Copy trading is a technique where one trader copies the trades of another trader. This technique is very popular among traders who need more experience in a certain market or those who have a limited time to commit to trading. Copying trading can be either manual or automatic, and it is up to the trader to decide how they would like to carry out copy trading.
If you are looking to start copy trading, then make sure to carry out your own analysis of a position before risking real capital. Even if you copy trades of some experienced traders, your capital would still be at risk. Moreover, check whether the copy trading platform you are looking to use is regulated and meets licensing requirements for the simple reason that you can’t risk your capital copy trading with an unreliable platform.
Copy trading is widely used in the forex market because of small and sudden price movements, which require constant monitoring. However, with the help of copy trading, a trader can simply copy the positions of another trader instead of scanning the rapid movements of the forex market.
Another instrument that is very popular among copy traders is crypto CFDs for the same reason, i.e., volatility. However, the same volatility can be dangerous as well, so traders must be very careful while doing crypto copy trading. Selecting the right trader for copy trading becomes critical at that time. Fortunately, some copy trading platforms allow traders to be ranked based on their past performance, which makes things very easy for traders who are looking to copy trades from them.
Here is an example explaining the process of forex copy trading:
Let’s assume there is a domestic market crash in France and you wanted to get exposure to the Swiss Franc. However, if you think you don’t have enough knowledge about the French economy, politics, or central banking policies to make correct trading decisions, then you could switch to copy trading and bank on the experience of another trader who has experience trading CHF. At the same time, you can learn about the French economy, politics, and other factors that affect CHF.
Pros & Cons of Copy Trading
- Copy trading allows you to diversify your portfolio in the markets you were not familiar with but would like to.
- Copy trading lets you capitalize on another trader’s experience and expertise or make the most of ongoing trends that you wouldn’t consider as a potential opportunity.
- This technique allows you to base your trading decisions on traders with proven track records.
- It’s not a 100% risk-free technique, as sometimes even the most experienced traders fail to analyze the market correctly, hence losing trades.
- Copy trading can make traders complacent, especially when they have a few profitable trades on the trot.
Is Copy Trading a Good Option for Beginners?
Since most beginners fail to develop a winning trading strategy, copy trading would seem like an appropriate solution.
Here are the top reasons why beginners should use copy trading:
Great Learning Curve
Trading forex or cryptocurrency can be challenging, especially for beginners. However, things can be simplified using copy-trading techniques. Newbies can see experienced traders in action in real-time, which helps them learn the trading charts and find a suitable time to open and close the positions.
Another notable feature of copy trading is that it saves time, since newbies don’t have to spend hours poring over charts, watching the news, testing scenarios and placing trades, etc. Copy trading allows beginners to delegate all these tasks to others. This makes copy trading a great technique not just for beginners but experienced traders as well by providing them with a secondary source of income.
Diversification of Portfolio
You can copy trades of multiple traders who trade different instruments to diversify your investments to reduce the amount of risk. You can easily find traders trading forex, cryptos, and other instruments, so you can choose the ones according to your preference and risk appetite.
Source of Passive Income
Copy trading is a great way to make profits while doing very little work. You can copy a few traders and still make over 100 trades per week. Copy trading is very easy to set up as well, this makes copy trading a great method to generate passive income.
Copy trading is undoubtedly a great way to experience success in forex, crypto, or any other market, but you need to be careful while choosing a copy trading platform and trader(s) to copy trades from because, in the end, these two will determine how successful you become in this field.