What is Copy Trading?

Copy trading is a method that allows novice traders to replicate the trades of experienced and successful ones.

In fact, the concept of copy trading originated from social trading, where investors share their trading activities publicly. 

Traders can browse through the profiles of various investors, analyze their performance metrics, and choose to copy their trades automatically.

In our article, you can find detailed information about this concept.

How Does Copy Trading Work?

Although it seems complicated, the mechanism is quite simple. Copy trading operates by connecting less experienced traders with seasoned investors through a digital platform.

The process begins with users selecting a platform that supports copy trading and creating an account. Once registered, traders can scan investors with different styles, examining their trading history, performance metrics, and risk levels.

After selecting an investor to copy, users allocate a portion of their funds to mirror the chosen investor’s trades. The platform then automatically replicates the trades made by the professional investor in real-time, proportionally adjusting the trade sizes based on the user’s allocated funds.

Step by Step Copy Trading Process

1. Start by selecting a reliable copy trading platform.
2. Open an account on the chosen broker by providing the necessary personal information and completing the verification process.
3. Browse through the profiles of various traders available on the platform.
4. Decide how much initial deposit you want to allocate to copy trading.
5. Choose one or more traders to copy based on your analysis. Allocate the desired amount of funds to each selected trader.

How to Find a Trader to Copy

When selecting a trader to copy, it’s important to analyze several key metrics to ensure you’re making a logical decision:

• Assess the overall profitability of the trader’s portfolio.
• Understand how well the trader manages risk relative to their returns.
• Measure the price fluctuations in the trader’s portfolio.
• Identify the largest loss the trader has experienced.
• Look at how often the trader makes trades.
• Evaluate the trader’s experience and consistency over time.
• Determine if the trader's approach aligns with your investment goals and risk tolerance.
• Create a blend of different traders to enhance overall portfolio performance.

Example of Copy Trading

The financial markets are vast and complex, making it challenging to stay informed and analyze every segment effectively.

Imagine you're a seasoned trader proficient in forex pairs like EUR/USD and GBP/USD, with a deep understanding of European and US economic dynamics. However, commodities like gold (XAU/USD) are influenced by different factors, such as geopolitical events and industrial demand. In this scenario, you might choose to copy a trader with a proven track record in the gold market. By mirroring their trades, you can potentially profit from gold's price movements while gaining insights into the commodity market.

Which Markets are Best Suited to Copy Trading?

Technically, copy trading is applicable to any market, including Forex, indices, commodities, and stocks.

For those interested in the FX market but constrained by time, copy trading provides an efficient entry point. It eliminates the need to learn advanced technical skills. By following experienced traders, you can participate in the largest and most liquid market in the world.

Similarly, if you want to test your trading skills across different markets and sectors, copy trading makes it easy. For instance, if you are less familiar with technology stocks but have always wanted to trade companies like Apple or Netflix, you can follow traders who specialize in these areas and benefit from their expertise.

Advantages of Copy Trading

• Copy trading provides an easy entry point for those new to the financial markets.
• Accelerating the learning curve.
• Copy trading saves time as it eliminates the need for constant market monitoring and analysis.
• Copy trading reduces the emotional impact of trading decisions.
• Traders can access a wide range of global markets and instruments through copy trading platforms.

Risks of Copy Trading

• The success of copy trading relies on the performance of the chosen trader. Choosing a long-term reliable trader to follow can be difficult.
• All investments are subject to market risks, including volatility, liquidity issues, and economic changes. Walking in the footsteps of an expert doesn’t eliminate those risks
• Some platforms may charge extra fees such as performance commissions or management fees.
• There is a potential risk of fraud; traders may manipulate their performance metrics to attract followers.

Copy Trading Terms

• Fixed Size: When using the fixed size option, you choose the total size of each trade you replicate. This means you are copying the signal's position but setting your own trade size rather than copying the exact amount of the original position.
• Mirror Master Size: It directly replicates the trade size of the signal you are copying. For instance, if the trader you are copying buys 50$ worth of gold, using the mirror master size option will also execute a trade for 50$ worth of gold in your account.
• Mirror Master Risk: It adjusts the trade size relative to your account size, ensuring that you take the same percentage of risk as the signal you are copying. For example, purchasing 5,000$ of CAC40 is riskier for an account with 5,500$ than for one with 100,000$.
• Max Drawdown: Maximum drawdown (MDD), also known as a "Hard Stop," is the largest observed loss from a peak to a trough in a portfolio before a new peak is reached. For example, if you set a Max Drawdown value of 30%, all copying is suspended, and all signal-sourced trades are closed when your account's equity falls by 30%.
• Warning Level: When your drawdown reaches a specified percentage, known as the "warning level," the platform will notify you.
• Soft Stop Level: If the drawdown reaches the user-defined soft stop level, copying will be suspended.

Difference Between Copy Trading & Mirror Trading & Social Trading

Copy trading involves automatically replicating the trades of selected experienced traders in your own trading account. When the chosen trader executes a trade, the same trade is simultaneously executed in the follower’s account.

On the other hand, mirror trading allows traders to copy the strategies of other traders, but unlike copy trading, it doesn’t necessarily replicate individual trades. Instead, it replicates the trading strategy itself. When a strategy is implemented by a trader, the same strategy is mirrored in the follower's account.

Social trading is a broader concept that encompasses both copy trading and mirror trading, as well as other forms of collaborative trading. It involves a network of traders who share their trades, strategies, and market insights with each other. In a social trading platform, traders can interact, discuss strategies, and learn from one another.

Below you can see the differences between these three trading strategies:

FAQs About Copy Trading

Is copy trading risky?

Yes, copy trading can be risky. While it allows you to leverage the expertise of experienced traders, your success is directly tied to their performance. Additionally, market volatility, slippage, and technical issues can further increase the risks involved.

What are alternatives to copy trading?

Alternatives to copy trading include various strategies and tools. These include DCA and Trading Bots. Dollar Cost Averaging involves investing a fixed amount of money at regular intervals. Trading Bots are automated software programs that execute trades based on pre-set algorithms.

Is copy trading legal?

Yes, copy trading is legal in many countries.

Is copy trading suitable for beginners?

Yes, copy trading is suitable for beginners as it allows them to replicate the trades of experienced traders. This way, beginners can learn trading strategies and market behaviors passively.

What is slippage in copy trading?

Slippage in copy trading refers to the difference between the expected order price and the actual price at which the trade is executed. This can occur due to market volatility, where prices change rapidly, or due to a slow internet connection.

Can I customize the trades made by the trader I’m copying?

Generally, copy trading platforms do not allow for significant customization of trades made by the trader you are copying. The trades are automatically replicated in your account as they are executed by the copied trader.