If you’ve been exploring forex or CFD trading, you may have encountered the term “copy trading.” As you sign up on a new forex or CFD platform, you can mimic famous traders’ moves — to get on the bandwagon of their success in hopes you might replicate it without much effort.
Before you dive into copy trading, it’s essential to understand the dynamics behind it, as well as its advantages and disadvantages. As a beginner forex trader, automating your trades immediately without evaluating the risks involved is not advisable.
There are many pros to copy trading and some genuine hazards you should know about. This article focuses on the advantages when you copy trade. Copy trading will be convenient for a beginner because it provides you access to investment opportunities beyond your experience level.
Remember to evaluate your trading goals, risk appetite, and portfolio type before deciding whether copy trading suits you.
What is copy trading?
Copy trading involves trading currencies, stocks, and other financial instruments. It lets you select experienced traders and mimic their trading decisions on a platform.
Such traders are typically highly skilled and are deemed successful by their peers. Copy trading can provide beginners, novice investors, or passive investors access to various automated strategies with varied degrees of risk by way of the pro traders’ moves.
With copy trading, you skip the research and analysis part and replicate the investment strategies made by others. You rely on the decisions of experienced professionals who understand market trends better than most. It allows you to mirror the pro traders’ performance and returns over time.
What are the advantages of copy trading?
Copy trading is a quick and easy way to get started on forex, currency, or stocks trading without the learning curve. It has some clear advantages, the top five of which are:
1. It requires zero experience to start
The idea of forex trading is likely intimidating to beginners. Analysing the markets requires a background in fundamental and technical analysis, as well as a good understanding of the structure of the markets.
By learning to copy trade, you forgo the need for experience and extensive market knowledge. Whether you are a beginner or require more time to learn about the markets, copy trading allows you to invest in the fastest time possible.
Moreover, as most copy trading apps are user-friendly and straightforward to understand for beginners, you don’t need much time to learn a platform’s features, like the number of options and order types. You avoid the complexity associated with classic trading platform setups.
2. You manage risk better
While copy trading does not eliminate trading risk, you can adjust for various parameters that allow you to customize and limit your risk to acceptable levels. For instance, you can set a maximum drawdown level for your trades. You can also decide if you want to copy the exact trade size of your “master trader” or pro trader or whether you want to reduce it according to your account or portfolio size.
3. You can diversify across different markets
Typically, traders have their favoured instruments. They choose the ones they are most comfortable with, or their strategy is most compatible. Through copy trading, beginners can gain exposure to markets they would only be able to explore if they have expertise.
Moreover, shifting your attention to unfamiliar territory can benefit you when your usual or preferred trading instruments are experiencing a low volatility period. Low volatility limits trading opportunities. Thus, it makes sense to copy trade more experienced traders and follow them in other markets.
4. It benefits traders with varied skill and experience
Copy trading benefits more than just novice traders or those who want to trade passively. It also helps traders who wish to use the strategy to diversify. For instance, a trader biased toward the swing trading strategy can choose to diversify by copying the moves of someone who is evidently better at scalping. If traders find that their approach isn’t performing well currently, they can pivot and copy others’ styles to make up for their mistakes or poor performance.
Another way by which skilled traders can benefit from copy trading is to provide services as a signal provider. By becoming a signal provider, you can earn more income by charging a subscription and performance fees.
5. It eliminates emotion from trading
Traders of varied backgrounds aim to reduce or keep emotions in check while trading. However, few can keep a cool head when real money and risk are involved. With copy trading, you rely on a veteran or master trader’s decisions. If you are wary of getting too emotional at a particular time, you can switch to copy trading to limit your impulsivity and risk.
Use Copy Trading To Learn From the Pros and Build Your Skills
Copy trading has numerous advantages and is ideal for those with little experience. However, the goal is not to stay a copy trader your whole life. Eventually, you must develop a backbone and master the markets for yourself.
You can use copy trading to learn the strategies of expert traders. One way to do this is to be proactive and join communities where you constantly interact with fellow traders, including master traders. The exchange of information and ideas will allow you to be more autonomous in your trades.
Building trading skills is essential because signal providers are only sometimes right. Moreover, your portfolio will typically take time to grow and appreciate. Meanwhile, you can use that time to learn how to recover independently from losses, take advantage of opportunities, diversify your investments, and manage your portfolio independently without relying on signal providers and paying their fees.
