Understanding Copy Trading: Strategy, Risks and Benefits

One of the most popular strategies in trading these days is copy trading. It allows you to copy the trade of another experienced trader. You are not required to have any trade inputs, and you receive identical returns on every other trade as the other trader. Thus, by following the footprints of an experienced trader, you make money by lowering the overall risk!

Read on to know more about copy trading, how it works, and the pros and cons of this strategy.

What is Copy Trading?

Copy trading is a way to automate your investments that involves copying the trades of other traders. You can copy the positions opened and managed by other selected individuals to generate the same rewards earned by the other investor. The idea is simple – replicate the positions of a successful trader to replicate their returns in your account.

How does Copy Trading Work?

When it comes to copy trading, you choose an experienced trader to follow. Upon that, you copy his/her trade movements. Let us suppose that the trader you follow purchases 100 shares of stock. Consequently, you also purchase 100 shares of that same stock. Further, if they decide to allocate 5% of their portfolio to a specific sector, you do the same. 

However, to use this strategy successfully, you need to choose a trader whose investment style and preference are the same as yours. 

You can do copy trading through a platform. This will allow you to choose a trading activity to replicate. Additionally, make sure to choose the best copy trading platform and ensure that you have enough funds in your trading account for the automatic trades.

Also Read: What Is Intraday Trading? Know The Strategies To Maximise Profits

Copy Trading Strategy – How to do Copy Trading?

Evidently, copy trading allows investors to diversify their portfolios. In simple terms, you get to use multiple ways to make money by participating in the market. However, this could happen only if you follow the correct way to conduct this strategy.

Find the steps to conduct copy trading below:

1. The initial step is to create an account on a reliable copy trading platform. Note that different trading platforms feature different standards for choosing the right trader.
2. In the second step, you need to select the investment sum. You can consider starting your journey by investing a small percentage of your disposable income. Gradually, you may increase the sum.
3. Finally, you need to observe. Various copy trading platforms allow automatic trading by selecting the stocks of the trader you choose to follow. However, you also get the option to manually copy trade by assessing a trader’s portfolio.

Difference between Mirror Trading and Copy Trading

Mirror trading and copy trading are somewhat similar. However, there are a few differences. With mirror trading, you mirror the trading style of another trader. In simple words, you copy everything the trader does, including the same investment position he/she takes.

With copy trading, you follow the same path as the trader, but you get the option to modify the position sizes. This means that if you are not confident about the volume of a trade, you can simply reduce your investment amount.

What are the Benefits of Copy Trading?

If you manage to find the right trader to copy, copy trading could help you gain substantial profits. Irrespective of your choice to conduct crypto copy trading or stock market copy trading, this strategy exhibits various benefits, some of which are listed below:

1. Flexibility

While you copy the movements of another trader, you still have the power to decide the amount you want to invest. This provides flexibility and ensures that you bid according to your trading capacity.

2. Transparency

Copy trading platforms also provide users access to a leaderboard. This shows the performance of different traders, allowing you to compare them. In simple terms, wins and losses are visible to everyone, which helps to make trading decisions. 

3. Efficiency

Not every other trader can dedicate long hours to a trading platform. However, copy trading platforms allow you to trade with top-level players while you are busy with your daily activities. You simply need to ensure that your risk-taking capacity is kept in check.

4. Diversification

You can also consider selecting a trader for investment diversification. For instance, you may be comfortable with swing trading technology. At the same time, you can copy a trader who uses scalping. Thus, copy trading can compensate for some of the loss if one of your strategies fails to perform.

What are the Limitations of Copy Trading?

Apart from the advantages, copy trading also features a few disadvantages. They are:

1. Risky

Copy trading can be somewhat risky. While you have the flexibility to choose the investment amount, you cannot control the movements of the trader you follow. The market conditions could change, and that trader might suffer losses. This will impact your investments directly.

2. Additional charges

Note that some copy trading platforms charge a subscription fee. Thus, ensure to know about these before making any decision.

3. Picking the ideal trader can be daunting

While proceeding with this strategy, you have to look for the right trader. This could demand extensive research from your side, which might get a bit overwhelming.

Is Copy Trading Profitable?

Copy trading can result in massive profits if you judiciously choose the trader to follow. However, you may experience some amount of risk if the market fluctuates. Moreover, if the strategy of the fellow trader you follow fails, you might lose money. 

You might also experience the risk of liquidity if the instruments you invest in face liquidity during volatile market conditions. 

Is Copy Trading Risky?

Typically, all trading is somewhat risky. Thus, copy trading carries some amount of risk. However, in this strategy, you have full control over the amount you want to invest. Moreover, you can also adjust your risk parameters to suit your needs. Even though you will be copying another experienced trader, it is advisable to conduct proper market research before making any decision. 

Also Read: What Is Options Trading And How Does It Work?

Final Word

Copy trading is a useful investment strategy if implemented carefully. This method allows investors to copy specific strategies of experienced traders in hopes of earning substantial returns. However, consider assessing your financial standing, risk-appetite and investment goals before proceeding.

FAQs on Copy Trading

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.