Undoubtedly, the foreign exchange market, or “Forex”, comfortably sits on the list of the biggest global traded markets, currently worth over $1,934,500,000. This makes the forex market 27x larger than the global equities market. Its sheer size and volume make it a market that is very lucrative and profitable, with a trading volume that is 53x the size of the New York Stock Exchange.
Diving into this market as a trader is one that takes guts and grit, and understanding the inherent risks and complexities attached to this market. Therefore, certain strategies need to be adopted while trading in this market. One of such efficient strategies is known as copy trading.
In this article, we examine what this strategy is, how it works, and how you can profit off it.
What is copy trading?
Copy trading is a trading technique that allows an individual to automatically copy certain market positions opened by other preferred individuals. This occurs by simply investing a certain amount in the market using the trading positions of another trader.
This is similar, but not identical, to mirror trading. Mirror trading entails copying certain strategies of another trader, while copy trading merges a part of the copy trader’s funded account, to the account which is been copied.
This implies that, in any case where a strategy is employed by the selected trading account, a copy of such action – be it inputting stop losses, opening a position, etc – will also be executed on the account which copies the original trading account. This thoroughly eliminates the need for any thorough financial knowledge or expertise.
The copy trader additionally reserves the ability to detach his trading account from copied trades, and individually manage each trade. Although, this terminates the relationship between such accounts, as well as all copied positions at the present market price.
Those who provide signals -and are also known as copied investors or leaders- get their recompense through a monthly subscription fee paid by the signal follower who copies such trade. An additional 100% spread rebate on all transactions further incentivizes such traders to allow their positions to be copied.
This strategy of trading unlocked another type of investment portfolio, which industry insiders termed “People-Based Portfolios” or “Signal Portfolios”. This portfolio differs from the conventional investment portfolios in the sense that, the investment funds in the former are invested in other investors, rather than traditional market-based tools that encompass the latter.
The History Of Copy Trading
Copy-trading wasn’t the conventional name when it started. It simply came across as a mere conveyance of intention by a specific trader -about specific open and close positions- to their followers through emails and newsletters.
Later, there was an emergence of a trading room comprising the elements of copy trading. While in a virtual room, a trader released information about the execution of a transaction, enabling followers to read and recreate the same transaction.
As the chat rooms began to increase, other traders began to make inquiries about the trades. This implied that the original owner of the trading positions needed to be online consistently. This then devolved into payment of feed to use the platform.
Some traders quickly realized the massive potential this strategy possessed and began to work towards an automatic replication system. The year 2005 heralded a significant boost in this strategy, as Copy trading and mirror trading emerged. These strategies were also termed algorithmic trading.
Through this system, traders were able to share their trading history, which others could replicate in real-time.
How Does Copy Trading Work?
First, one needs to create an account on a reliable trading platform. With most trading platforms, there are a plethora of options with regards to following fellow traders.
Several standards are employed when it boils down to selecting the appropriate trader. For example, one might decide to opt for a trader that amassed more profits or one that consistently patterns his trades.
Secondly, you – the investor – elect a certain amount that you are willing to risk. A small percentage of your income that you can do away with, is most advised for a start.
Finally, step back and observe the market! Many trading platforms nowadays now have an automation system, where they automatically copy trade from your stock selection and fellow investors. Regardless, if you prefer the manual route of copy trading, you can monitor the selections of your peers and their opening and closing positions.
Should You Engage In Copy Trading?
There are several reasons why you should engage in copy trading. Let’s examine some of them.
It saves time
First of all, copy trading saves time. It is indeed a veritable fact that an experienced and successful trader does not emerge overnight. Becoming a successful trader involves a ton of time, effort, and patience. Ironically, most people willing to venture into the foreign exchange market are usually committed to their other routine activities, be it their day jobs or other commitments.
Therefore, copy trading allows you to avoid the rigor that’s usually involved in forex trading, and instead grants you an alternative by simply copying the positions of those that have already invested the much-needed time and effort. However, it is critical to set risk ceilings, to minimize potential losses.
It reduces risks
Secondly, if you’re new to the whole forex market, copy trading is a safe way to venture into this “unknown.” This is because many copy trading platforms have been developed using basic interfaces and are user-friendly. This makes this copy trading affords quite useful for beginners. So that beginners in Kuala Terengganu can make gains on the market, as confidently as a pro in New York.
It helps you to develop technical knowledge
Additionally, it gives greenhorns some insights on how to trade, even with a limited amount of knowledge of the financial markets. Analyzing the markets is a skill that is only harnessed through years of consistent trading and ardent followership of the markets.
And copy-trading allows a beginner to dive into the markets with a limited wealth of knowledge of how the markets operate. However, a basic understanding of the market structures, which includes fundamental and technical analysis always comes in handy.
It can help expand your knowledge of the markets
Finally, you learn how to whilst you’re at it! Gathering your wealth of knowledge from the best in the business is definitely a sure-fire way of mastering the intricacies of the markets. Although some traders prefer anonymity, others may build a community of signal followers, where learning is always the bane of its existence.
In conclusion, copy trading can be a profitable investment. However, this does not negate the fact that trading, in general, is usually risky. Therefore, copy trading is not an exception to this general rule.
No trader makes a profit all the time. Therefore, in order to manage the potential losses, it’s advisable to engage different signal providers and employees with different strategies that will ultimately achieve a unique style of diversification.