What Is Copy Trading and How to Start

The concept of “copy trading” appears deceptively simple initially. The notion that one can simply follow the example set forth by professional traders and automatically make trades in the same manner represents an effortless method for trading in what is often a complicated world. Because of this, many individuals wish to experiment with copy trading because they desire to have exposure to the financial markets without having to learn and understand the numerous concepts and theories associated with charting and trading strategies over a significant amount of time.

The purpose of this article is to present copy trading in an uncomplicated fashion and, as such, without any form of hype associated with it or any form of promises related to monetary gain. It will provide an overview of how copy trading works, the reasons that new traders utilize it, and how one can get started as a copy trader if one feels interested in doing so.

What Is Copy Trading?

The concept of copy trading is straightforward; it allows users to connect their trading account with that of another trader’s account. When the trader whom you have chosen to follow opens or closes a position in the market, the same action will occur within your account.

Since users of copy trading are not making decisions regarding their own trades or predicting when they should buy or sell an asset, rather they are determining the individual(s) to whom they wish to follow.

The popularity of copy trading has stemmed from its ability to enable traders to continue trading while simultaneously lowering the learning curve necessary in order for the novice trader to become proficient in technical analysis prior to being able to trade successfully.

How Copy Trading Fits into Today’s Market

Copy trading and other forms of social trading are approaches to and methodologies in trading that allow for the sharing of performance, as well as strategies and opinions regarding what constitutes success. The primary difference between copy trading and the concept of social trading is that with copy trading, users take that which they have observed in the form of a trade and execute the same trade in their account.

Therefore, new traders will have access to real-time data regarding the trading strategies of others, while simultaneously being able to put that information into immediate action. This combination of transparency and automation in copy trading has changed the way in which many new traders now enter the marketplace.

An Example of Copy Trading

Let’s say that you are a new trader.Most people who are new to trading have an idea of common trading elements; however, you may not feel prepared enough to decide on which trading strategy to pursue at this time.

You may find a trader who has consistently performed well, while at the same time exhibiting a low amount of risk in their trades. You now have the choice of using the trades of that trader as your own by using your small amount of money as a copy of their trades.

Your account will then mirror each of the trades made by the trader, each time the trader executes a trade, you will execute a trade.

This is how Copy Trading works.

Copy Trading and Mirror Trading

The terms of these are frequently confused or used interchangeably. The key distinction between these terms lies in the fact that Mirror Trading is performed based on a trading strategy that is defined and designed prior to trading, while trades made during Mirror Trading are executed based upon algorithms, as opposed to relying upon human judgment.

Copy Trading is based on following only one specific trader, and imitating the specific decisions made by that trader.

Both strategies in trading offer automated trading, but Copy Trading allows more room for the presence of human input than does Mirror Trading.

Why do People use Copy Trading?

Copy Trading may appeal to different people for different reasons.

Some individuals want to gain access to trading in the financial markets, but do not have enough spare time available to do the trading themselves.

Some who want to gain access to the financial markets want to learn to trade like the most successful traders.

Many others just prefer a hands-off investment approach to making investments.

For many individuals, Copy Trading feels less intimidating than beginning trading without any prior training or experience.

What is not Copy Trading?

Many individuals have erroneous beliefs concerning Copy Trading.

First, Copy Trading does not guarantee that you will make money.

Second, Copy Trading does not eliminate risk.

Third, once you begin Copy Trading, you are still required to regularly monitor and manage your account.

The financial markets are continuously changing, and individual traders, at different stages of their trading careers, will experience a multitude of losing trades. Therefore, although Copy Trading will allow you to spend a significant amount of time on your trading, it will not eliminate responsibility.

Understanding these points about Copy Trading will enable you to make more informed decisions in the future.

This is where “”automated copy trades”” come into play. They remove emotional delays, such as hesitation or panic clicking.

These programs eliminate the biggest emotional barriers, such as the fear of making a mistake (hesitating) and the panic caused by losing.

The downside, though, is that automated trading systems can produce automatic losses. Therefore, it is very important to set an individual trader’s risk limits.

Finding Someone to Copy

Finding the right person to copy could be the most crucial step.

Don’t only look at high returns. Look for:

Your level of risk tolerance

What level of risk did they experience as a drawdown?

How long did they trade?

Did they have consistent performance over time?

A trader who has steady growth (slow and steady) is generally considered safer than a trader who has extremely volatile returns.

Risk Allocation

Most copy trading platforms allow you the choice on how much capital to allocate to the trader you are copying.

You can either choose a fixed dollar amount to copy with or a percentage of your trading balance. This gives you control of how much you want to have at risk.

A good approach is to start small and see how the trader performs before committing larger sums or risking your entire balance.

Continued Risk Management

It doesn’t matter if you are copying someone else or not, you still have risk management responsibility.

You need to understand how to set your maximum loss settings.

