The trading ecosystem has attracted an ever-growing number of investors over the last few years, all of whom are looking for ways to make the most out of their money and ensure their capital withstands the adverse effects of inflation and currency devaluations. However, when you’re a beginner, you will most likely feel a little intimidated when taking your first steps into this sector. Making all the right choices is pretty much impossible at this point, as you can only learn what you need to do after gaining some experience and making a few mistakes. However, that’s not an ideal scenario, especially if you don’t have a lot of funds to work with and aren’t keen on the idea of losing capital.
Enter copy trading. This method takes this issue away from your hands, allowing you to rely on the actions of savvier traders when it comes to your own portfolio as well. Even if you don’t want to follow this path throughout your career as an investor, it can still serve as an educational experience and provide you with insights that you may have remained unaware of otherwise.
What is Copy Trading?
The concept of copy trading refers to a way in which to approach financial markets that involves copying the positions of other investors. You get to choose whose movements to follow, so make sure to be informed before making this choice and look for those whose financial goals are aligned with yours. Copy trading is somewhat similar to mirror trading as it allows you to copy a strategy, but the thing that makes copy trading fundamentally different is the fact that a portion of the funds earned by the copying investor is redirected to the copied investor.
Any trading activity made from that point onwards, including the assignment of Stop Loss and take Profit orders, the opening of a new position or its closing, are executed in the same manner, with the copied trader getting their allotted amount of the funds. As the copying trader, you will retain the ability to disconnect from copied trades and manage them yourself at any point, and you can also close the relationship between yourself and the other investor as well. This will also close all copied positions at the current market price, though, so make sure you’re fine with the values before taking this step.
The copied investors are commonly referred to as signal providers or leaders, and they are compensated via monthly subscription fees. Popular investors have the potential to earn as much as 100% spread rebate on their own transactions, with reward schemes aiming to stimulate them to allow others to copy their trades instead of carrying out ventures privately.
The Developments
Copy trading has led to the creation of a new kind of investment portfolio, one called a “People-Based Portfolio,” by experts operating in the sector. They differ from traditional portfolios in that they are based on investments created by other participants instead of relying on classic instruments based within the marketplace. Social trading networks are also known for providing new and innovative frameworks for delegated portfolio management due to the indirect control of portfolio managers over some of the capital accumulated by the signal followers.
Copy and mirror trading were first developed around 2005, although a proto form of this method existed before. Based in trading rooms, an investor would announce that they had executed a particular transaction by writing it in a virtual room. The followers had the opportunity to read and reproduce it in case they believed it would help their own holdings. But in the mid-2000s, automated trading was developed, leading to algorithmic trading and fully automatic systems that gave traders the possibility to share their own trading histories.
Starting from this point, investors would host their trading strategies on different networks, complete with their records, so that potential users could have a glimpse at their performance. These figures could also provide them with an indication as to whether the ways in which these investors were approaching the marketplace were in line with their own goals and expectations. Over the years, a new technique was developed, one that allowed investors to connect their trading accounts directly on the platform. That means that every single action was recorded and made available to the users without the need to submit to any other strategy.
Copy trading has become increasingly prominent since 2010, becoming a popular feature among online trading brokers worldwide. Less experienced traders joined in right away, eager to take advantage of the trading decisions of successful, veteran investors. Most of these trades take place in markets with an elevated level of liquidity, and it is still vital for investors to be careful and do their best to avoid scams and fraud, as regulators are still trying to get the ecosystem under control.
Is it for You?
There are many different ways to approach trading markets, and there’s no one-size-fits-all process or system that fits everyone. You need to decide what your expectations are and create a strategy based on those particulars. Copy trading offers several advantages, including the ability to leverage someone else’s experience, the fact that there’s no need to have a lot of knowledge about market movements and what each of them means, as well as the general passivity associated with copy trading, as you’re leaving all the hard work of choosing the investments to someone else, but can still earn plentiful returns.
However, the fact that your success depends on someone else naturally has some drawbacks as well. No matter how much experience someone has, they will still make mistakes and lose money. As such, copy trading can be a pretty risky endeavor. Just because you’re hoping for maximum returns doesn’t mean you’ll actually get them. Copy trading can also become quite expensive if you must pay commissions for frequent trades.
To sum up, it can be the best choice for some investors but a lackluster game plan for others. If you’re unsure whether copy trading is for you or not, you should give it a try. Practical experience is the best way to determine if it works in your case.