For beginners, starting out in trading can be overwhelming. The vast amount of information available can be complex and difficult to navigate. However, there is a straightforward solution that may be perfect for those just starting out: copy trading. Copy trading involves replicating the trades of successful investors. Copy trading is a useful tool for beginners and experienced traders alike, however, it’s important to note before starting that you should still conduct your own extensive research on how to trade. Copy trading is NOT a “cheat code” that allows you to not put in any effort and make a profit. In this article, we will introduce you to copy trading, explain how to get started, differentiate between copy trading and mirror trading, and examine the pros and cons of copy trading.
What is copy trading?
Copy trading is a strategy for managing your investment or trading portfolio with the goal of being profitable. This type of trading is mostly seen in the forex, Contract for Difference (CFD) and cryptocurrency markets and is usually focused on short-term trading (day trading or swing trading). While it may seem legally questionable to novice traders, copy trading is completely legal and can be an effective way to make a profit while taking a less involved approach. Due to the volatility of day trading and swing trading (especially in forex and crypto markets), these types of trading require significant time investments each day, making copy trading an attractive alternative for those with busy schedules. Copy trading is permitted by the FCA, ensuring that traders are within their rights to use this strategy.
How to copy trade
To get started, you need to set yourself up on a trading platform. Most trading platforms have some infrastructure in place to allow for copy trading, but it’s essential to research and choose the best platform for your needs. A popular trading platform for copy trading (and one used by many forex traders who do not copy trade) is MT4. Copy trading often incurs a cost, so make sure to thoroughly research the associated costs before making a decision. Once you have set up on the trading platform and determined how much you want to trade, you can start identifying the trader or traders you want to copy. Diversification is crucial in trading, so it may be worth finding more than one trader with different specialties to shield your portfolio from localized market issues that could affect your entire investment. That is how simple it is to start copy trading, but it is in no way easy. You still need to put a huge amount of research in to ensure optimal strategy, and your decision to copy trade can backfire if you decide not to do this research.
Mirror trading and copy trading
In addition to copy trading, it is worth discussing mirror trading, which is a similar but more hands-on strategy. With mirror trading, you replicate another trader’s strategy rather than their specific trades. All copy trading is a form of mirror trading, but the opposite is not true. However, it’s crucial to note that you should not mirror a trader without a thorough understanding of what a trading strategy is and also a thorough understanding of their trading strategy. Once you have a trader’s trading strategy in place, you can adapt it to your liking, enter different sectors, and take a more hands-on approach to managing your portfolio. For example, you can tweak this mirrored trader’s stop-loss orders to better suit your risk tolerance. Mirror trading offers more flexibility than copy trading and can be a suitable alternative for those looking for a more customizable approach to trading.
Pros of copy trading
Copy trading has two major pros: its potential to help traders become profitable and its ability to familiarise beginners with trading without incurring too much risk. The first is necessary for any type of trading to be sustainable in the long term, so should really go without saying. However, the second is a key pro to take advantage of as a beginner trader. Copy trading is a way of seeing many of the theories and practices that you should have studied in action and allows you to gain a greater understanding of what it is like to be a trader without being excessively risky. It can also give you clarity on whether you should become a trader. If, even when someone else is essentially trading for you, you find yourself concerned about losses or find yourself wanting to move off strategy, you can realise that your personality does not suit trading, as these are things that can damage your profitability.
Cons of copy trading
There are many cons to trading that you should be aware of from your other research, and so we will not go into detail about these here. However, copy trading has its own specific drawbacks, such as the difficulty of finding a trading platform that offers copy trading and the need to thoroughly investigate the costs and consistently monitor your portfolio. Choosing a trader can also be challenging, requiring extensive research to determine if their risk/reward ratio aligns with your investment goals.
Copy trading takeaways
In conclusion, copy trading is a viable option for beginner and experienced traders alike. While it is important to conduct thorough research when selecting a trading platform and choosing a trader to copy, copy trading offers the potential for profit while requiring less time investment than traditional day trading or swing trading. Copy trading is not a shortcut to success and requires ongoing monitoring of your portfolio. However, with the right research and strategy, copy trading can be a valuable tool in your trading toolbox.