The Benefits of Copy (Social) Trading
Key Takeaways:
- Copy trading is a market strategy that allows you to allocate funds to successful traders
- Benefits of copy trading include easy access, more chances for profit, and increased knowledge
What is Copy Trading?
Copy Trading, also known as social trading, is a strategy enabling you to mimic trades of successful market participants. Taking place in social investment networks, usually offered by brokers, copy trading gives you access to financial markets through positions of the best-performing traders.
The goal of copy trading is simple. It aims to help you get profits from the markets by automatically copying other people’s trades. The process is entirely automatic and there is no need for you to do any decision-making.
Further, you may even leave your account unattended and let the copied trader do the heavy lifting for you. Through copy trading, you will see positions in your account open and close by themselves. You can be in any market including forex, stocks, cryptocurrencies, etc. All you need to do is find the right traders to partner with and watch your funds grow.
This said, let’s find out if copy trading is for you.
Why Should you Copy Trade?
Copy trading is a practical and easy way for beginner traders to enter the world of investing. Not only will copy trading give you the opportunity to build wealth, it will also help you increase your knowledge of the markets.
To this end, copy trading should be considered a quick and reliable way to immerse in financial markets and overcome a lack of experience. Essentially, this trading strategy can be utilized virtually at any time as it doesn’t require anything more than a few clicks. With this in mind, let’s examine the way copy trading works.
How Does Copy Trading Work?
Copy trading is straightforward in that it allows you to easily copy the trades of other market participants with just a few simple steps.
First, you need to scan the rankings and select an investor that meets certain criteria. Major positive indicators include significant follower count, strong gains over a sustained period of time, and a reliable trading strategy with proper risk management.
Next, all you need to do is click on the ‘Copy’ button and there you have it – you are now allowed to copy the trading activity of other traders.
An example of a copy trade
Usually, you can follow every trader with as much as 20% of the funds in your account. This means that you can decide to allocate up to 20% to a single investor, or strategy provider. Let’s say you decide to allocate 10% of your equity.
Your money is now staked with the trader you want to copy. When they go out in the market and open a trade, your funds will follow proportionally. In other words, if the trader moves 10% of their equity into a position, the same amount will be taken from the funds you have staked.
For example, if they have an account of $1000 and invest 10% in a single position, this would mean the position is worth $100. On your end, if you have staked $500 with them, the same 10% would be worth $50.
Whatever the trader gains percentage-wise, you will also gain. If they pocket a profit of 10%, that would be $100 for them and $50 for you. Losses, on the other hand, are shared in the same proportional way.
Benefits of Copy Trading
Copy Trading offers a wide range of benefits that have the potential to both boost your returns and accelerate your knowledge of financial markets. More specifically, let’s dive into the main benefits and flesh out the details.
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Easy entry for a beginner trader
A novice trader is likely to be somewhat overwhelmed by the vast number of markets and trading opportunities. A reliable trader, in this sense, could provide much-needed guidance and help a new trader get strategic market exposure.
In practice, being a copy trader does not require any market-related skills. On this note, it’s a great option for inexperienced traders who want to feel the thrill of trading in different markets and asset classes.
Using successful traders’ strategies will help you get into the broad financial markets, ready to start getting profits without the burden of decision making.
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Learn from the best traders
A huge benefit of copy trading is the chance you get to learn from the best in the trading game. Social investment platforms that offer copy trading usually have Top 10 or Top 100 lists. Among them, you can find literally the best traders for any period of time.
To this end, selecting the most popular and most profitable could be a promising strategy that would bring you solid gains. A few important questions you need to consider when selecting your strategy provider include:
How much time the account has been active?
Watch out for ‘young accounts’ and preferably select those with at least 1 year of experience.
Have they been returning steady profits over a sustained period of time?
If a trader is consistent, the returns would be spread across their time as a market participant. Moreover, you should make sure there have been no steep drops and big losses.
Are they using a reliable strategy with stop-loss orders?
Traders who win in the market can either win consistently or occasionally. If the latter is true, the trader may be having a streak of luck and their returns may tank in case of any sudden market events, especially if their strategy does not include a stop-loss order.
Stop loss, for that matter, is the level at which a trader would have their position liquidated in case it starts showing a loss. For example, you may buy a stock at $200 and set your stop loss at $190. Once the price reaches $190, your position will be closed and your account will be safe from more losses.
With this in mind, seek traders with reliable trading strategies and make sure they are using stop-loss orders.
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Copy Trading is a Passive Investment Strategy
Copy trading is a strategy that allows you to have passive income, provided you have decided to copy profitable traders. With this in mind, you can take advantage of copy trading regardless of your experience in the markets.
You can be inexperienced and have this passive income stream. Or you can be experienced, trade actively, and still allocate some funds for other traders to manage.
In that context, through traders you copy, you can start investing without any preparation or knowledge and still enjoy passive income opportunities.
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A Wide Variety of Markets and Investment Opportunities
Copy Trading can carry you around any market and enable you to see how trading works in different asset classes. By selecting a diverse set of strategy providers, or guru traders, you can get exposure to any market available.
For example, you may choose a trader who specializes in forex and is good with trading currency pairs. Further, you may stake some funds with a trader who is focused on stocks. You could also add to the mix a trader involved with cryptocurrencies.
All of these will give you practical ways to diversify your copy trading portfolio as you expand your presence in different markets.
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Copy Trading Saves Time and is Less Stressful
Copy Trading practically means you let someone else do the trading for you. It’s their responsibility to reap profits, deal with stress, and put in the time and effort to win in the market. On your end, however, as a copy trader, your job is only to find a trustful and reliable trader and allocate resources to their account.
Researching individual markets and assets like a company stock can be daunting and off-putting. Especially if you have a full-time job, you will likely not be able to dedicate much time and focus to staying ahead of the markets.
Against this backdrop, profitable traders who might as well trade for a living could be a better bet for you.
Summary
Copy trading is a solid alternative to active trading as it enables you to get access to markets and gain a profit without going into the details of every trade. With copy trading, you let someone else, ideally a successful trader, go out in the markets, research, and invest on your behalf.
And the better reputation and track record they have, the bigger your chances of trading success will be. Simply make sure to select those traders that have built a solid base of followers and boast consistent returns for at least 1 year of experience.
Further, carefully analyze their strategy. Are they investing in stocks or currencies? Maybe crypto assets? Decide which market you want to invest in before you set out to seek your strategy providers. And finally, make sure they have a proper trading strategy in place with robust risk management including the use of stop-loss orders.
Copy trading, for its part, offers you many ways to get involved in the financial markets and diversify your risk across traders, assets, and risk-taking.
