Let's suppose that you would like to venture into the stock market trading but you do not have much knowledge about it. It seems that the work is a bit tough, also there’s no time to read the books when the market is open for five days a week. This is where copy trading comes in handy. It is simply mimicking the actions of professional traders. When they open a position, you do the same – automatically! Which basically means that you hire a professional investor to do all the work for you.
People gradually began to engage in copy trading around 2005. Nowadays, the number of people who do it reaches millions. The idea is very easy. You pick experienced traders, which you may even want to be, and you try to enter the stock market through them.
How Does Copy Trading Work?
Copy trading works in a straightforward manner. You register on a site like eToro or ZuluTrade which allows you to view various traders' profiles. You can see how successful they are, how often they lose or win a trade, and how aggressive their strategies are.
Once you’ve found the trader you’d like to follow, you indicate what your maximum investment is going to be. After this the platform undertakes to replicate all the transactions carried out by your designated trader. You purchase a share if they purchase it. If they sell it, you sell it too.
You still do not have to do anything else, but for practical purposes, it is useful to perform a review of the situation periodically. In such a situation, you are allowed to cease following and copying that trader and look for a different one.
Why People Like Copy Trading
There are many factors that account for the growing popularity of copy trading especially among budding investors.
To begin with, it is time efficient. Copy trading is ideal for you if you have no idea how to trade regularly or do not have time for whatever reason since it allows you to invest without knowing too much about complicated things. Just choose the trader you would like to be copied and sit back and relax.
In addition, it helps you in capitalizing on diversification. It means, you can invest in different markets e.g. stocks and forex or even cryptocurrency because you are following different traders who trade in various markets hence minimizing risk of loss of all your money in one market.
Moreover, it is an effective strategy for education. The more time you spend copying trades from expert traders, the more you begin to learn how these expert traders go about decision-making processes and eventually conclusion-making. Over the years, you will acquire knowledge of the markets without stepping into a class.
Last but not least, it can generate income without being active. You would be able to earn funds without putting in a great deal of effort. The trades will be automatically executed by the system on your behalf and you can check your profits at any time you desire to.
The Risks of Copy Trading
But in any case, copy trading is not all about making easy money. There are risks too.
One risk is that one has to trust someone else with your money and not all traders are good. Some traders are lucky for a time and later make poor choices resulting in losses. It is necessary to choose a trader whose strategy is worth copying.
The other risk is the market volatility. There are times when the market moves up and down too much, and even seasoned traders can incur losses because of this. Even if you’re following an expert, he may be rendered helpless when his whole market crashes.
Also, keep in mind that you will not have much control. You can for instance wish to copy a cautious trader, and he or she makes a reckless trade; you’ll have to go along with it unless you stop copying that trader altogether.
Lastly, some of the platforms use spreads. It is advisable to understand how much of your broker’s fees would be incurred in using the platform so as not to eat away profits too much.
How to Pick the Right Copy Trading Platform
You have learned the fundamentals; which platform, therefore, should you follow for copy trading? Consider the following factors:
Fees and Costs: Some providers have single rates or subscriptions while others take a percentage based on how well you perform. Always check how much such an engagement will cost you before proceeding.
Safety: Are the platforms you are considering regulated? Any unregulated broker or broker with a tarnished reputation should be avoided as you trust them with your money.
Trader Info: Ideally, you want to have a platform that offers such critical information regarding the traders you intend to follow as: their achievements, statistics, risk degree and the strategies they apply when trading.
Ease of Use: It is advisable to use an easy-to-use interface. A number of platforms offer apps for mobile devices, making it quite easy to keep track of your trades and not depend on your computer or laptop.
Variety of Traders: Select a provider with many traders who trade in currency stocks and other markets. With many traders, it will be easy to widen your opportunities for diversification.
Tips for Successful Copy Trading
In copy trading, then these steps might help you make it:
1. Copy More than One Trader
You should not concentrate all your funds on one trader. It is advisable to allocate your funds to several traders with different specialties, such as stocks, forex, or crypto. This helps lower the risk.
2. Check their Performance History
Do not just be quick to jump at a trader who has recorded success in the last week. Assess them after several months or years. The best traders are those who can consistently win.
3. Use Stop Loss
Certain platforms allow the user to set a threshold that will prevent them from copying a trader who may start losing. Leverage this to avoid losing large amounts.
4. Monitor your Portfolio
Try as much as possible to monitor your account periodically even if the platform does it automatically. If one trader is underperforming, it could be prudent to cut the losses and move on.
5. Avoid Risking Much Capital
If you are venturing into copy trading for the very first time, it is recommended that the user deposits a minimal amount. You can always increase the amount as soon as you feel accustomed to the environment.
A Real-Life Copy Trading Story: Sarah’s Success
Let’s explore one instance when copy trading was actually put into practice.
35-year-old Sarah works full time so she has scanty time to trade in stocks. However, she was interested in making an investment, so she attempted copy trading. To this end, she registered on a trading platform and invested $5,000. Three traders were identified: one specialized in stocks, the second worked on the forex market and the third rotated in cryptocurrency trading.
In the beginning, she was a bit anxious about things because the cryptocurrency trader was making some losses. Thanks to her strategy of distributing her funds across several different traders, these losses were offset by the stock and forex traders’ profits. After six months, Sarah reported a growth in her account with the percentage increase being twelve percent. She didn’t make any trades on her own, but rather, she made it a point to have a look at her portfolio to ensure that all was well.
Since Sarah got back to school, it was obvious that she had investment opportunities which made copy trading very appropriate as a means of enhancing her funds.
Is Copy Trading for You?
- You may be suited for copy trading if:
- You don't have the time or the resources to figure out trading on your own.
- You wish to learn from experienced and successful traders.
- You’re comfortable with the idea of handing over trading to a third party and the associated risks.
- You want to explore investments through different avenues but do not want to put in the work that is involved.
However, if you prefer to be in absolute control over your funds and any decisions regarding trading, or if you’re averse to risk, then copy trading does not seem very appropriate.
Conclusion
If you do not have time to invest your money, copy trading is an excellent investment strategy to consider. With copy trading, one can follow expert traders and reproduce their winning trades, which increases one’s profits while relieving one of the burdens of thinking. However, one must be cautious and select suitable platforms and traders. Though it’s a low-touch method of investing, if done sensibly, copy trading can be beneficial in increasing your savings.