Trading novices can benefit from mirroring the trades of more seasoned investors by “copying” their trades.

Copy trading allows you to reap a number of benefits, including gaining access to the trading tactics and information of more experienced traders, boosting your confidence, and reducing the amount of time you spend trading.

Here, we’ll provide you with a high-level overview of what “copy trading” is and how it may help you. If you’re just starting out in the trading world and don’t have a lot of time to devote to researching the markets and formulating your own trading strategy, copy trading may be for you.

On the other hand, seasoned traders looking to broaden their trading may find copy trading to be an attractive option.

What is Copy Trading? How Does it Work?

Using copy trading, one can automate trading by mimicking the actions of successful traders. It’s great for beginners who are learning the basics but don’t know much about trading yet. Since all trades are handled automatically, experienced traders can take a break from their computers if they need to.

Similar to traditional trading, copy trading entails opening and closing positions on numerous financial markets such as foreign exchange (FX), and contracts for difference (CFDs) on stocks, commodities, indices, and cryptocurrencies. Of course, just as when you’re trading on your own, there’s always the risk of losing money.

Those who don’t have the time or knowledge to invest on their own may benefit from this. This is why many brokers provide the option of copy trading. One can get copy trade services on a number of different sites, some of which are totally automated while others are more hands-on. Because of this, you may relax and enjoy the show.

What Are The Benefits of Copy Trading?

Take a look at the following list of advantages to copy trading to help you determine if adding it to your trading strategy is a good idea.

• Time-Saving

Let’s be honest, honing your trading skills to the point where you can consistently turn a profit is not a quick or simple process. Some traders won’t be able to devote the time and energy to building a trading career for many reasons, including but not limited to having full-time work or other significant obligations.

This fact, however, does not suggest that they have to abandon the hope of someday becoming a successful trader. You can replicate successful traders using copy trading, which does not necessitate manual intervention or continuous supervision. However, to avoid losses above your risk tolerance, you should make sure you have set proper risk limitations.

• Good for Beginners

The majority of copy trading programs and platforms offer a straightforward and easy-to-navigate user interface, making them suited for new traders. Traditional trading platforms have a wide range of features that can be as simple or as difficult to use as the trader sees fit. Additionally, these platforms offer a multitude of order types and options, all of which can be extremely bewildering to inexperienced traders.

• Learn How to Trade from Expert Traders

Although some master traders choose to maintain their anonymity, others favor developing a community in combination with the delivery of their service. This will provide you the opportunity to gain knowledge from a seasoned trader as well as interact intellectually with other traders.

• You can View Signal Providers’ Records

The most effective signal providers will typically be highlighted on a top performers list within most copy trading programs. In addition, signal providers will typically have a profile that is viewable on the copy trading app. This will make it possible for you to obtain information regarding the signal provider’s historical trading results. 

Even though past outcomes don’t guarantee future results, they might give traders an insight into a signal provider’s trading strategy. A 50% drawdown on their account, for instance, would suggest that the signal source is engaging in high-risk trading, which may not appeal to all of their clients.

• Manage Risk Effectively

Using a copy trading service does not reduce the risks of trading. Traders, on the other hand, have the ability to change a variety of risk criteria within the copy trading software, which gives them the ability to maintain the risk at levels that are more manageable. For instance, investors can limit their exposure to losses by specifying a maximum drawdown level, and they can choose to either copy the master trader’s transaction size or customize it to their individual account balance.

• Removes Emotion from Trading Decision-Making

One of the hardest things for traders to do is to keep their emotions in check. This is the reason why traders frequently find it simple to start making money on a demo account (at least temporarily), but fail as soon as real money is at stake.

Although less common than with traditional trading, emotions may nonetheless play a role in copy trading. If a transaction you replicated is losing more money than you bargained for, for instance, you should probably adjust your expectations. Nonetheless, you can put a lot of faith in the judgment of the expert trader. Copy trading may be a better option for you if you have found that manual trading makes you overly emotional and causes you to cut your winning positions short while allowing your losing ones to continue running.

• Diversification Across Markets

When it comes to trading, most people have a favored instrument. This may be because they are more familiar with it or because it is the greatest fit for their trading approach. With the help of copy trading, you can explore new marketplaces you would not have considered before. This can be especially useful when the volatility of your favorite trading instruments is low and opportunities for trading are scarce.

• Beneficial for Both Experienced and Beginners

Copy trading is useful for traders of all experience levels, but especially those who are too busy to research and execute trades on their own. Copy trading can be a useful diversification strategy for experienced traders.

Someone who finds the most success with swing trading may decide to emulate someone who has found similar success with scalping. Copy trading might help compensate for a lack of success with one’s own trading approach or a lack of trading possibilities.

• Additional Income for Signal Providers

So long as a trader is making money and content with how things are going, expanding the business and developing new revenue streams makes perfect sense.

You have the ability, in your role as a signal provider, to charge consumers a subscription fee in addition to a performance fee. This will allow you to generate a consistent source of money for yourself.

Disadvantages of Copy Trading

The benefits of copy trading have already been discussed; now we will look at some of the drawbacks.

• Signal Providers Don’t Always Win

You can determine the amount at risk by, for instance, depositing a predetermined sum into the trading account from which you intend to copy traders and adjusting the account’s risk settings to your liking. However, the master trader is making all of the trades and you have no say in the matter.

The conditions of the market are always shifting, even a master trader may find it difficult to keep up with certain shifts. The fact that such occurrences are beyond your control is one of the primary reasons why it is essential to ensure that sufficient risk management procedures are put into place.

• You Will Not Develop Proper Trading Skills and Knowledge

If you put in the effort to analyze the transactions and the underlying approach, you can learn something by “copying” a successful trader. But nothing can replace hands-on experience trading on your own to educate yourself about the markets and develop your own unique trading style and technique.

Therefore, you need to think about where you want to end up and whether or not you’re satisfied with simply imitating the trades of other traders so long as you turn a profit. Or do you hope to one day establish yourself as a successful and profitable independent trader?

If the second scenario describes your situation, you probably do not want to develop an unhealthy dependence on copy trading.

• Some Signal Providers Charge to Copy Trades

There are some providers that will allow you to copy their trades, but they will charge you either a subscription fee or a fee based on the performance of your account. Always make sure to check what fees are associated with copying a trader before you begin.