Stocks and trading are excellent options when you want to diversify your financial portfolio. Whether you want to achieve long-term or short-term goals, trading offers good investment opportunities.
To navigate through the trading world, investors use the system of copy trading.
Following the trade patterns of experienced investors is known as copy trading or social trading. Since it is a good way to automate your trades, beginners often find this helpful. It is also beneficial for experienced traders who want to take a break from prolonged screen time.
Just like regular trading, the ultimate aim of copy-trading is to open and close positions in the financial markets. This is done across different markets such as forex, stocks, commodities, indices, and cryptocurrencies. Those who cannot invest a lot of time into trading or are inexperienced can opt for copy trading.
Several brokers offer copy trader that may or may not be fully automated.
Here are some benefits of copy trading
- New traders get a chance to get accustomed to the financial markets and become confident about their trading decisions.
- Part-time traders who may be experienced but lack the time to trade at their convenience can use copy trading to keep trading consistently.
- Foreign exchange, stocks, commodities, etc can all be copy traded with ease
- Helps in building a community of like-minded investors who may share similar financial goals and ideas.
How to copy trade
- First and foremost, you must have an account with trustworthy trading platforms. You may even find the option to follow traders on your platform. In that case, how you pick the right trader, makes all the difference. Decide whether you want to follow someone who makes more profit or someone whose trades yield consistent returns.
- Next, set aside the amount that you are willing to invest and also calculate the risks you are comfortable taking. Do not put all your money into a single investment, start small. Try trading with an amount that is completely disposable because you must take into account the fact that the risk of losing your money is always there.
- The final step is to sit back and observe. Some trading platforms will automatically pick up your stock selection and kickstart the trade, while others will require you to manually choose your options. In this case, observe what your peers are trading with and see if it works in your case too.
- As a trader, you can choose to imitate all transactions, including trade-entry, take-profit, and stop-loss orders.
- You can also choose to be notified about the trades and then you may go on to manually add these details vis-a-vis a spread betting or CFD trading account. You can speculate on the price positions of underlying assets without having to own them using these two derivative products.
- Copy-trading can be a great strategy when implemented wisely. Remember your goal is to diversify your portfolio, so you need to observe and choose the trading styles of various investors. As you see various trading strategies at play, it will also help you analyze various strategies and also observe their performance. It is a good opportunity to gain from multiple strategies within the same market.
- Look for copy traders that operate on different financial instruments and perhaps even those who work in a diverse set of time frames. You can copy the trades of a short-term intraday trader while another could be investing for long-term gains.
- You may also try to copy trades of those investors who handle high and low volatility returns on their trades.
Is copy trading profitable?
If you find a successful trader in the market, copy trading can yield great profits. In any case, you must always take into account the market risks because copying the wrong trader would also mean going in for a loss. Liquidity risks are also a challenge in highly volatile markets and there are always systematic risks that you should be vary of.
As a trader, your end goal in the market is to earn more. You do that when the value of the asset you’ve traded rises. But if the change in the price of the asset or security does not move in your favor, i.e, it falls, you run into what is called market risk. To minimize the risks, you need to put into place an asset allocation strategy. This ensures that you’re not putting all the eggs in one basket. Only X amount of funds are invested in a particular trade.
When liquidity risk is involved, you are not in a position to exit the trade at expected levels. You should be able to access and familiarize yourself thoroughly with the risk management method of your trading strategy. Usually, it provides an investor with the historical drawdown of the copy trader, so one can make an informed decision.
Systematic risks are proving to be a big problem, especially in emerging market currencies. You could find yourself in a tricky position where you are not able to exit a trade because your money is locked in. Though rare, it has happened previously when nations are overthrown and their currencies are locked. Even if there are one in a million chances of this happening, it must be a part of your trading strategy.
Copy trading is a common feature these days and more often than not, online trading platforms would give you the liberty to copy trades directly. Softwares usually offer three types of copy trading functionality – automated, semi-automated, and manual.
- Manual: As the name suggests, you simply choose whose trades you want to follow and that copy those trades on your own, manually.
- Semi-Automated trading: In this option, you can choose the positions of the trader you selected. You must make the call and decide which of their trades would you like to copy.
- Automated: When you choose this, all you need to do is sit back and watch your money grow (if you have picked the right strategy). Analyze your positions and pick the right trader and strategy. All the trades will get copies automatically.