In its simplest form, copy trading is when a trader copies the positions of another, usually a more experienced trader with a proven track record. There could be many reasons a trader might want to start copy trading, such as lack of experience or insufficient time to monitor the markets.
Throughout this article, we’ll explore everything a trader might want to know about copy trading in more detail.
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What exactly is copy trading? To answer that, we must first go back to when it all started. Before copy trading, there was mirror trading, which allowed traders to copy trading algorithms and strategies developed by other traders through automated trading.
From there, some traders started copying the actual trades of other traders instead of only their strategies, and thus, copy trading came into existence.
Copy trading is the same as social trading; the only difference is social trading has a social media approach to trading, whereas copy trading is more automated, meaning your account is connected to a more experienced trader account. Whenever they open or close a position, your account automatically opens and closes the same position.
However, closing the position automatically is not always the case, as the copying trader can manually close the position on their account. Regarding opening a trade, there are two choices: automatically or semi-automatically. We’ll get into more detail regarding the automated and semi-automated process later.
However, whether a trader chooses an automated or semi-automated approach depends on them. Also, keep in mind that even though you might follow a trader with more trading experience, your risk remains the same.
Before deciding which trader you want to copy, there are a few aspects to look out for, such as the number of followers they have, their risk-to-reward ratio, the amount of funds they trade with, their overall performance, and the amount of time they’ve been active in the market.
The choice you make will all depend on your personal preference and goals. Another factor is deciding on the amount of investment because there is still risk involved with copy trading. You could always choose to add more funds or take some away, depending on the performance of your chosen trader.
Regarding taking trades, there are two ways traders can participate in copy trading: automatically and semi-automatically, as mentioned above. Below is a breakdown of the difference between automatic copy trading and semi-automatic copy trading.
After you decide which trader you might want to copy, you can automate the trading process. This means every time the copied trader opens a position on their account, the same position will open on your account. Once the position is opened, you can either let the copied trader close their position, which will automatically close yours, or you could close it manually.
This process works a bit differently; you do have control over whether or not you want to proceed with the trade taken by the copied trader. When the copied trader opens a position, you have a choice whether or not you want to open the same position. Once the position is opened, the same as the automatic process, you can close it manually.
Copy trading does have some benefits, which are discussed in detail below.
Now that you have more information about the benefits let’s look at what risks are involved with copy trading.
Before choosing which trader to copy, you might want to start with which instruments you might want to trade. As there are many instruments to choose from, each with its own set of liquidity, volatility, and market exposure, some traders may have their own speciality.
Below, you’ll be able to see a breakdown of some popular instruments copy traders will trade.
Forex, or foreign exchange, is arguably one of the most popular instruments with copy trading. Most traders in this sector usually trade with a short-term strategy. Forex trading requires a good understanding of technical analysis.
For those traders who lack knowledge of the forex market, copy trading might be the alternative option.
The stock market has many companies listed on the live markets. And because of the vast number of companies, traders might use different strategies, from a short-term approach to a longer-term one.
The choice behind the strategy might come down to various factors, such as market conditions or the industry of the company's stock.
If you have certain goals in mind for your trading or investing, you might want to look for a trader with similar goals.
Stocks and forex are not the only sectors in which copy trading is available. There are various market sectors in which copy traders participate. Some more popular ones include energy, finance, and healthcare, while some emerging sectors that are gaining traction include crypto, Web3, blockchain, and artificial intelligence.
Copy trading and social trading are the same, with subtle differences. Social trading was first introduced when a popular broker launched their own social trading platform, which went viral among traders.
As previously mentioned, copy trading presents the opportunity to link your account with another trader’s account, allowing you to copy their trades. So, when the copied trader opens and closes a position, your account will automatically open and close the same position. You also have the ability to close a position manually.
Some platforms also have the option to semi-automate the process, which means if the trader you might be following opens a position, you get to decide if you want to proceed with the same position.
On the other hand, social trading has adopted a social media approach to trading; you can get to create a profile for yourself on a social trading platform. And just like any social media network, you get to follow other people, in this case, other traders.
Every trader's profile is transparent, meaning you can see their bio, performance over time, profit and loss ratio, and the instruments they trade, to name a few.
The traders you follow can share their trades, news, updates, or strategies to the social trading platform news feed. You can share your own trades, news, updates, or strategy to the news feed.
Both copy trading and social trading are available through mobile apps.
There is some terminology within copy trading that might be useful to understand; let’s have a look at what these are:
Trade Nation does offer you the ability to copy trade. Let’s take a quick guide on how you could go about this.
Copy trading and mirror trading have some similarities; however, there are also some aspects where they differ. In copy trading, you are copying the trades of another trader directly while having the option to adjust your position size and risk level.
Mirror trading, on the other hand, you are copying not only the position of the trader with the exact position size but you’re also copying the strategy and algorithms developed by numerous traders.
There is a chance for copy trading to be profitable if you choose the right trader to copy. However, any trading, including copy trading, is risky. It doesn’t matter if you pick a trader with positive results; every trader goes through losses. You could decrease your position size, limit your risk level, or even choose multiple traders with different strategies to copy in order to mitigate the losses.
There is no minimum required amount, although many brokers might specify a minimum amount you might need to start copy trading. If you decide to start trading with a small amount, it might be best to choose only one trader to copy, limit your position size, and reduce your risk level to keep your margin positive. You’ll also need to remember the fees charged by the copy trader.
There is no rule that you’ll need any previous experience to copy trade. However, it might be wise to do solid research to understand various financial instruments, market conditions, leverage, and margin requirements. But for the most part, copy trading is a way for inexperienced traders to use the knowledge and expertise of experienced traders.
Any trading involves risk, even copy trading. With that said, you have complete control over your account, so you get to decide how much you want to risk per trade.
You could research the various traders you might want to copy to see their trading history, performance level, and risk-to-reward ratio. This will give you a better understanding of the type of trader they are.
Copy trading is an easy way for inexperienced traders to use the knowledge of expert traders. While copying their trades, you still have control over your account and the outcome, meaning you can close a position if you don’t feel comfortable with its direction and adjust your position size per trade.
The possibility of losing money is always present in trading. This is why you might want to consider trading with money you could feel comfortable losing while also limiting your position size per trade. You could factor this into your risk management strategy.