What is Copy Trading?
Copy trading allows you to directly copy the positions taken by another trader of your choosing. This means that you are linking your portfolio to another trader and are copying all of that trader’s current positions as well as future moves. If that trader opens a new trade, you do as well; if she closes a trade, so do you. Similarly, if the copied trader executed a stop loss or take profit order than your portfolio will make the same move. If the copied trader made a winning trade, so did you; conversely, if the trade ended up a loss than your trade was a loss as well.
In a copy trade, your account uses the same proportion of the allocated cap as the copied trader. As an example, if a trader uses 1% of the account balance to purchase GBP/USD, then the copy trader will then make an identical trade, purchasing GBP/USD with 1% of the funds that you allocated to that trader. In essence, when you are engaged in copy trading you are “investing in an investor”. Through copy trading, you can review the profiles of thousands of traders and choose one or more of these traders that you feel will provide you with the best chance of making a winning trade.
How does Copy Trading work?
Many forex brokers provide copy trading platforms, which are also called automated trading platforms. If you are searching for a broker and are interested in utilizing copy trading, make sure that the broker offers a copy trading platform. A word of advice – a trader who is just starting out in forex should always practice on a demo account before trading in real-time. Similarly, if you are new to copy trading, make sure to try out a demo account before trying out a copy trade. You can use the demo account to copy forex signals or even complete strategies of another trader. Once you feel comfortable working with the demo account, you can then proceed to live trades.
When you decide to copy trade, whenever the copied trader makes a trade, your account will make the same trade in real-time. You decide the portion of funds to allocate to copy trade. Many brokers will allow a maximum of 20% of your portfolio to be used for copy trades, which protects your capital in case the copy trades result in losses. When you choose to copy trade, you still retain some control. You decided what portion of your investment to allocate to copy trading, and you can disconnect your portfolio from the copied trader instantaneously, at the touch of a button.
You may have said to yourself, “copy trading sounds great, but is it legal?” The answer is yes, it is a legitimate method of trading forex. The copied traders are usually directly paid by the broker, who will pass on the costs to the client in one way or another.
There are hundreds of forex brokers looking for your business, so you will need to do your research to choose a broker that you feel provides the best copy trading platform. In our opinion, Admiral Markets provides one of the best forex copy trade services in the forex industry. It’s popular Meta Trader 4 and Meta Trader 5 trading platforms provide traders with a wide access of live forex signals, which are recommendations to make a trade in the forex market. The platform allows you to subscribe to a trading signal provider and have their trades automatically reproduced in your own account. There are many reputable forex brokers that provide copy trading; a simple Google search of “best forex copy trading” will bring up a list of brokers which you can research.
Benefits of Copy Trading
As we have discussed elsewhere, forex trading is no simple task. It is a skill that will take time, work and discipline to develop. For beginner traders who have limited knowledge of the forex market, copy trading provides an easy way to get started as a forex trader. You can “earn while you learn”, as you let the copied trader do the work! Copy trading is a passive investment strategy, which may fit your style of trading, especially as a beginner.
Experienced forex traders can also benefit from copy trading, as they can learn new trading techniques which they can incorporate into their own trading strategy. If you find yourself to busy to trade, you can simply put on the “automatic pilot” and engage in copy trading.
Finally, if you are a proven winner at trading forex, you can receive commissions from traders who are eager to copy your trading strategy (and keep in mind, there are an unlimited number of copiers out there).
Another benefit of copy trading is that it enables traders to diversify their portfolios into unfamiliar markets. Suppose that you are interested in trading the Turkish lira, a risk currency which often exhibits sharp volatility. You may feel that you don’t have enough knowledge about the Turkish central bank and economic events that could affect the movement of the currency. Through copy trading, you can find a trader who has profited on trades involving the Turkish lira and benefit from his trading experience and expertise.
Risks of Copy Trading
Like other forms of forex, the risk of copy trading is significant, as there is no guarantee that the copied trader will make a good trade. Therefore, it is important to carefully review the trading history of an account before you decide to copy it. A successful trader should be consistent and stable; stay far away from traders who make erratic trades, even if they manage to show a profit. Your broker may recommend traders in good faith, but it is your responsibility to do your own homework and ensure that the trader has a proven track record of success. It is preferable to choose a trader who has a history of moderate but stable profits over a trader who has made high profits in a handful of trades.
As well, you should avoid making copy trades from too many accounts at the same time. Some diversification is recommended but too many open positions can work against you.
Copy Trading Strategies
Is copy trading profitable? Absolutely! However, you will need to develop a successful trading strategy. Here are some suggestions which you can utilize in your copy trading.
- Demo Account
As we discussed earlier, a demo account is a must in forex trading, especially when learning a new method of trading. A demo account allows you to learn the ins-and-outs of a trading platform and lets you experiment with no risk attached. You want to make sure that you are thoroughly familiar with the trading platform before trading in real time.
Although copy trading shifts the trading strategy to the copied trader, always keep in mind that the risk hasn’t disappeared, simply because you are linked to another trader. The forex trader you have chosen may have a stellar record, but each and every trade that he makes involves currencies, which can move up or down.
Enter and Exit
A key to successfully engaging in copy trading is knowing when to enter and when to exit. All traders experience upswings and downswings, and as you master copy trading, you will be better able to hit the upswings. It is certainly important that your trader has a solid past performance, but his current situation is no less important. As forex brokers like to remind their clients, “past performance is not an indication of future results.” When you examine a trader’s profile, keep an eye on how may open positions he has in his account. If there are a lot of such positions, it is preferable to avoid copying them, especially if they are showing losses. It is preferable to go with a trader who has only a few open positions.
In copying trading, it’s also important to know when to stop. Often it is not easy to abandon a losing trade since it’s psychologically hard to admit defeat and ‘cut your losses’. This tendency can become even more pronounced in copy trading, since there is now a ‘face behind the trade’, and you may have had some interaction with the copied trader. It is critical to minimize your emotional attachment to any trade that you make! This is one of the golden rules of trading. An effective method to avoid emotional hang-ups in trading is to set a “Copy Stop Loss” tool so that from the outset, you will have determined the maximum amount that you can lose.
Diversification is a key component to successful trading in any financial market, and this holds true for copy trading as well. Put simply, you never want to put all your (trading) eggs in one basket. You may have chosen several traders to copy, but in itself, this may not ensure diversification. For example, if all of these traders are trading GBP/USD, your account in not well balanced. Always make sure that you don’t become too heavily invested in one currency pair so that your exposure to one type of asset is limited.
We hope that this blog has provided some useful insights into copy trading, a popular method of trading forex. We wish you the best of luck in your trading!
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