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What is Copy Trading?

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What is Copy Trading?

Copy Trading is the practice of choosing traders to follow who typically have more experience, and a higher success rate, and copying their trades. Here we will take a closer look at exactly what copy trading is, how it works, and some of the benefits you may find for yourself by getting into copy trading.

The Basics of Copy Trading

As a copy trader, the very first thing you will need to do is find yourself a forex broker who allows copy trading. Perhaps the best example of copy trading through a broker in the world comes from eToro. They are well recognized as a giant of both copy, and social trading. Even so, most top brokers can be connected with a copy trading service which will allow you to get into copy trading.

With copy trading, what you are essentially doing is investing in the growth of a particular trader, or traders, who you decide to copy.

This process can actually be a very simple one. Through your copy trading platform, you choose traders to copy based on their own trades. Once you have done this, your trading positions will be opened and closed at the same time as the traders you copy. This means that you should emerge from copy trading with much the same profits and losses as those traders you copy.

There are a number of factors that will influence this outcome. Chief among them will be when you have started to copy a trader, as well as if you choose to automatically copy their entire movement of positions or only certain ones. You typically also have the flexibility to open and close positions at any time you wish even though you are copy trading.

Before You Start Copy Trading

While you are copy trading, it is likely that you will choose to copy the trades of an experienced, and profitable trader. Before this though, there are a few key steps that you still need to follow in order to set yourself up for success.

  • Although you may be copying other top traders, it is still vital that you do your own research on the markets and positions that they are opening. This will make you much more successful in choosing the right traders to copy for you.
  • Take time to evaluate the information made available on the traders you copy. You want to make sure that they fit your risk profile in how they trade.
  • Make sure you are comfortable with the size of trades that a trader you are copying is opening.
  • Evaluate the past and current performance of a trader and pick your time to start copying. You may not want to start copying at a time when they have reached peak profits and are starting to decline. Choose your entry point.

How Copy Trading Works

Copy trading usually takes place through a dedicated and structured copy trading platform such as that offered by eToro, or through connecting your broker account to other similar trading platforms.

There are two parties to a copy trade, the trader, and the copier. Traders can sign up to be copied if they have enough experience and can typically demonstrate strong performance. These traders will then typically earn a commission for each copier they have. This commission can vary based on the trader or platform.

When your trader opens a new position, you will be notified, and your positions also opened simultaneously if you are engaged in an auto-copy strategy. You will then stay in these trades until the positions are closed by the trader, or you manually close them prior to that.

The profits you have made here, minus any fees and commissions, are yours to keep. All of this without doing any trading yourself.

For Example

As a new trader, you may want to trade forex for the first time. With little or no experience, you may not know the best trades to make, particularly during uncertain market times, or with most volatile forex currency pairs.

In this case, it makes great sense for you to find a forex trader you can copy who has a good record in trading the pairs you are interested in. You then have an experienced trader effectively controlling your positions in the market and doing their best to make them profitable.

Advantages and Disadvantages of Copy Trading

Advantages:

  • You can benefit from the experience and skills of traders who know the markets you wish to trade and have proven records of profitability that you can view with transparency.
  • Copy trading can be a great way to diversify your portfolio and become invested in assets that you may not previously have considered, or have experience in.
  • The top copy trading platforms like eToro make the whole process very user-friendly, and you can also save a great amount of time by not having to follow market movements and do your own trading.

Disadvantages:

  • There is still an element of risk in copy trading. The trader you are copying could, and sometimes will lose. Beware of traders who claim to never lose.
  • While you have a certain degree of control, more than in mirror trading for example, you are still limited in the actions you can perform once you have decided to invest in a trader.
  • The ease with which you can engage in copy trading can act as a disincentive to many when it comes to learning more about the markets and building trading skills.

With less time to dedicate, but an increased curiosity about the forex market and desire to diversify, copy trading has become increasingly popular in recent years.

It is accessible, user-friendly, and extremely efficient as an investment method, though you do sacrifice a degree of control, and there are still risks to factor in.

For those reasons, it will depend on your trading style, and what you see as your trading vision whether or not you decide to take up the popular pursuit of copy trading.

Where to Copy Trade

There are many places that offer the option to copy successful traders. We currently recommend the following:

Etoro –  A multi-regulated broker trusted by millions of users. They are the most popular broker that offers copy trading.  If you wish to learn more read our Etoro Review.

AvaTrade – They provide copy trading in cryptocurrency, stocks, indices, commodities, bonds, and ETFs. Read our AvaTrade Review.

XM – They offer copy trading and offer over 1200 assets to trade. Read our XM Review.

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Anthony is a financial journalist and business advisor with several years’ experience writing for some of the most well-known sites in the Forex world. A keen trader turned industry writer, he is currently based in Shanghai with a finger on the pulse of Asia’s biggest markets.

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