Copy Trading (Social Trading) for the Beginner Trader: A How-To Guide
Key Takeaways:
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- Copy trading is a technique that enables you to mimic the performance of the best traders
- You can automatically copy trades of the most profitable traders without any decision making
What is Copy Trading?
Copy trading is the act of copying trades of other traders participating in the same social trading platform together with you. Essentially, copy trading allows you to have trades identical to those of experienced and successful traders.
This type of trading is quickly gaining traction, especially because it enables you to replicate the best traders as they work for you and teach you. In that sense, copy trading is not only profitable but also helps you accelerate your journey to more knowledge about financial markets.
With this in mind, you don’t have to be a trading expert in order to invest like a champion. You can easily subscribe to the best performers in the social trading platform and let them carry you forward.
On the other hand, you might as well be an experienced trader and still take advantage of copy trading and its benefits. For one, you can use it to evaluate the effectiveness of your trading strategy. Or you can move to be a provider of ideas and strategies as you share your trading activities.
How Does Copy Trading Work?
Copy Trading works in social trading platforms where users post their trades openly so other participants can see and join them. More specifically, such a platform would ideally be a friendly environment where you would discover other traders’ results and easily copy their trading with a click of a button.
Furthermore, copy trading is beneficial for both parties: those who provide trading strategies usually earn commissions as incentives to share their expertise. The more followers they get, the bigger commission they will be paid.
And those on the receiving end can simply hit the ‘Copy’ button and tap into trading wisdom without spending all day in front of charts and news reports.
For the most part, copy trading happens automatically. The manual work is over once you find an investor worthy to be followed. How to spot the right ones? We will discuss this a bit later in this article. Before that, let’s give an example of a copy trade.
An example of copy trading
Let’s say you have a trading account with $200. Depending on your broker, you will most likely not be able to allocate more than 20% to a single trader. So, this trader now has 20% of your equity, or $40.
Once they enter a trade, the two positions (theirs and yours) will be opened proportionally. That means if the expert trader decides to invest 5% of their equity, the same amount will be taken from the funds you have allocated. In practice, you as a copier will enter the position with 5% of this $40.
As a result, once the guru trader opens a trade, you will instantly see it in your account. And if they get a profit of 10%, you will earn 10% on your staked amount. Losses work in the same proportional manner.
This said, if you spread your funds across the most successful traders on the platform, you will greatly minimize risk and increase your probability for profit. To do that efficiently, you can select traders with different risk appetites, trading strategies, and investment styles.
Practical Tips for Copy Trading
Before you jump into the copy trading world, it’s important to know what to look out for and what to avoid. In that context, there are certain practical tips you should follow so you could better understand the system and make educated choices.
Finding the best traders to follow and copy requires some research. To this end, here are 5 rules to help you pick the safest and most reliable traders to copy.
1. Be careful with numbers as they may be misleading
Social trading platforms would usually have Top 10 or Top 100 rankings. These rankings, however, do not guarantee safety and security. A trustful trader, for that matter, would not only have a significant follower count but also have their strategy laid out in a transparent manner. Keep in mind that some successful traders may be boosting their ratings through high-risk strategies not suitable for anyone.
2. Good traders may be found outside the Top 100
Profitable traders may as well be found outside the Top 100 rankings. Emerging high-reward experts could be gaining traction before they’ve been noticed and put into the best performers list. Therefore, you could find sustainable and satisfactory returns by looking further down the list.
3. Be wary of traders who don’t use stop-loss orders
Some high-performing traders could have climbed up the ladder without a safety net. In other words, they could have been opening high-risk positions without the use of stop-loss orders. A stop-loss order, on this note, would guarantee a losing position will be closed out if it reached a certain level, set by the trader.
4. Look for sustainable growth without steep drops
Go through some successful traders with a large base of followers and scan their past performance. If you see a continuous streak of winning positions without steep drops, this is usually a good sign. It would mean that these traders have designed a sustainable strategy that is bringing a stable rate of return with calculated risks. In other words, they will likely be reliable and trustworthy.
5. Be careful of analyzing ‘young accounts’
Young accounts are considered those that are less than 1-year old. Even though they can show sizeable profits and strong performance over the course of their existence, they may not be as reliable as a more mature account. This said a good rule of thumb is to look for winning traders with an experience of 1 year or more.
Pick a Trading Style and use a Strategy
Social traders, or those that share their trading activity, tend to have their own investment style and market approach. In that context, optimally choosing the ones worth following would be determined not only by their performance but also by how and what they trade.
There are two main trading styles, or strategies, when approaching the financial markets: technical analysis and fundamental analysis.
1. Technical Analysis
Aims to interpret charts and price behavior in order to predict what a financial asset might do next. Technicians, or those traders that use technical analysis, focus on identifying trends and chart patterns that hold key insight into the price’s next moves.
Moreover, the study of charts can be applied to any market, regardless of what’s being traded. It could be stocks, forex, cryptocurrencies, or any other financial asset.
2. Fundamental Analysis
Is the study of broad or narrow economic news, events, and reports. Fundamental traders aim to predict how news like interest rate increases or jobs reports might affect the market.
To this end, fundamental analysis helps you keep track of how a certain company is doing. In turn, you can then transfer this fundamental development to the asset’s price and see how traders evaluate it. If you’re looking into trading currencies, you may want to stay in touch with central bank decisions or economic indicators.
Pick a Diverse set of Markets and Assets
Choosing a market or markets to get exposure to will greatly enhance your copy trading strategy. Some traders are only good at trading stocks. Others prefer to keep their focus on currencies. Therefore, it’s important to carefully pick a variety of markets so you could get the best out of copy trading.
The most popular and liquid markets, with the most probabilities for profits, include:
- Stocks
- Forex
- Cryptocurrencies
- Indices
- Commodities
Summary
Copy trading is a highly practical and relatively hands-off approach to financial markets. Done in social investment networks, this trading strategy enables you to get the best performance without being actively involved or making any decisions.
If you are a beginner trader, it is recommended that you give copy trading (or social trading) a go. Not only it could fuel your account to a larger size by pocketing passive income, but it could also give you a ton of knowledge and insight.
With this in mind, you may decide to become an active participant in investment networks that offer copy trading. Prior to this, however, be sure to carefully analyze both the broker and the high-ranking traders.
Copy Top Investors on TradOwise
And while it may seem intimidating at first, markets can be your best bet for reaching financial freedom. If you learn to harness the power of copy trading, you might get closer to your financial goals sooner rather than later. Up your trading game and copy top investors with TradOwise.
Copy Trading is the act of copying trades of other traders participating in the same social trading platform together with you. Essentially, copy trading allows you to have trades identical to those of experienced and successful traders.
Copy Trading works in social trading platforms where users post their trades openly so other participants can see and join them. More specifically, such a platform would ideally be a friendly environment where you would discover other traders’ results and easily copy their trading with a click of a button.
Whether you’re a beginner learning the basics or you simply don’t have time to watch the markets TradOwise’s revolutionary Copy Trading technology allows you to leverage the expertize of other investors.
