What Is Copy Trading and Is It Profitable?
Last Updated: February 1, 2023
Although it’s a relatively new concept in the trading world, the practice of copy trading can be a great way to improve your trading skills and make more money in the markets.
In this article, we’ll discuss what is copy trading and show you how to get started. We’ll also mention the crypto and Forex trading copy trading practices and discuss the legal policies of copy trading in the US.
What Is Copy Trading?
Copy trading allows less experienced traders to copy the trades of more skilled investors and have the same position as the traders they’re copying. When copying someone else’s work, traders have no access to the trader’s strategy, they simply follow the trades they’re making.
The History of Copy Trade
Copy trading is a relatively new practice that was born out of mirror trading. Initially, traders began using an automated trading platform as a way to minimize risk. Later, expert traders with plenty of experience in the financial market started sharing their trading history, which allowed a beginner trader to access and copy another trader’s trading strategy.
However, in an effort to avoid costly mistakes, less experienced traders started copying the trades instead of the whole strategy, giving birth to copy trading.
The Basics of Copy Trade
Copy trading is often seen as portfolio management, and can be useful for traders who have no time to follow the market themselves. It’s mostly focused on short-term trading and, among others, mainly revolves around swing and daytime trading strategies. The main focus in copy trading is often placed on the crypto and Forex market.
Nonetheless, before starting copy trading in crypto or Forex or engaging in any other trading platform, traders need to understand stock analysis of the market they’re entering.
|DID YOU KNOW: When investing, it’s advisable to start small and invest no more than 10% to 15% of your annual income. Although the minimal deposit varies, there are plenty of quality investing tools available to traders to help you get started.|
How to Copy Trade
One of the biggest benefits of copy trading is that it allows traders to diversify their portfolio—a trader can gain access to multiple strategies that benefit an individual market and use them accordingly. However, one thing to keep in mind is to copy the work of several traders rather than sticking to just one.
No matter if you’re interested in copy trading in Forex or another market, read on below to find out how to begin your copy trading journey.
- To ensure a good copy trading experience, you should create an account on a reliable stock or any other type of trading platform of your choice. The majority of platforms allow you to follow fellow investors, so you can choose between following a trader with a consistent pattern or someone who’s accumulated a bigger amount of profits.
- Another thing you should consider is how financially prepared you are and how much you’re willing to risk. Once you’ve identified your disposable income, start off with a small percentage, as there’s always a risk to investing based on someone else’s copy trading strategy.
- It’s up to you to decide if you want to manually copy what others might be buying or selling or opt for a platform that automatically copies your trade selection. Having made your decisions, all that’s left to do is watch how the market unfolds.
Is Copy Trading Profitable?
Copy trading can be lucrative if a trader is able to predict which trader is likely to be successful and copy their trades. However, there’s always risk involved, as even expert traders make mistakes and lose money. Copy traders are subject to systematic risks, as the product they’re trading may witness sharp declines and railles. Markets are known for being unpredictable, and traders face liquidity risk as well.
How much is copy trading profitable very much relies on who a trader chooses to mirror, which is why this practice is seen as extremely risky. To ensure greater success, traders may join trading groups where members share experiences and give suggestions on which stocks to sell or buy.
Copy Trading Forex and Crypto
Many traders choose to trade on the Forex market simply because it’s currently the largest and most liquid market in the world. But how profitable can the forex market be? The reason why traders prefer it over other markets is that many brokers offer specialized softwares for Forex copy trading, allowing traders with little to no experience to increase their chances of profit by mirroring the actions of others.
Copy trading in crypto is another popular practice with traders, especially in Bitcoin and Ripple currencies. Similar to the Forex market, crypto providers are also trying to provide traders with opportunities to copy trade in leading cryptocurrencies such as Bitcoin, Ethereum, and Litecoin. However, both these markets are associated with high risks, as they may be very unstable.
|Copy trading allows less experienced traders to secure a position as a successful investor.|
|When copying trades, it’s important to determine your disposable income.|
|Copy traders are subject to systematic and liquidity market risks.|
|US traders should copy trade only within the US.|
Is Copy Trading Legal?
Can you copy trade anywhere in the world without facing any legal charges? Although copy trading is legal in most countries, there are some countries such as Malaysia where the practice is banned. However, if you’re a US resident wondering is copy trading legal, you won’t have to worry about facing legal charges if you copy the trades of other US traders. However, due to the regulations introduced by the Dodd-Frank act of 2010, US residents are advised to refrain from copying trade from traders of foreign countries due to the following rules:
- The FIFO (first in first out) rule, which states that traders should liquidate multiple positions within the same asset in the same order as in which they were taken out, with the oldest always being first.
- Hedging is forbidden, meaning traders should first liquidate the original position either fully or partly before opening contrary positions within the same asset.
The fact these rules exist in the US but not in other countries makes copy trading risky, meaning traders should steer clear of copying trade beyond the US borders. You might copy a trader who isn’t bound by these rules, for which you’ll be held accountable. This also applies to trades that are carried out automatically, which is why it’s best to copy only US traders.
|DID YOU KNOW: Investing is a good idea only if you’ve already achieved financial stability.|
Copy trading allows you to trade beyond your expertise, but although it provides you with an opportunity to earn profit you’d otherwise be unlikely to attain on your own, there’s no guarantee on future returns in copy trading. This is why if you’re planning on copy trading in Bitcoin, for example, it’s best you have a basic understanding of the crypto market. This will allow you to have an overview of your losses and profits, and ultimately gain better control of your disposable income.
Copy trading is one of the best ways to get into a market with little to no experience, as inexperienced traders use the strategies of others to earn a passive income. They participate mostly in copy trading Bitcoin or Ripple within the crypto market, and there’s an even bigger interest in the Forex market.
The biggest benefit of copy trading is that you don’t have to develop a strategy of your own, you simply copy the trades and actions of experienced traders. Although it’s risky and there’s no guarantee for success, it can be a good way for beginners to enter the market through broker firms that make a good choice for beginners.
As we mentioned earlier in our article on what is copy trading, copy trading can result in high profits if you find a successful trader to copy. However, market risk is the biggest danger a trader will encounter when copy trading—if the copied approach is unsuccessful, a trader will risk losing money.