Copy trading from the name itself, give you the opportunity to directly ‘copy’ the positions held by another trader. You have the decision to invest how much you want and simply copy everything they are doing in real-time. And when that trader you’re copying makes a trade, your account will perform that same trade as well.
Copy trading is known to be one of the simplest ways to utilize another trader’s expert skills and knowledge. If you want to know more about how it works and if you can make money out of it, just keep on reading!
The History of Copy Trading
Copy trading has a history that goes back to 2005 when traders were copying certain algorithms that advanced through automated trading. Brokers found out the potential of having systems where any associated with that trader could automatically copy their trading account. There was no need to monitor email signals from time to time or check trade ‘chat’ rooms.
And because of this, Etoro and Zulutrade came into the picture as they have allowed traders to connect their personal trading accounts to their platform. Traders are not required anymore to submit their specific strategies. This is the time that copy trading became so popular.
How Does Copy Trading Work?
Copy trade or trading is a technique that newer investors use, particularly those who don’t have the necessary experience. It’s just as simple as placing down your money, selecting a trader, and then allowing a website to mimic the chosen trader’s purchasing and selling with your cash. Here’s an easy step-by-step guide:
- Choose a trader who suits well with your goals to follow. What are your goals? Determine that first. After that, you want to select a trader to copy. What do you look for? Is it their number of followers? Profitability? The total amount of earnings they handle or their ROI? Risk level? It’s completely up to you and you can choose a combination of these.
- Determine your investment amount and how you’re going to share it among different managers. Don’t immediately put all your eggs in one basket, make sure that you maintain balance. Wisely decide how much you’ll allocate to every chosen trader if you have picked more than one person to copy.
- After you have decided on the amount, the copy trading platform will automatically duplicate all the selected trader’s positions in your trading account.
- Put more funds. If you’re happy with how the trader is performing, you can add more funds to it. Or lessen your exposure to one trader and maintain your portfolio assorted by not investing so much in one trader. You may replace your current ones at any time, but remember that you’re required to have a separate investment account for every trader you want to follow.
- Most platforms don’t have special fees to use the function of copy trading, aside from the ones you pay the Strategy Manager when they generate a profit. If there are any brokerage fees that will be administered to a normal trade then they will be applied to copy trades as well.
The Risk of Capital Loss
Of course, you already know that trading is a high-risk venture. You need to be aware that every day you trade, you’re always risking a capital loss. It’s most likely possible that you walk away with nothing. This is the reason why copy trading should never be paired up with financial products like Investment-Linked Policies, endowments, unit trusts, and many more.
Contrary to these products, the returns from copy trading will whipsaw, shifting significant each day. You need to be prepared mentally to see huge losses on several days, and if you are scared of risks, this will definitely keep you at night.
Avoid putting all of your savings or retirement fund in copy trading. Just use the money that you can afford to lose, take note of that. Let’s be honest, if you’re the kind of person who can afford to lose money, you’re most likely smart enough not to need copy trading.
It’s Not Easy to Choose Traders to Follow
There are so many thousands of traders to choose out there but it’s not that easy to find a “great” trader. It’s not a simple process. There are things to consider such as what they trade (forex, commodities, stocks?), and if their approach fits you and your goals.
Furthermore, if you don’t have enough money, for example, and you’re copying an aggressive forex trader, then that will most likely wipe you out in a matter of days. Meanwhile, if you choose traders with 100 per cent win ratios, you may eventually find out that it’s because those traders don’t want to close losing positions, instead of anticipating for the price to increase again. Although this gives the trader a 100 per cent win ratio, it also makes them high risk. These types of traders are not cutting losses.
Just remember that your “trading guru” will not be your financial adviser, and they won’t prevent taking risks just because they’re putting their followers like you in peril. You must completely accept the risks your trader is doing, they will never be accountable to you.