Copy trading: The ultimate guide
Get up-to-speed with this exciting social phenomenon which is as simple as it sounds.
* Trading is risky. Your capital is at risk.
Why trade when you can simply copy someone who knows more?
Copy trading is a revolutionary trading strategy that allows individuals to replicate the trades of experienced traders in real-time.
In this ultimate guide, we'll break down exactly what copy trading is, its pros, cons and some simple steps to get started.
Key takeaways
Success in the forex market means understanding the fundamentals, picking the right broker and platform, and building a strong trading plan.
Managing risks is key in forex trading. Using stop loss and take profit orders is vital to safeguard investments.
Managing risks is key in forex trading. Using stop loss and take profit orders is vital to safeguard investments.
What is copy trading?
Copy trading is a portfolio management strategy that allows you to copy the positions taken by another trader directly. You decide the amount you wish to invest and simply copy everything they do automatically in real-time – when that trader makes a trade, your account will make that same trade as well.
You do not need to have any input on the trades, and you get the identical returns on each trade as your chosen trader.
Copy trading is one of the easiest ways to use another trader’s expert knowledge. It also means that you don’t lose any control over the outcome. You still have the ability to close trades, and open new ones when you want.
But by copying another trader, you could potentially make money based on their skills.
In fact, no advanced knowledge of the financial market is required to take part!
The story of 'copy trading'
The history of copy trading goes back to 2005 when traders used to copy specific algorithms that were developed through automated trading. Brokers recognised the potential of having systems where any linked to that trader could automatically copy their trading account. There was no need to constantly monitor email signals or trading ‘chat’ rooms. We think they were onto something…
Out of this were born Etoro and Zulutrade who allowed traders to connect their personal trading accounts to their platform. Traders no longer had to submit their specific strategies. The popularity of copy trading has since exploded.
According to a recent survey…
- 1 in 3 say a traditional stock market approach is over-complex and this can be simplified by automatically following traders
- 1 in 4 investors said they were considering Social trading last year
- Social trading platforms are expected to grow to €40bn in 2020 (annual growth of 96%) and €70bn in 2025 (annual growth of 48%)
Key takeaways
Copy trading is automated trading made easy.
What markets are most suited to copy trading?
You can copy trade across all markets, including: FX, indices, stocks and Commodity markets.
If you want to enter the FX market but are short of time, copy trading allows you to get involved without having to learn advanced technical skills. This can be very time-consuming.
It is very simple to trade in and out of different markets if you want more exposure in one over another. Perhaps you are less familiar with technology stocks but have always wanted to trade Apple or Netflix?
Let’s remind ourselves about the FX market, which is by some distance the biggest traded global market:
- The global FX market is worth $1,934,500,000,000
- This is 27x larger than the equities market
- FX trading daily volume is 53x more than the NYSE
- Over 85% of FX transactions take place solely on the majors i.e. EURUSD, USDJPY, GBPUSD, USDCAD, AUDUSD, NZDUSD and USDCHF.
The benefits and risks of copy trading
Benefits
The advantages of copy trading are the reason it has become so popular.
What is the goal? To find traders that have a strong track record and trading style that you want to emulate.
Or you can spread your risk across your portfolio which will enable you to ride the ups and downs in markets so that you can trade over the long-term.
Accessibility
Copy trading offers an interesting and reachable route into trading. Huge advances in social trading and the multiple social trading networks means this is now freely available.
Upskill your own trading knowledge
Copy trading allows you to follow the trading activity of experienced traders, some of whom have years of expertise and know-how. You can learn from watching by replicating their success and developing your own trading.
Diversification
With the huge variety of trade strategies on offer, you can now allocate your portfolio to numerous providers across different assets. By spreading the risks associated with individual decisions, you can offset losses if one trader performs poorly. You could also potentially make money in several types of market environments.
