Copy Trading: Important Risks and Advantages to Take into Consideration

By doing so, beginners or those just getting started in investing can benefit from professional traders’ returns with no additional cost to them. Blain Reinkensmeyer has 20 years of trading experience with over 2,500 trades placed during that time. He heads research for all U.S.-based brokerages on StockBrokers.com and is respected by executives as the leading expert covering the online broker industry.

• The most important thing is to make sure that you’re choosing a regulated and trustworthy copy trading platform.
• It refers to the process of automatically copying trades from an experienced and high-performing trader and then paying them a small fee.
• But don’t take my words for it because you can compare the spreads of a normal Forex broker with a copy trading platform and you’ll see the difference.
• Finally, you can use some YouTube channels to manually copy trades from experienced traders.
• Today, individual investors agree to a Letter of Direction (LoD), which is a form that authorizes the broker to copy the trades of other traders automatically based on your explicit instruction.
• While partners may reward the company with commissions for placements in articles, these commissions do not influence the unbiased, honest, and helpful content creation process.

Although no technical trading knowledge is required, it is important that you have a clear strategy to determine how you will allocate your funds, and know your attitude to risk. These things are a strong basis to use when selecting the trader you want to follow. For example, if you have a low appetite for risk, don’t follow a trader that regularly takes high risk trades. This means you’ll lose often, but when you catch a trend, your profit will more than compensate for the little losses you incurred along the way—and that’s how a trend follower makes money. And by the time it happens, the master trader would have already profited from his “fees” and the ones left suffering are the followers.

Does copy trading really work?

But if your goal is to beat the market, an index strategy might be more appropriate. On their page, you will see all the details of your copy investment. Zignaly differs from the rest because of its profit-sharing feature. With this tool, you can copy trades and only pay trading fees when profits are made. This minimizes your costs, while maximizing your profits, according to the project.

It is always a good idea to have some money in cash that is easily accessible. Before you leave, please support this website by clicking on the social media buttons below to help share this article. With that said, I hope you enjoyed my article that covers the pros and cons of copy trading. Market conditions can change quickly so staying informed and adjusting accordingly can help you protect your capital and maximize profits. Before you start copy trading, there are several important things to consider.

Advantages of Copy Trading

You can copy trade a forex, CFDs or stock trader, or follow a crypto trader along his journey. Yet if you compare the actual trades to the situation in the market, you will gain insights into how others reason, how they go with the market or act against it, and what the outcomes of their approach are. It is one of the best experiences you can gain from copy trading. So while letting other traders guide your first steps, educate yourself, read overviews and prognoses and compare them to your copied trading moves. In such a way, you learn and you trade for profit at the same time.

If you think this sounds like a smart strategy, keep in mind that there are pros and cons to this approach. Here’s what copy trading is, how it works and what you can expect from it. If you’re not sure what investments you should make then consider working with a financial advisor who can manage your investments to match your long-term goals. This is done without any comprehensive research on market trends or individual stocks, allowing newcomers to take advantage of larger accounts and more experienced traders’ strategies with minimal effort. Copy trading allows inexperienced traders to take advantage of the knowledge and experience of more professional traders.

Step 1. Search for traders available for copy trading

As the market adage goes, “Past performance is not indicative of future results.” As copy trading is risky (and many traders do lose money), you should only invest what you are willing to lose. Start with a small amount of capital, and do thorough research before committing to a strategy. Copy trading is legal in most countries, as long as the broker itself is properly regulated. As soon as you start using this type of platform, you’ll be able to easily filter through trading results from experienced traders. This makes it simple to find the best fit for your trading style and risk tolerance. Imagine, what if you could open the same traders as professional investors.

As a result, copying them would theoretically allow you to do the same. Copy trading creates an opportunity to leverage someone else’s investment knowledge and experience. Copy-trading was initially developed as a way of helping new and inexperienced traders make money in the market. The same goal happens today but we have also seen many experienced traders open copy trading accounts. Copy trading platforms are gaining in popularity as they provide an easy way to potentially benefit from the success of more experienced traders.

It never happens instantly. The business game is longer than you know.

Moving from the current system known as T+2, or settling a trade within two days of the transaction, to T+1 or one day, cuts the time cash is tied up to back trades. Too many beginners make the mistake of putting money into copy trading thinking it will make them rich overnight. If you go in with such a mindset, you are going to be less likely to run away and quit as soon as the market dips. If you just want quick money, you will be more likely to quit.

That’s because no trading strategy works all the time as market conditions are always changing. The way he trades is by having a wide stop loss and small target profit. If the market moves against him, he’ll average into his losses so he can quickly recover back when the market reverses back in his direction. Clearly, with such a trading methodology, your equity curve will be sloping higher for a long time— which will entice new traders to follow the master. Well, this is the mark up that’s determined by the copy trading platform and you’ll need to check with them for the exact amount. But on a Forex copy trading platform, you might pay 2 to 3 pips more.

Choosing A Platform

Copy trading is mostly safe, is legit, and can generate income, even if you are a beginner. However, it is still important to invest wisely and choose the right trader to copy and invest in the right trading platform. After reading this article, you should be a wiser trader and will be able to mitigate the risks of copy trading. Copy trading is a type of investing strategy in which investors copy the trades of other more experienced or successful traders. On the one hand, it offers novice traders the opportunity to benefit from copying experienced traders’ trading decisions without any need to actively monitor the market or study charts. These platforms act as a bridge between professional and amateur traders allowing users to follow and copy trades made by successful investors.