You should know how to stop copying a trader.

You should understand the value of diversifying your portfolio among several different traders.

With these three pieces of advice, you have some protection should your copied trader go through a tough time.

An Additional Benefit To Copy Trading

Copy trading can be an educational opportunity.

Watching the actions of other traders, especially professionally managed accounts, will allow you to identify trading patterns that become evident over time. You will also learn how winners and losers are treated by professional traders.

As you become more familiar with the copy trading process, many copy traders become confident enough to begin trading for themselves.

Copy trading will not replace your trading but can be a learning tool while developing your ability to trade independently.

Who Benefit Most from Copy Trading?People Who Would Benefit from Copy Trading:

New Traders

Limited-Time-Savers

Structured-System-Lovers

Those Who Want Exposure Without Full-Time Commitment

Copy Trading Will Probably Not Suit Someone Who Enjoys Total Control and Active Decision Making.

Understanding Your Personality Will Help You More Than Any Platform Feature.

Common Mistakes That New Traders Make

Common Examples of Mistakes Made By New Traders Include:

Following Based on Only Recent Performance

Putting Too Much Capital to Work too quickly

Not Paying Attention to the Drawdown of the Trader They Are Copying

Trying to Follow Too Many Traders Simultaneously

Taking Your Time to Observe a Trader Before Making Your Decision on Whether to Copy Them Would Prevent Most of These Problems.

Short-Term Versus Long-Term Copy Trading

There Are Many Different Reasons Why Someone Would Copy a Trader, Including Making Quick Profits, or Getting Involved with a Trader Long-Term (Multiple Months or Years).

Long-Term Copy Trading Typically Provides a Higher Probability of Success, Less Volatility, and Lower Stress Levels Compared to Short-Term Copy Trading.

“There Is No Right or Wrong Way to Do This; It Would Be Best to Decide What Works for You.”

The Emotional Side of Copy Trading

There Are Emotions Associated with Copy Trading Even When You Trade Via Automated Processes.

It Is Normal to Feel Uncomfortable When You See Automatic Losses Occur or When You See Your Copy Trader Succeed While You Are Feeling Passive About It.

Acknowledging the Way You Feel Is a Necessary Step in Adjusting to a New Way of Trading. Most Users Will Adjust Over Time.

The Transparency and Trust Issue

The Transparency of Copy Trading Platforms Is One of Their Advantages. For Most Copy Trading Platforms, You Will Have Access to Performance History and Risk Scores, as Well as Open Trades, So You Have a Good Sense of the Trader’s Past Performance.

Having Access to Performance Information, Risk Scores, and Open Trade History Is One of the Factors That Builds Trust in a Copy Trading Platform; However, It Is Important to Remember That Just Because Past Performance Has Been Successful, Does Not Mean That Future Performance Will Be Successful.

It Is Important to Keep Everything in Perspective Between Your Level of Trust and Your Level of Caution.

“Are You Able to Stop Copying a Trader at Any Point?”The majority of platforms enable cessation of copying, in real-time.

Users generally have the option of either closing open trades, or having them run manually.

This is beneficial in that you’re not restricted or locked in to any one method of trading. You will always maintain control.

Using multiple copies of different traders to spread risk

Many users minimize their reliance on any single strategy by copying several traders. However, using too many traders may increase difficulty in managing them.

Balancing your copy trading strategy is more meaningful than the number of traders your copying.

The Story Agreeing

Consider copy trading as an opportunity to receive driving instruction from a more skilled driver.

While enjoying the ride, you’ll recognize the motion of the vehicle, and through experience you’ll have a better understanding of how the roads and highways function.

Over time, you’ll have the opportunity to decide to drive the vehicle yourself, or you may enjoy riding in the car with your instructor for a longer period.

Both choices are completely acceptable.

How to Begin Copy Trading Safely

The process to copy trade is usually straightforward:

Choose a licensed and regulated trading platform

Open an account

Research trader profiles

Allocate a small investment

Regularly monitor individual traders’ performances

There’s no reason to rush into this. Your confidence will increase as you become more experienced.

Is Copy Trading Comfortable for You?

Copy trading may not be a be-all-end-all or a panacea, but it certainly has its place.

If structure and transparency and the ability to learn through watching others is important to you, copy trading may fit your needs very well.

If you feel comfortable taking complete control over your trades and being an active decision-maker, copy trading could be more of a temporary situation.

Both options are valid ways to proceed with copy trading.

Conclusion

Copy trading is a different way of playing in the financial markets. It combines technology, transparency, and human judgment to create a single system.

If you are thoughtful and careful with it, copy trading can reduce anxiety levels and increase potential learning opportunities, while providing you with exposure to the market without all the time involved in being an active trader.

The biggest part of copy trading is establishing realistic expectations and understanding the risks, to be able to use this type of trading as an effective and educational tool in your trading journey.