Ask yourself…
Do you want some oil exposure as Saudi Arabia becomes prone to more acts of sabotage? Do you want to take advantage of intraday moves during Jerome Powell’s press conference? Or perhaps you are content with a quieter life, lower volatility, green investing perhaps? You can get whatever exposure you want, on your terms by tapping into a wealth of global expertise.
Free time
you can continue to trade in the markets throughout the day as someone you have chosen is monitoring them and trading. This means you can spend time on your other hobbies!
Risks
The main risk with copy trading is an obvious one – you are taking part in some risk with financial implications. Trading by its nature is a high risk, high reward endeavour.
Market risk
Copy trading, like with any trading in financial markets, involves putting some of your capital at risk. Inevitably, the market risk associated with this means you can lose that capital as the assets your chosen trader has bought and sold may be prove unsuccessful.
Trader histories
Choosing a long-term reliable trader to copy can be difficult. It is up to you to do your own homework to make sure you understand your chosen traders. Sometimes, results can be too good to be true, or a trader is going through a hot streak which means a drawdown is close by.
Execution risk
As with any financial trading, there is risk involved if the assets being traded are illiquid i.e. how easy is it to exit the positions held. You also need to be aware of other areas like what costs are included in the copy trader’s returns and is the bid/offer spread already included in published returns.
Copy trading platforms
Most software will have the option of three types of copy trading functionality – automated, semi-automated and manual.
FXTM offers the industry's leading FX trading platforms MT4 directly on your PC, MAC, mobile or tablet so that you can trade at your convenience whenever and wherever you like.
The advanced technology of MetaTrader combined with FXTM’s unparalleled trading services, offers a high quality experience for the user.
Manual is most similar to ‘normal’ trading where you decide who to follow and which trades to copy. Many people refer to this as social trading too.
Semi-Automated trading lets you view all the positions of your chosen trader. You can then choose which to copy and trade yourself or which to automatically follow which means your chosen trader takes the lead.
Automated is the full package – you choose your traders and the strategies which best suit your risk profile. All positions and subsequent trading are replicated automatically.
Key copy trading terms
Here are a few of the common terms and phrases you'll come across when copy trading:
| Term | Definition |
|---|---|
Diversification | Allows you to hedge trading risks by incorporating different trading strategies and assets in a variety of market conditions. This is a key benefit of copy trading. |
Investor | The person who follows other traders to utilise their information or directly copy trades from them. |
Slippage | The pip difference between the order price and the execution price of a trade execution. Due to market volatility or slow internet connection, the order price could change before it reaches the broker for transaction. |
Technical analysis | Often means charts which a trader uses to interpret historic price action and behaviour for future direction. |
Fundamental analysis | The understanding of all news including economic and political to forecast future price movement. |
Drawdown | The fall in equity in a trader’s account, normally from a relative peak to a relative trough. It can be expressed in absolute terms or in terms of percentage. |
Mirror trading | Allows you to copy a trader’s actual strategies. |
Social trading | Allows you to copy transactions made by one or more investors inside a trading network. |
Equity line | The graphical representation of the signal provider’s account balance. |
Money management | A way to control risk and the most important factor is determining success or failure. How much should we assign to each provider and each strategy? |
Stop levels | The price the trader chooses to close out a live trade in order to limit your losses if the market moves against you. Stop loss levels depend on the trading strategy. |
Signal provider | The trader who identifies the signals to be followed by the investor or follower/copier. |
Symbols | Currency ticker symbols are used in the forex market to represent the pair that is being traded. A currency, such as the dollar, is never bought or sold in absolute terms, but always in relation to another. |
The bottom line
Copy trading has transformed the way people approach investing, making it more accessible, educational, and efficient.
By borrowing the expertise of seasoned traders, you can diversify your portfolio, save time, and potentially grow your wealth - all without needing advanced market knowledge.
While it comes with risks, careful trader selection and a balanced strategy can help you make the most of this innovative approach.
Whether you're a beginner or looking to enhance your trading game, copy trading offers a unique opportunity to tap into the power of collective expertise.