What Is Copy Trading? Is It Profitable?

copy trading

Copy-trading permits traders the copying trades executed by other investors in financial markets. Copy-trading aims at the same position as the trader being copied. This is where copy trading is differentiated from mirror trading. Copy-trading proceeds unquestioningly on the successful trader rather than go for a critical look at the successful strategy’s layout. In fact, the copied trader has no clue of this vital layout.  The latter involves copying actual strategies, which might be actually conducive to understanding complex trades. What is copy trading? We will go into a little more depth in the matter. 

The origins of social trading 

It might surprise you to know that mirror trading was derived from mirror trading only in 2005. In the beginning, traders copied certain automated trading developed algorithms. Developers permitted others the copying of their strategies, thus sharing their trading history. This led to the formation of a social trading network. Soon, traders began copying trades in their personal trading accounts. The preference was to copy another trader rather than copy the strategy simply. 

Copy-trading – trending consistently

But why not simply benefit from the knowledge of others? Copy Trading makes it possible and is, therefore, a big trend in 2021. Copy Trading appeals, particularly to beginners. This is the simplest form of social trading. Social trading thus means imitating the investment strategies of other traders.

With copy trading, you don’t even have to analyse these strategies and draw your conclusions from them – you just let them trade for you. This is also possible with CFDs and foreign exchange rates. The advantage of copy trading is, thus, primarily that you save time.

Trend 2021: Copy Trading

Actually, copy Trading is simple: you put your money in the hands of another, who then speculates on the stock market for you. However, he uses his own fortune, and your money follows his strategy. Succinctly put – it is copied. Hence the term copy trading. 

The principle is simple: if the trader places his trades on the stock exchange, this also happens automatically with your money. Depending on the platform, this is even possible with day trading and CFDs.

If you have little idea about the mechanisms of the stock market, copy trading is, of course, ideal for you. However, in this case, you should initially invest rather small amounts to gain experience. When looking for a suitable platform for social trading, you should also pay attention to various criteria, which we explain below.

Find the Right Copy Trading Platform

Of course, copy trading wouldn’t work if the professional lacks some merit. Hardly anyone likes to share their stock market strategy with others. In copy trading, of course, the trader deserves it. When selecting the platform, it should be shown transparently how high the commission for the trades is. With Capixal, you can rest assured no heavy commissions will be heaped upon you. 

Choosing the most cost-efficient broker/trader

Naturally, you also need to be able to see how successful the broker/trader has been so far and which trades he has placed. This is the only way to assess whether you want to link your money to his strategy or choose another trader.

Caveat against putting all your eggs in one basket

Undoubtedly, a large number of traders would be desirable. Ideally, you can also communicate directly with the professional. It would also be important that there are several asset classes, and you can choose your copy trader, contingent upon your risk appetite and product. It goes without saying, costs are also a decisive factor. What fees does the platform charge for copy trading, and is it worth investing smaller amounts? At high flat-rate costs per trade, trading can become a cost trap.

Control your trading costs

Ultimately, when choosing the right platform for your trades, you should also see if there is a minimum amount for trading. Because ideally, you spread your investment across multiple traders to spread the risk. However, if you have to raise a higher amount per trader, it can be difficult.

By the way, most brokers offer a pool of international copy traders. Depending on the provider, you can even choose from thousands of competent people and decide for yourself whether you prefer to bet on a trader from your own country or not. Without a doubt, speaking the same language is an advantage in a complex subject such as stock trading.

Responsiveness

Unsurprisingly, you may want to get in touch with the trader before copying. Then you should also understand each other. By the way: a professional trader will answer your questions. Otherwise, the assumption is that he either has no idea or doesn’t care about his trades as much as he cares about your offer.

Is Copy Trading risky?

The question of the risks of copy trading actually answers itself. The opportunities and threats of trades are not higher or lower than in normal stock trading. While one could now argue that beginners benefit from the expertise of a professional trader, even he can only predict the ups and downs of the stock market to a limited extent. Additionally, you do not have the action in your own hands since you copy someone else’s portfolio – virtually blindly.

Minimising copy trading risks

Copy-trading can be quite lucrative-especially for professional traders, of course, but also for beginners. On the other hand, you may need good nerves if the person whose portfolio your copy is making losses over a long period of time. Then it is no different than if you are trading on the market yourself – avoid getting emotional. How well you can sit out such phases ultimately has an impact on your earnings. Don’t follow a cryptocurrency trader if you have weak nerves.

Incidentally, there are providers with a copy-stop-loss function. There you define while copying specific losses you are ready for. If this stage is reached, the copy relationship for this trade will be terminated immediately. The risk of copy trading can be minimised.

Researching Copy Trading Experiences

Remember: do not blindly copy the traders with the most followers. This ‘number of followers’ criterion is not a relevant scale because many copy traders are inexperienced and go with the flow – you will lose money. Even if someone has several thousand followers – look at their history. Often you will find that he is not as successful as it seemed at first.

Picking a copy trader 

You will need to invest some time in choosing a trader. Look not only at his recent gains and losses but at long-term successes. Especially in good stock market years, it is not uncommon for many traders to take profits. Someone may simply have been lucky. Price increases of several hundred per cent in a short time indicate this. 

However, pay attention to the maximum losses per day or week, which should not exceed ten percent.

Diversification 

We recommend diversification. By diversifying trades, you can minimise your risk of capital loss, which is especially important for investors with little experience. What applies in normal stock trading is also to be considered in copy trading. Even if you copy the portfolio of an experienced investor, you subject his and your investment to the usual price fluctuations on the stock exchange. Diversification minimizes the risk of default and usually provides a better average return.

If you choose Copy Trading as an additional investment method and have already invested some of your money elsewhere, you have hit the ground running. Then it is no longer absolutely necessary to pay attention to diversification in social trading. In this case, one trader is already enough.

Choosing a broker, diversifying across asset classes

However, you should also consider some things in social trading and not invest blindly. First, you have to choose a broker and register with the trading provider of your choice. Capixal is very resourceful.  

Then define the desired investment sum. Depending on whether you are already placing trades elsewhere, you should pay attention to a diversification of risk in copy trading. In this case, do not invest everything in one copy trader, but choose several. 

Take a look at their strategies and history beforehand and ask yourself which asset class is suitable for you. Do you want to learn more about CFDs or trade-in cryptocurrencies? Social trading is excellent at facilitating all this. 

However, the availability of specific trades varies depending on the provider.

Conclusion

Copy-trading allows you to be a great learner and observer. Suppose you follow the basic rules of copy trading and think about your own strategy beforehand. In that case, it’s an excellent way for you to learn more about the stock market and take advantage of the knowledge of other traders. Now only the stock prices have to rise, and your money multiplies almost by itself – thanks to social trading and successful coping strategies. Capixal’s customer support staff can guide you to further good advice regarding your trading goal. 

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