If you're thinking about investing online but don't want to actively trade or manage your investment, Copy Trading could be a good option for you. You will learn about the benefits and drawbacks of copy trading in this article.
What is Copy Trading?
As you early 2000s, Copy Trading (Mirror trading) is being used in foreign exchange markets. The idea behind Copy Trading is to copy someone else's trade, and this technique has become popular and came helpful in growing many businesses associated with online currency exchange. It is nice to have the best traders in the world handling your trades for you and help you grow your business. The client won't need to do anything to handle the trading; all he/she needs to do is log in to his/her account and check their balance weekly. Some companies have gathered many experienced traders worldwide to work with them to handle the trades for the clients. These traders are offered free trading accounts, through which they express their trading skills and massive gains in the performance for the users who visit their profiles. These companies also check their trades' accounts and performance and update the stats regularly on their websites.
These companies made agreements with several brokers. The accounts of the brokers are integrated into one master account, which the company itself controls. The company controls these master accounts, whereas the broker controls the broker account within the master account. These master accounts are offered to the top-performing traders, which are then mirrored with the other accounts.
The client is given a broker's recommendation to the master account when he/she chooses the trader to operate their account. The selected trader's master account is configured with this account after the account is opened. After this, whatever the trader will do on his/her account, the same strategies will be mirrored into the client's account. However, the client can select his/her risk parameters, which will prevent any trading failure to be replicated into the client's account.
How Copy Trading Works?
As Copy Trading is automated, this prevents new investors from making investment decisions emotionally. Clients who choose copy trading use the trading platform of the brokerage company they have selected. This is important to have detailed information about the trading strategies. While investing in the stock market, the investors are offered the services such as Metatrader or a third party site.
When the client has done thorough research on the performance, he/she will now choose the algorithm which is best suited according to their investment goals, risk tolerance, investment capital, and desired assets that they want to invest in. For instance, if a client wants to choose an algorithm based on a low tolerance, he/she should choose a low maximum downtown mirror strategy. The strategies of the leading investors are copied into the account of the new investors via software with the primary goal to provide the best possible results. eToro, PrimeXBT, and Skilling are among the prominent names in Copy Trading platforms.
The advantages
Less Emotional Decisions: As copy trading is automated, the client doesn't have to worry about making difficult trading decisions. This feature is handy for investors who are new to forex trading and initially tend to make an emotional decision. The investor doesn't have to worry about the market fluctuations. All he/she needs to do is to check their performances as a result of copy trading and decide whether they want to continue mirroring a particular investor or not.
Confirmed Results: There is a system on these brokerage websites which rules out those traders who are not performing well. The new clients can see the performance charts of those investors who are delivering good results recently. For instance, if the broker is listed as the top performer, he/she should present the performance history of the last 12 months, which shows a specific maximum downtown. Before choosing a broker to mirror trade, investors should ask for the verification of the results, which shows the recent performance and products they have delivered over time.
The disadvantages
Automated Strategies: Automated strategies work well for specific market conditions, which means if the market situation changes, these automated strategies won't come in handy. For instance, some strategies may work better for the trading market but won't be useful in a bond market. Before choosing a strategy, investors should check these strategies for different market cases to ensure that their chosen strategy is adaptable.
Risk Assessment: It might look simple to analyze which market situations are working better for you. However, it is difficult to determine what risks are taken to make profits for you. For instance, if a market strategy delivers a profit of 300%, further analysis will show that this strategy will require you to endure an 80% downtown on their capital.
Mirror Trading vs Copy Trading vs Social Trading
The concept of mirror trading, copy trading, and social trading is the same, which is to copy the strategies of the famous trader and use them to generate profit for your investment. However, when put in practice, all of these three investment strategies have differences.
Mirror Trading
The trader whose strategies need to be copied is put on the brokerage website, which is available for all users to replicate. The host traders must have programming knowledge that will make it possible for them to send signals to the clients, replicating their strategies later.
Copy Trading
The main idea of copy trading or CopyPortfolios is similar to mirror trading. Still, instead of putting investing strategies on the server, these are sent directly to the trading platforms, which are then forwarded to the clients so that they can copy them.
Social Trading
It is like a social network where there are two types of participants, signal providers and followers. The signal providers post their investment strategies so that their followers can benefit from this knowledge and social these strategies to make their investment beneficial.
Best Mirror Copy Trading Platforms
Trading Platform | Best Features | Our valuation | Review | Promotion | Website |
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1 | 83.7% Average Yearly Profit * of our 50 most copied traders for 2020 |
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2 | Crypto, FX, Commodities and more. Suitable for people that own cryptos |
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3 | 1000s of Trading Strategies* Ready to be Copy Traded |
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Conclusion
Copy Trading is an excellent initial step for new investors. However, success is never guaranteed in the trading business, but Copy Trading will allow new investors to gain an advantage over experienced investors. It is essential to analyze the risks involved in this technique and finalize which strategy will work better for your copy trading,