So, you’ve heard about the forex market’s profitability but aren’t sure you have the necessary skills to succeed? Some may think copy-trading is a good place to get their foot in the door and keep going for a while. But what’s copy-trading, and does it work?
Copy-trading may work if you choose the right trader to follow. It helps forex newbies copy a seasoned trader’s actions, use their expertise, and learn about the market. Yet, you shouldn’t fully depend on it, put all your capital in, or choose someone with a different trading approach.
In this article, we’ll elaborate on how copy-trading works and how it can help you make a profit. We’ll also talk about copy-trading disadvantages and important tips to achieve high profits.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Is Copy Trading?
Copy-trading involves choosing a successful trader with a good track record and copying their moves and positions. With this strategy, you can connect your portfolio with an expert’s portfolio to imitate all their actions and get the same results as they do.
In this sense, copy-trading can be confused with two other trading styles:
- Mirror-trading. It involves copying trading strategies or styles of other traders, who reveal their trading algorithms to interested mirror traders.
- Social trading. Traders share their experiences, strategies, and algorithms on social networks to develop new tools and techniques.
However, copy-trading means emulating every action that the other trader takes. So, technically you’re investing in people instead of investing in a market.
Copy-trading is particularly popular among forex beginners. The market involves frequent price movements that are difficult to monitor and scan continuously. So, newbies start to piggyback on another person’s skill to avoid failures.
How Does Copy-Trading Work?
Copy-trading platforms allow users to see other traders’ profiles and history to choose them based on their performances. The new investors pay subscription fees to the platform or agree on revenue sharing plans to make up for their services. Similarly, the platform gives the experienced traders small commissions as incentives.
Why Is Copy-Trading Helpful?
The main objective of copy-trading is to help newcomers get familiar with market strategies and learn how to trade independently. They can rely on experienced traders and make a profit while learning.
But seasoned traders can use copy-trading, too. Suppose you’re up to speed with a market’s dynamics in a particular time zone, but you don’t know how it works in another country. In this situation, you can find an experienced trader in that country and follow them until you get the hang of it.
A major advantage of copy-trading is that it allows traders to diversify their portfolios. They can use different instruments to trade on without having to do much research about the market. So, if a trader is an experienced commodity trader, they can use copy-trading to enter the forex market.
What Are the Risks of Copy Trading?
Copy-trading looks like a straightforward way to make higher profits with fewer efforts, but you should also be aware of its risks. Here are some important caveats:
It’s Not Guaranteed
No matter how successful the trader is, there’s always some risk of losing your capital. A successful history doesn’t necessarily translate into a profitable future. Things happen, and you have to be prepared to see adverse outcomes.
That’s why putting all your eggs in one trader’s basket is a no-no.
Some copy-trading platforms don’t allow copy traders to invest more than 20% of the portfolio in another trader. That’s a good strategy as it potentially prevents traders from losing their capital and makes them diversify their portfolio.
Try to copy a wide range of traders with different trading styles to spread the risk. For example, follow a combination of short-term and long-term traders or high vs. low volatility on returns.
It Isn’t Easy To Pick a Trader
Choosing one trader from a thousand is not simple because it’s hard to find someone with similar trading approaches as you. Suppose you’re risk-averse due to low investment capital, but your trader takes aggressive risks. These differences could wipe out your capital quickly.
Your trading model may also not care much about your loss as they’re not financial advisors. All they do is follow their trading patterns, which have proved to be right for them. But they’re not necessarily right for you.
Besides, this person might have different views of risk from you due to differences in investment sizes.
Consider the following tips when choosing a trader:
- How long have they been trading in forex?
- Do they trade with diverse instruments?
- Do they trade short-term or long-term?
- What’s their winning record?
- What risk/reward ratio do they have?
It Can Make You Rely Too Much on Other Traders
As useful as copy-trading can be, you shouldn’t rely on it as the only way to trade forex. When you’re too dependent on copy-trading, you may stop researching to learn about the markets.
Copy-trading is not supposed to make you rich overnight and without trying any efforts on your part. It’s just a tool that helps new traders learn how to trade.
By copy-trading, you can’t be 100% sure that you’ll make a profit risk-free. Every trader has their bad streaks. So, learn the market dynamics through other traders’ experience and develop your strategies.
How to Make Sure Copy Trading Works?
Copy-trading can be a successful strategy that brings you high profits. If you find a well-seasoned trader that matches your trading style and preferences, you can expect to reap good profits. But remember that copy-trading is exposed to all forex risks such as liquidity, leverage, and volatility risk.
So, make sure to do your homework before choosing the trader. Plus, have realistic goals. Copy-trading isn’t a magic wand or a get-rich-quick scheme. You want to go slow and don’t go all-in with the money you can’t afford.
Do the following to ensure high profitability:
- Control your portfolio: You may use copy-trading as a strategy to avoid spending a lot of time researching and analyzing the market. But you can’t leave it unattended and come back just to cash your profit. It’s necessary to put some time and effort into evaluating your portfolio, strategies, and risks to ensure you’re getting the results you want.
- Set clear goals: You can’t find a suitable trader unless you know what you want. How much profit do you wish to make? How much money do you plan to earn a month? For that profit, how much do you need to invest? Can you afford it? Maybe you need to lower your expectations to match your conditions. Plus, high profits mean higher risks. Are you willing to take that risk? These considerations help you make an informed decision.
- Stick to trade proportions: Most copy-trading platforms set fixed limits on followers’ trades. These limitations appear as a proportion of their daily or monthly trades. For example, a follower can invest 10% of a trader’s investment. It’s crucial to stick to these proportions and don’t get tempted to do more. If you want to copy a trader, you need to copy every aspect of their trading processes.
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Conclusion
Copy-trading is a highly popular trading strategy, especially among forex novices. They find successful traders willing to be copied in exchange for a commission.
The most critical part of copy-trading is finding a trader who suits your trading style, especially in capital investment and risk-taking skills.
If you can find a good trader to copy, this trading style can be profitable, although it comes with the forex market’s common risks.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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