One of the most exciting developments in recent years is copy trading, the technique used by millions of everyday investors and traders to mimic the actions of experts. If your brokerage firm offers the service, consider trying it out to see if it’s a good fit for your style of investing. Before you sign up for a copy trading account with your broker, it’s essential to know what it’s all about, how to use it correctly and safely, and what steps to take to maximize your chances for earning a profit. The best way to learn about copy trading is to review the pros and cons after working through a real-world example.
What It Is
If you find yourself asking what is copy trading, consider this. It’s not complex to understand or do. In fact, it’s simply the process of automatically mimicking the buying, selling, and position management of another trader. Of course, newcomers are careful about the person they choose to follow, but firms that offer the service publish success rates of experts. That means you don’t need to do a lot of guessing about how accurate your mentor trader is; the results are right there in front of you. It’s up to each person to decide how much capital to put in their copying accounts. For first timers, it’s wise to experiment with a small sum in order to gain confidence in the expert and understand how the complete process works.
The Steps for Getting It Right
Learn as much as you can about copy trading. Ask your broker which kinds of automated platforms are available. There are numerous choices, with some more suited to people who have been copying for a while and others designed for newcomers. Spend time studying the history of the various experts available on your brokerage site. Avoid the urge to jump at the one with the best percentage of wins. Instead, look at long-term success, volatility of returns, the expert’s credentials, and their financial philosophy. Try to find someone who matches your style and risk tolerance but who also has a solid record of success in the kinds of securities that you prefer to buy and sell. Monitor results closely and frequently. Don’t let one or two losing trades discourage you. Even the most adept experts have far less than a 100 percent success rate.
Pros
There are numerous advantages to the technique, including the chance for newcomers to follow along with experts and earn a profit from day one. Additionally, using copy trading frees up your time so you can spend just a few minutes per day monitoring results. And for risk minimization, copiers have access to some of the most advanced methods used by experts. Finally, if you decide that losses are too great, you can opt out of the process altogether or switch to a different expert to follow.
Cons
Even the most experienced market gurus experience successive losses. Unless you have enough money to cover several losses in a row, it’s possible to lose the bulk of your capital even when copying a top-ranked trader. Note also that there can be fees for successful transactions. That’s why even if your broker charges nothing to sign up for a copy trading program, you might have to pay an expert’s fee on winning trades.
An Instructive Example
If your brokerage firm offers copy trading and you sign up for an account, here’s how a typical situation might work. First, there are no fees for using the copying service in most cases. Second, suppose you put $1,000 into the account, and after five trades, you’ve earned a profit of $100. With a $1,100 balance, you’re ready for the next copied trade. Note that if you choose to do fully-automated copy trading, then all transactions will be entered based on a percentage of your capital account balance, mimicking that percentage the expert uses.
If the expert has $50,000 of capital and buys ABC Corp. stock worth $1,000, the system would use the same two percent of capital from your balance to make a buy. If you only have $2,000 to trade with, the copy trading algorithm would buy $40 of ABC stock for you. Be sure to check with your broker and find out your options for using automated and manual copy trading. Then choose whichever method you feel most comfortable with. Also, read the fine print on the copy trading agreement to see how your platform uses percentages of available funds to buy and sell.
