What is copy trading, how does it work and which brokers provide it?
If you have been interested in online trading for some time, you’ve no doubt heard of copy trading and may be wondering whether you should try it. In this short copy trading guide, we’ll help you decide if copy trading is the right choice for you.
What is copy trading and how does it work?
Copy trading allows you to use automated strategies to copy the trades of other online traders. Using an automated copy trading system, the copying trader will follow the account of another, more experienced trader, and copy his or her trading activity. When an action occurs on the copied trader’s account, it also occurs in the account of the copying trader. If the copied trader opens a position, creates a stop-loss order, or closes a position, the same action will be replicated in the copying account.
The advantage to the copying trader is clear. He or she will be able to mimic the trading activity of a more successful trader and is, therefore, more likely to make profitable trades, without having to spend a lot of time learning trading strategies. There are advantages for the trader who is being copied too. They will generally earn regular payments, based on their annual assets under management (AUM), which is the total amount other traders have allocated to copy their account.
Brokers who provide copy trading
Many reputable online brokers offer copy trading. Some of the platforms you might want to consider include:
Remember to check that the broker you choose meets your general needs and requirements, and offers the instruments you want to trade.
The pros and cons of copy trading
Unsurprisingly, there are both advantages and disadvantages to copy trading. The main pro is that it allows you to start trading with relatively little knowledge of the market. It’s less time-consuming than taking courses and reading books about trading and devising your own strategy. You may well make a more significant profit than you would trading alone, and you can learn from a more experienced trader, by observing their trading activities and strategies.
There are, however, cons to copy trading, as well. It can provide you with a false sense of security, encouraging you to assume you are trading ‘safely’ when, in fact, it is still easy to make losses. You may follow someone who is in a very different financial position to you and can afford to lose money by trying a few risky strategies.
You can, of course, choose who to copy based on their trading history and past successes, but this can be time-consuming too. You may find that researching and choosing traders to copy takes almost as much time as educating yourself and starting to trade alone. Many of the traders available to copy are not experts, but just moderately experienced traders hoping to make extra money out of their trades being copied, so it’s important to do your research and choose carefully.
Limitations to copy trading
When you copy someone else’s trades, you’re not in control. You are literally trusting someone else to make your decisions for you and many people are simply not comfortable with that. In addition, there is a slight time delay (copy latency), which means you may lose out, even when the trader you are copying makes a profit.
Benefits of copy trading
While copy trading isn’t a good idea for everyone, it can be a wise choice for some traders. It can help you get started with online trading, and be used, alongside studying the market, to allow you to get some experience of having funds in play, while learning the ropes so you can start making your own trading decisions.
Costs of copy trading
There is no extra charge to copy trades, but every broker has various fees and charges that you’ll need to be aware of. So check trading costs, commissions, and any extra ‘hidden’ fees at each broker.
Who should consider using copy trading
Copy trading can be a good strategy for new and inexperienced traders who have limited time to learn about trading strategies and who feel comfortable putting some of their funds in someone else’s hands.
The terms ‘copy trading’ and ‘social trading’ are often used interchangeably. However, many traders use the term ‘social trading’ to refer to platforms that allow investors to observe other traders within a social network of active traders. Copy trading is seen as the automated strategy of actually setting your account to mimic the trades of another individual. Many copy traders use an online social trading platform, such as ZuluTrade, which allows you to fully automate your copy trading account.
Copy trading can be a useful strategy, especially for less-experienced traders. Take a look at the brokers listed above and consider trying copy trading for yourself.