Fri, March 29, 2024

What is a copy-trading strategy, and how can you use it?

Copy-trading

What is copy-trading? Well, copy-trading is a way to select traders and follow those who seem to have great experience and have a higher success rate of trading strategies. As a trading system, copy-trading replicates signals from traders in real-time. This process is automatic, and it is up to investors to decide how they wish to carry out copy trading. Copy-trading focuses on digital instruments in the cryptocurrency, foreign exchange market, and other financial markets.

However, when copying another trader, you will not receive the trader’s strategy layout but blindly follow their trade. Compared with mirror trading, this allows the actual strategy of the trader to be copied.

Copy-trading was born in 2005 as mirror trading. At first, traders copied certain algorithms developed through automated trading. Developers shared their trading history and let others reproduce their trading strategies. This scene forms a social trading network too.

Why is copy-trading useful?

Copy-trading is a form of portfolio management. The goal is to find other investors with track records that you want to emulate. The copy-trading lets traders observe the strategies of other successful traders. Like any trading system that a trader decides to adopt, a trader should follow investors before deciding to risk with actual capital.

Copy-trading is helpful for traders who don’t have time to follow the market. Generally, copy trading focuses on short-term trading, especially day trading and swing trading strategies, but several different techniques can generate revenue. However, although copy trading may be profitable, there are also risks.

How to copy-trade

There are several ways to copy and trade with another investor. For instance, traders are able to copy all transactions, including stop-loss orders, entry, and take profits. Or, they can receive transaction notifications and manually copy these transactions. This is done through spread betting or CFD trading accounts. These two derivative products allow you to speculate on the price changes of the underlying financial asset without actually owning the asset.

Copy-trading allows traders to diversify their investment portfolios. This means that traders are using multiple ways to make money in the market. Traders can use numerous trading strategies instead of investing all their funds in a position, asset, or strategy to benefit each market. When copying orders, you should consider using several different traders to copy orders.

One way to further diversify your portfolio is to find copy traders who trade with different financial instruments. For example, you can copy foreign exchange traders or commodity traders. They can also consider copying traders who use different time frames. One may be a short-term day trader, and the other may be a long-term position trader in the stock market. This strategy is the most common. Compared with traders with low return volatility, traders with high return volatility are also considered. Finally, compared with less active traders, consider very active traders.

Sometimes, traders use the business model in copy-trading, which comes out profitable. Most copy trading business is a subscription models, and individuals pay monthly fees to the copied trader. Revenue sharing is another option that traders can use.  Here, a person receives a certain percentage of winning transactions.

Copy trade in forex

Copy-trading in foreign exchange trading is probably the most commonly used market for this strategy. This may be because the foreign exchange market is the world’s largest and most liquid market, so it is the preferred market for trading. Various brokers provide specialized foreign exchange copy trading software, allowing traders to imitate others to profit. Crypto copy trading is also prevalent in the cryptocurrency market, with various tools such as Bitcoin and Ripple. However, these markets can be very volatile and risky.

Copy-trading VS. Mirror trading

Copy transactions and mirror transactions are slightly different. The definition of mirror trading is to reflect the trading strategy. Traders imitate the trading styles or trading strategies of other traders. Traders will find highly rewarding algorithms and then copy their results, first asking permission to access their strategies.

As we mentioned above, copy-trading was born from mirror trading, but in this case, the trader will not receive the strategy layout of the copied trader. Instead, they follow the trader’s actions and transactions blindly.

Copy-trading VS. social trading

Copy-trading also has similarities with social trading. In the case of social trading, investors get ideas from many different social trading networks. Traders can share ideas, develop new strategies, and copy similar techniques and tools, while copy traders prefer to copy individual traders’ positions and subsequent results accurately.

Summary: How profitable is copy-trading?

In a word, copy-trading is a portfolio management technique. With this method, a person copies another trader’s trade and tracks the investor’s performance. There is also an automatic version of copy trading, in which one person’s transaction will be carried out automatically.

Copy-trading certainly is a money-making strategy. However, before you start, you should consider practising manual copy-trading to see if the returns are as profitable as expected.

If a trader finds a successful trader to copy the order, the copy transaction may bring high profits. However, the most considerable risk that traders face when copying transactions is market risk. If the strategy copied by traders is unsuccessful, they may lose money. If the instruments they trade encounter insufficient liquidity when the market fluctuates, traders will also face liquidity risks. Finally, if the traded products experience a sharp decline or rise, traders may face systemic risks.

Though, copy-trading is still a well-used tool for especially beginner traders. It is highly recommended traders try it out while exploring and learning about the market.

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