To Copy or Not to Copy – Is Copy Trading a Good Strategy?

Copy Trading

With the rise of the Internet, online payments, and trading platforms, stock market training is more accessible than ever before. All you need is a credit or debit card, some savings, and an appetite for risk. Soon enough, you’ll learn that there are actually plenty of different trading strategies out there, many of which can help beginning traders like yourself rake in their first significant profits. One of such strategies is copy trading. This tactic is quite polarizing amongst traders for a good reason: some platforms are better than others, and it may take a lot of trial and error before you get it right. Reading copy trading reviews from Trade Wise or another trading-focused website is a good way to find out what trends are worth looking into.

In this article, we’ll provide you with an overview of copy trading, how to best get into it, as well as take you through some of the risks associated with this practice. By the time you’re done reading, you should have a better understanding of copy trading and whether or not it is the right thing for you.

How Does Copy Trading Work?

In a nutshell, copy trading is a trading strategy based on following and recreating the moves of successful and experienced traders. This is a very common practice regardless of the market you’re operating in, whether it’s forex, cryptocurrencies, or stock exchanges. Many people swear by copy trading as the best way to help inexperienced traders make their first profits, but it is important to note that seasoned veterans also resort to copying others’ trades, especially when they are entering a market they are not too comfortable with.

Not every trading veteran makes their activity open and available for everyone to copy in real-time. You need to find a trading platform that offers copy trading services, accept their terms and conditions, and set up an account. Only then will you gain access to a list of the so-called “master traders”, granting you the ability to analyze their performance and recreate their trades. Some platforms can also give you insights into these traders’ preferred trading strategies and their commissions. Once you deposit some money into your account, you’re free to start copy trading. Whenever your chosen master trader opens a trade, your account will mirror it to a tee.

How to Start Copy Trading

The very first thing you need to do to begin your copy trading adventure is to find a broker that suits your needs, payment method preferences, and is available in the region you’re located in. With that out of the way, you’ll have to consider how much funds you can devote to trading, and make a deposit. Keep in mind that in certain cases, master traders will demand a minimum deposit.

Once you’re all set up with a broker and have found a few interesting master traders you’d like to copy, you’re pretty much good to go! However, we recommend that you keep on expanding your knowledge and not become over-reliant on the work of master traders. One good way to do so is by trying to manually copy other people’s trades by following prominent trading bloggers and YouTube channels.

Copy Trading Risks

While it is a good way to dip your toes into the world of day trading without overwhelming yourself with information and skills to learn, there are certain risks associated with copy trading to remember. Do not let yourself get discouraged by them, but you should keep them in mind nonetheless – it will help you make your own informed decisions instead of blindly following the master traders.

Divergent Investment Goals

Master traders are undoubtedly experts at what they do. You can learn a lot from their activity, and even get a shot at earning some serious cash. However, you need to keep in mind that their interests and ultimate goals may not be perfectly aligned with yours. They operate with different budgets and likely have higher risk tolerance. Having conflicting goals with your master trader may increase your risk of losing money.

Not Understanding Market Shaping Events

If you rely solely on copying a master trader’s actions, you will not have a chance to develop the analytical skills required for you to understand the impact of offshore and market events that have an effect on your investments. These kinds of events include wars, law changes, and other important news that relate to global financial markets.

Poor Risk Management

Masters are ranked on copy trading platforms based on their performance. Basically, it means that the more money they make, the higher they will rank. However, in order to rake in sky-high profits in short periods of time, they need to expose themselves to a lot of risks. This exposes novice traders to potential losses that they simply cannot afford.

The Bottom Line

Copy trading is one of the easiest ways to dive into the world of day trading, but it is worth keeping in mind that it is not the only one. While it certainly has a lot of benefits in that it enables you to learn about trading from the very best professionals, it can also put you in a disadvantaged position in the future, mainly by having you follow in the footsteps of high-risk investors without the same high budget and risk tolerance.

All in all, it is a viable strategy to get you started, as long as you simultaneously continue to broaden your knowledge of other trading tactics. Good luck!

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