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Understanding Copy Trading – Benefits, Limitations, and Strategies

Copy Trading is one of the best ways of trading for those traders who lack expertise in a particular market or do not have time to make trades. Copy trading platforms allow traders to copy professional traders and engage in trading, without actively being a part of the trading world. One can copy trade forex, crypto, or any other asset, depending on the copy trading platform one chooses. 

Table of content

  1. What is Copy Trading
  2. Working of Copy Trading
  3. Benefits of Copy Trading
  4. Limitations of Copy Trading
  5. Starting Copy Trading
  6. Is Social Trading Risky or Profitable?
  7. Final Thoughts

What is Copy Trading?

Copy trading allows new traders to copy the trades from professional traders without having to analyze the market on their own. Copy trading can be either automated or manual. Traders can choose either of these to make their trades. 

Before traders choose to copy trade on a copy trading platform, it is important to do their own research and analysis that includes their financial goals, risk appetite, and position sizing. It is to be kept in mind that even if you are copying your trades from professional traders, your capital is still at stake.

Working of Copy trading:

Copy trading is based on a social network and social trading system that involves three participants for making trades – Copier/Investor, a Seasoned/ Professional trader, and a Copy Trading Platform. 

1.  Copier/Investor: Copier or investor is the one who copies the trade from the experienced trader.

2. Seasoned/Professional Trader: Seasoned trader is one whose trades are being replicated on an investor’s account.  

3. Copy trading platform- It is the platform that allows investors to copy the trades from seasoned traders. 

Investors can choose the seasoned trader based on their preferences, and when a seasoned trader opens a position, that same trade is replicated on the copier or the investor’s account. 

Generally, professional traders are the ones who have a good trading track record and experience, whereas investors are either the traders who do not have the expertise to trade a specific market, or are entirely new to trading the financial market as a whole. Even those traders who do not have time to place trades themselves make use of copy trading platforms and use an investor’s account to copy trades of professional traders. 

Benefits of Copy Trading:

Traders should find an appropriately seasoned trader to copy their trades to make consistent profits. There are certain benefits of copy trading irrespective of what financial market a trader choose to trade:

1. Flexibility in Trading: Investors can choose the trading capital based on their financial capability even when they are copying other traders. This ensures that a trader is not risking more than s/he can afford.

2. Transparency: Traders have access to detailed information about each trader so they can easily compare the trading performances of different seasoned traders and decide who they want to copy from.

3. Efficiency in trading: Since copy trading happens automatically, it doesn’t require copy traders to invest a lot of time in monitoring and managing their positions. However, it is important for traders to keep their risk tolerance in check and set limits so that their positions can automatically close if the losses or profits exceed the pre-set limit.

4. Diversification in trading: Traders can consider choosing different traders who use different trading strategies or trading different trading assets. This means that a trader can copy the trades of a swing trader and a scalper at the same time. 

Limitations of Copy Trading:

1. Risks: Even though copy trading is a great way of making profits, it can be risky as it is not necessary that a seasoned trader always wins. Though the trader has the flexibility of controlling their trading capital, the market conditions can change, which can result in losses.

2. Choosing the right seasoned trader can be a tedious job: Picking up the right seasoned trader requires extensive research which can be daunting. It requires time to find a seasoned trader who complies with the financial goals, risk tolerance and trading capital to be used by the trader. 

Starting Copy trading:

1. The first step is signing up on a copy trading platform. There you’ll be able to access a large number of experienced traders and will be provided with their trading details. Investors can follow any of the experienced traders whose trades they want to copy. They should select the trader based on their financial goals, risk tolerance, and preferred position size.  

2. It’s better to spread the funds across different traders instead of investing all your money with a single trader. There is a saying “do not put all your eggs in one basket” which also applies to copy trading. Therefore, you should always diversify your trading capital so that even if a trader is on a losing streak, you can make profits by copying from other trades.

3. Once you have finalized the traders you want to copy from, you can follow them and their trading actions will start copying on your account. It’s advisable to try your selected traders on a demo account first to see if they suit your trading goals and then you can move to a live account. If you want to see good results, you should always keep a track of your as well as the traders’ performance. At any point, if you feel that the trader is deviating from their strategy it’s also good to unfollow them.

Is social trading risky or profitable?

Social trading can be highly profitable if the investor is able to choose the seasoned trader wisely. However, if the trading strategy of the seasoned trader fails, investors also lose their money. Though the investor/copier is copying their trades, it is suggested to do their due diligence before making any decision. 

Final Thoughts:

Copy trading strategy is a great way of making money without having to analyze the market on your own by simply copying the trades from experienced traders and earning substantial profits. Nevertheless, it is recommended to assess one’s financial condition, risk tolerance, and financial goals before proceeding with copy trading.

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