01.08.2024

Copy Trading

Copy Trading<

There are an incredible number of different ways to make money in the stock market. One of these methods is copy trading. This tool is arousing a lot of interest, especially among those who have recently entered the stock market. However, in copy trading, not everything is as simple as it might seem at first. In this article we will describe all the details of copy trading that should be taken into account if you want to use copy trading platforms or take someone else’s capital under management yourself.

Key takeaways:

Copy trading is the automatic copying of another trader's trades.
The trader you copy will charge a small percentage of the income for this.
There are risks in copy trading, namely market risk, liquidity risk, and systematic risk.
There are two types of copy trading - social trading and mirror trading.
Copy trading does not require advanced trading knowledge.

What is Copy Trading?

So, what is copy trading and how does it work? Let's look at the details of this trading strategy and how it can be used. Copy trading, also called social trading or mirror trading, allows investors to automatically copy a trade of experienced and successful traders. The basic concept is simple: beginners or people with less experience can benefit from the wisdom of more experienced traders, essentially adopting their trading tactics and trades. Essentially, copy trading involves investors repeating the trades of experienced people. This method easily duplicates transactions that experienced traders conduct on specialized copy trading platform.

For example, let's say you're new and interested in ETF. On the copy trading platform, you will find an experienced trader who has a successful track record. Fascinated, you decide to allocate some of your capital to imitate this signal provider's trading activities. Now, every time an experienced signal provider initiates a trade, your account will automatically repeat the action proportionately. Therefore, if they make a profit, you get a similar benefit; if they make a loss, your trading account will show a corresponding decrease. This allows you to passively participate in the ETF market without having to actively manage your trades. If you’re interested in trading solutions, you can find them here - https://j2t.com/solutions/mt5global/.

Social Trading vs Copy Trading

One of the popular subtypes of copy trading is social trading. It does not imply automatic copying of trades; social trading is the exchange of ideas and strategies between experienced traders. This type of copy trading will help you immerse yourself in the intricacies of trading, learn a lot of new things, but you will have to make decisions in trades yourself; you do most of the work yourself. Social trading is an auxiliary tool in your trading activities.

Time-consuming: Social trading is more time-consuming than both copy trading and mirror trading.
Education: With social trading, you get to understand why a professional trader takes a trade and what are the exact reasons behind a trade.

Mirror Trading vs Copy Trading

There is a subtype of copy trading called Mirror trading, when absolutely all trades are copied without changing the parameters. Copy trading assumes that the recipient of the signals can change at least the volume of trades. In reality, he has a much larger choice, including filtering the assets that are traded.

Automation: Just like copy trading, mirror trading is fully automated.
Diversification: Since algorithmic trading strategies are often designed to follow a myriad of market inputs, process them in milliseconds and create a trading signal, they can also lead to more diversification within your portfolio. In addition, many algorithmic strategies trade more than just one market.

How Does Copy Trading Work?

Copy trading involves a series of simple steps.

Initially, you should choose a copy trading platform that meets your currency investment needs, prioritizing copy trading platforms that have a diverse range of experienced traders and that offer detailed information about their trades and approaches.
After registering with an exchange, spend time researching and selecting traders on the copy trading platform, assessing their trading history, performance metrics, and risk levels.
Choose traders whose strategies match your risk tolerance and investment goals. Once you decide on the amount of capital you want to devote to copy trading, this amount will be used to proportionally copy the selected traders' transactions.

After these steps, the copy trading platform will automatically duplicate the trades of your selected traders in your account in real time. This means that if a trader initiates a trade, your account will automatically open a similar trade proportionately.

How To Copy Trade?

If we analyze the process of copying transactions in more detail, then everything is quite simple. You find a trader who meets all your requirements and click the “follow” button, but here are a few steps you have to take:

Open an account. Opening an account is a basic necessary operation. You fill out the registration form, make a deposit, then you will have to wait some time until your account is approved (usually this does not take long).
The choice of a trader is the most important part; on stock exchanges where copy trading platforms are presented, you can find many metrics and statistics by which the professionalism of a trader is measured. You must analyze all this carefully, set some of your own filters if necessary (for example, leverage is no more than 10x).
Next, all you have to do is subscribe to the trader and copy trade.

How To Copy Trade?

Advantages of Copy Trading

Copy trading has many advantages:

No trading knowledge required. You only need to choose a trading master to entrust your money to him. You don’t have to trade on your own or monitor the market.
Automation. You saw above that the settings need to be set only once, after which all that remains is to monitor trades and record income or losses.
Passive income. If you choose the right strategy, calculate all the risks, set the appropriate settings and find a trusted signal provider, copy trading can become a source of passive income without the need to take any action yourself.
Flexibility: the copier can not blindly follow the signal provider’s trades, but can regulate many aspects: transaction size, risk, assets, and so on.
Transparency: in copy trading there are always open statistics, there is a rating, you can always compare the effectiveness of one trader with another.

Disadvantages of Copy Trading

Despite all the advantages, there are also disadvantages:

Picking the right trader can be difficult: If you were thinking of buying into a stock or investment fund, you would probably spend some time doing research to figure out if it’s the right decision, and this is the same sort of approach you should use when choosing which traders to copy. You need to realize that it’s not necessarily the trader with the highest monthly return you want to copy. There are always other factors to consider, such as maximum drawdown and how much trading history the trader has.
Understand the risk: Copy trading can be risky because losses are replicated in the same way that wins are. While you have some control over the risk (for example, how much money you will allocate to your trading account and the risk settings), you do not control the trades of the trader you are following. Market conditions may change, and the master trader may struggle to adapt, or they may be stressed and unable to control their emotions when trading. While these things are beyond your control, you do need to consider them.
Additional costs: Some providers charge a subscription fee if you want to copy their trades, so always check before you trade.
Market risks: Copy trading does not protect you from all the typical market risks such as slippage, rejected orders, or copy trading platform outages.

