Are you thinking of automating your trade? Then, you should go for copy trade as it is considered a trading option. It copies the best traders, trade by trade, without having to analyze the market yourself.
Let’s move further to learn about this type of trading in detail.
What is Copy Trading?
Now, ‘what is copy trading?’
This is the question that most investors are looking for the answer to. By its name, you might have slightly figured out that it is an investment option that involves copying trade of other traders. It is widely famous among brokers as it only requires researching for the right and profitable trader on a copy trading platform. Some of these platforms make the process of finding the best fit effortless by providing filter options. Whenever the traders you chose open a trade, this platform automatically opens a similar trade on your account. It also allows you to select the amount of capital you want to allocate to your trader and the absolute risks involved in each trade.
Copy trading has two known types that are as follows:
- Social Trading- This type of trading does not copy the trades of other traders automatically. Instead, it exchanges ideas and market research with like-minded peers, benefitting personal trading performance. Here, you tend to learn a lot about trading from experienced traders. It involves the reasons they are taking specific risks, the process of analyzing the market, and managing the trades.
- Mirror Trading- Mirror trading is considered a subset of copy trading. It copies a particular trading strategy that comes in automated trading algorithms. It might include a large group of traders. Here, instead of copying individual traders, you tend to copy the algorithm strategy behind the trade.
Advantages And Disadvantages Of Copy Trading
Although this trading sounds fantastic form of trading, you should know that lunch does not comes free in the market. It means that like any other trading, this type of trading has both advantages and disadvantages that will be discussed further.
It is very straightforward to find experts in this trading platform. On several trading platforms, you can filter through different metrics on their website to find the best trader. It might include trading results, profit, and loss, average risk per trade, the average size of winning and losing trade, reward-to-risk ratios, and more.
Newbies always experienced their emotions getting in their way of successful trading. That is why they should choose this trading as it makes an emotional trading thing of the past. Since it restricts the need for analyzing the market on your own, there is no emotion involved.
This trading option can automate your trading by following other professional traders. The only effort you need to put on is finding the right and the most profitable traders and periodically reviewing their performance.
The only disadvantage this trading solution has is the inability to control risk. It is because your trading performance completely depends on the trading results of the traders you follow. However, you can bypass this limitation by setting up the amount of capital you want to allocate to any single trader. You can also interfere and close the trades manually whenever you feel that the copied investment is not as good as it should be.
Is Copy Trading Profitable?
As discussed earlier, this trading solution entirely depends on the performance of the trader you are following. If you select the one with the best long-term track record, you will excel further. However, during trading, you might encounter some of the risks that are given below:
Live trading is impacted by multiple market forces that eventually identify the results. In this trading, it might mean the risk of changing prices in forex, stocks, interest rates, and other assets as it might negatively impact the trade you have copied.
Traders often neglect this risk in copy trading. Since you are not directly connected with the type of trades your followed trader will open, you have to deal with this risk. It means that you find it difficult to close a trade at a specific price and within a particular amount of time.