What is Copy Trading?
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Do you wish you had the time and expertise to invest like pros, but make mediocre decisions instead? You could try copy trading to see if it helps. It's a game-changing method of investing since it lets you mimic the positions of profitable traders with minimal efforts. This article explains how copy trading works and what are its pros and cons.
What Is Copy Trading (in a nutshell)?
Copy trading is a type of social trading in which investors mimic the positions of active traders. In simple terms, it lets you "copy" the trades of successful traders to learn from their methods and reap the rewards without putting in the time or effort required to develop your own. Followers choose leaders to copy their trades in real-time and profit or lose together. It's a common route for investors starting or needing more resources to trade independently.
How Does Copy Trading Work?
Copy trading involves several steps listed below to help you understand the process better.
1) Account Opening
First, you need to signup with a broker to open a trading account. While the market is full of "legit" and "not so legit" brokers, you must proceed cautiously. Make sure the broker you select is regulated. Also, compare several platforms that support social trading and choose the one best fits your trading needs and budget.
2) Leader Selection
After signing up and depositing funds to your trading account, select a trader you wish to follow. Platforms typically list multiple traders on their leaderboard section, along with their trading history and success rate. A filter option is also likely available at your selected platform to fine-tune your selection.
3) Funds Allocation
Fund allocation in copy trading refers to deciding how much money to allocate to each trader you follow. The allocation of funds typically depends on several factors, such as your overall investment objectives, risk tolerance, and the performance of each trader you are following.
4) Start Copy Trading
Finally, click the start button. The trading platform or the app will start replicating your chosen trader's every move. The platform automatically opens and liquidates positions for you whenever the trader does so.
Pros and Cons of Copy Trading
Although copy trading is an effective way to generate passive income, you must consider both its pros and cons before getting into it. Below we list a few.
Pros
- Quick Start: Without spending years honing your own skills, you benefit from the knowledge of more seasoned professionals through copy trading.
- Passive Income Resource: Copy trading allows you to automatically replicate successful traders' positions without needing your active involvement to perform the market research and analysis and helps you generate a viable source of passive income.
- Accessibility: Copy trading helps lower the barriers to entry into the market, especially for inexperienced traders.
- Diversification: It offers a way to spread risk over multiple positions by automatically replicating successful traders with different trading strategies and styles.
Cons
- Dependability: One potential drawback of copy trading is the increased likelihood of becoming dependent on the trading decisions of other traders.
- Limited Control: Traders who engage in copy trading may find that their ability to implement their own trading methods and pursue their own goals is constrained.
- Hidden Cost: Copy trading can sometimes become expensive since select copy trading platforms add markups or fees to trades, cutting the trader's bottom line.
- Low Learning Potential: Long-term success may be hindered if copy traders lack a fundamental grasp of the markets and the rationales for the moves they copy.
Which Is The Best Platform For Copy Trading?
For copy trading, you can choose from many different social trading platforms like eToro, Skilling, Naga, ZuluTrade, etc. The one that suits your needs best varies from person to person. However, for all-round quality of copy trading product, eToro is the best. The platform's social features and straightforward layout make it simple for traders to network and pick up new trading techniques from one another. Moreover, its pricing structure is in line with average industry standards. Most importantly, the broker holds regulations from top-tier regulatory authorities like Financial Conduct Authority (FCA) and Cyprus Securities and Investment Commission (CySEC). Therefore, you can rest assured that the company follows best ethical practices and take maximum safety precautions to protect your funds.
Bottom Line
Copy trading is one of the most appealing methods to generate quick returns. It's simple to implement, requires little start-up capital, and can open up numerous marketplaces and asset classes to you. However, you should be aware of the dark side of it and pick your leaders wisely. No doubt, copy trading can help you progress to your financial independence quickly if you take the time to learn the ropes and use them consistently.
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