Copy trading is a another “new kid on the block” introduced by some of the bigger online brokers who are using the increased influence of the social media to invite new traders to the markets. It forms part of the increasing social trading network.
Simply put it is a way for traders to follow experienced traders, either by following their trades or automatically copying their trades.
Some of the reasons it is becoming increasing popular is the way we live today.
· Busy social and work life. (pre COVID)
· Wanting to enter the markets but no time to do their own analysis or not committed to learning.
· Trust in an experienced trader to do better than themselves.
· Ability to watch an experienced trader’s strategy and learn by example. Adopting some of the strategies.
· Very quick and simple entry to the online market.
· Peer pressure, you should be trading or investing.
How it works, example from one regulated platform.
Choose a trader.
· Search for traders by performance, the trader’s results are shown stating returns over a period.
· Look at the trader’s portfolio, what they trade, commodities, currencies, indices etc.
· Look at the risk elements of the portfolio, indices as an example can be very volatile and move quickly, giving potential bigger returns but also bigger potential losses.
· Decide the amount or proportion of your funds you want to Copy Trade.
· When you execute, the trades are copied automatically.
Pros of Copy Trading
New traders can gain by watching and following an experienced trader at work. They can then understand the mechanics of the platform and the way the trader executes a trade and for what period.
The new trader does not have to do their own technical and fundamental analysis, which can often be a long learning curve.
They can decide the amount of money they are willing to invest. If satisfied, with the trader’s results, can increase the amount.
Entry levels are initially low and instant, copy trading allows newcomers to observe in the real trading environment.
Cons of Copy Trading
There is no guarantee of success of the trader, no one wins all trades. He/she may be risk averse.
A common issue is the unrealistic expectations from new investor/traders, ‘you will not get rich quick’ with small investments.
The new trader will not gain knowledge of the markets by just copy trading.
Copy trading is an excellent way for an inexperienced trader to see what this is all about and speculate the markets with the amount of capital they are willing to risk.
It is very important to copy a trader that is licenced or trading on a reputable regulated platform.
Copy trading is not for everyone. it has been criticised for watering down the knowledge needed to properly learn to trade independently online. Making your own informed decisions is my philosophy to trading successfully.
Many new traders who just go into the forex market feet first often lose their capital quickly and it becomes an expensive learning experience. That sometimes is not the worst thing to happen.
Check out our recommended brokers for the best Copy trading platforms.