must analyze on your own, no matter how familiar a certain market is to you.
Pros and Cons of Copy Trading
Pros of Copy Trading
- Copy trading allows you to make the most of your time by saving you the time of analyzing the market often for hours on end. You can simply base your decision on a trader that has proven to have a lot of experience in the given market.
- You will have an overall better insight into trading because you can access other trader’s tactics and methods, and you can also be more aware of potential trading opportunities by making most of the seasonal trends for example. Making room for a bigger profit altogether.
Cons of Copy Trading
- However great it may sound, copy trading does not eliminate the risk of losing your capital. Another bad aspect is that some traders will aim to influence a market’s price just so they could benefit financially. Be very careful which traders you copy.
- With all the trading information from different kinds of trader’s expertise in different kinds of markets. Copy traders can get used to just using all the information available, and fall out of the habit of analyzing the trades themselves. This can hurt their profits both in the long and in the short run.
Studies showed that traders on the social trading networks who were practicing copy trading benefited more than the traders who were trading manually for an astounding ten percent more in profit. And they had around five percent better trades than traders who were copying random investors of their choice. Ever since these studies shed light on the benefits of copy trading, scientists have been working hard to develop a social trading platform which will better help traders to benefit from copy trading.