Is Copy Trading Considered To Be Profitable?

Copy trading seems like a very simple scheme, but don’t forget what responsibility lies with the trader you follow. All your profits (or losses) will depend on the trader on the other side of the screen, on his experience and professionalism. Therefore, there will always be risks in copy trading.

Market risk

Market risk is always present, it does not depend on the professionalism of the signal provider. It’s just that experienced traders know how to minimize this risk. Market risk is the risk, or more correctly, the probability of price changes not in your favor. Such changes may result in losses.

Market risk can be minimized by, for example, a leverage limit, a small percentage of loss of total capital, a good risk-to-reward ratio, or refraining from trading during important news releases that can greatly affect Forex. Even the best trader will have a small percentage of unsuccessful trades.

Liquidity risk

Liquidity risk is also quite common. What does liquidity risk mean? Liquidity is the ability to exchange an asset here and now. Conventionally, if you can quickly sell a currency and you don’t have to wait long for a buyer, then this currency is liquid. Liquidity risk is the risk of not selling or buying an asset here and now at a specific price. Liquidity risk may arise if you trade small cap stocks, exotic currency pairs, exotic stocks or currencies, and during the first minutes of market opening and last minutes of market close. Liquidity risk directly affects your earnings, and this can be quite frustrating if a trade is perfectly timed but you can't get out of it due to liquidity risk.

Systematic risk

Systematic risk is similar to market risk in that it does not depend on the skill of the signal provider; systematic risk is always present in all markets when you trade. What is meant by systematic risk? Bad news, a sharp trend reversal, an unexpected crisis, and so on. These are factors that we cannot control. It is because of systematic risk and market risk that even the most experienced traders with many years of experience can have a small percentage of unsuccessful trades.

Copy Trading Terminology

In the field of copy trading, you can come across terms that you may not have encountered before. This list will be helpful for you, especially when you need to select a trader to copy, analyze his results and set your filters:

Fixed size: this is the amount of money that you are willing to provide to a trader to enter into a trade. When you copy a trader's trade, you do not have to use as much money in the saddle as he uses, you can designate your own amount of money that will be acceptable and safe for you.
Mirror master size: Mirror master size is a mode in which you buy the same amount of an asset as the trader you are copying buys. For example, if a trader buys £50 worth of gold, you will also automatically buy £50 worth of gold, no matter what your trading account balance is (leverage is used if the balance is insufficient).
Mirror Master Risk: Mirror Master Risk mode adjusts your potential loss percentage to the trader's potential loss percentage. To explain in simpler terms, if a trader enters a trade at risk of 2% of the total capital (this means that in the worst case scenario, if the price reaches the stop loss, the trader will lose 2% of the total capital), then the size of your transaction is automatically adjusted so that the maximum loss is also no more than 2%.
The max drawn: this is an indicator of the downside risk over a certain period of time. It is important to note that it only measures the size of the largest loss and does not take into account the frequency of such losses. The maximum drawdown is calculated as a percentage and will apply to your entire trading account, not just a specific signal. For example, if you set the maximum drawdown to 30%, then when your account's equity decreases by 30%, all copying is suspended, and all transactions received by the signal are closed. Please note that new copy trades cannot be placed into your trading account until you increase your maximum drawdown. In the example above, you will need to increase the drawdown to, for example, 40%.
Warning level: this is a certain drawdown percentage, upon reaching which you will receive a “warning level” notification.
Soft stop level: a certain percentage of drawdown, upon reaching which the copying of transactions is suspended (all transactions are closed).

Copy Trading Strategy

Making a Strong Copy Trading Plan: What You Need to Know Copy trading lets you follow other traders without having to come up with your own trading strategy. But it's still a good idea to have a plan for choosing the best traders to follow. Here are the main things to think about:

Markets: Pay attention to what markets your chosen trader focuses on the most. Make sure they match up with the markets you like to trade and your goals. For example, traders who mostly trade tech stocks might be taking on risks that come with the tech industry. And traders who deal with volatile currencies might see bigger ups and downs because of how much those currencies prices can change. Go with a trader who sticks to the markets you prefer.
Risks: Think about how much risk you're okay with taking on. A lot of copy trading platforms let you set a max loss amount or choose how much of your trading account to give to each trader you follow. Plus, semi-automatic copy trading and social trading give you even more control over risk.
Keeping an eye on things: One of the best parts of copy trading – not having to analyze the markets yourself – can also be a big downside if the trader you're following doesn't really know what they're doing. It's always smart to keep an eye on the trades you're copying and make changes if the market shifts in a big way.
Using leverage: Decide if you want to copy trades that use leverage. Leverage can make your profits bigger, but it can also make your losses worse. Never put in more money than you can afford to lose.

By keeping these key points in mind, you can build a copy trading plan that works well for you. Having a solid strategy can help you feel more in control and hopefully boost your success in the exciting world of copy trading.

FAQs

What is the minimum amount required to copy a trader?

The minimum amount of money depends on copy trading platforms, it can be $200, $100 or $50.

Is copy trading illegal?

Copy trade is legal, it is a legitimate way to create passive income. Of course, you need to pay attention to the copy trading platforms on which you are going to copy trades, it is better that platform to be popular with a good reputation.

How much can you make from copy trading?
Your earnings will depend on which signal provider you choose, how he will trade, what conditions and limits you set.

Is copy trading too risky?

Risk can be adjusted through filters and limits, you can also study the trader’s strategy, his statistics and understand how risky his trading is.

Do I need prior trading experience to engage in copy trading?

It is advisable for you to understand the basics of trading. It would be good if you already had trading experience, but this is not necessary in order to copy trade.

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