What Is Copy Trading & Should I Use It?
If you’re looking to learn more about Copy Trading, then you’ve come to the right place.
Many retail traders are turning to copy trading as a solution to their forex account management.
Most beginners think it’s a fast and easy way to make money in forex.
But is it?
Read on to find out why you may choose this trading path.
What is Copy Trading?
Copy trading is where an investor sets up their trading account to copy another trader’s actions automatically with the hope to emulate the same returns.
So if 5 people copy 1 main trader, all 5 of the accounts will replicate the exact trades placed on the 1 main trader.
Literally copying the trader’s actions.
This is all done automatically and hosted on secure platforms such as eToro and ZuluTrade for example.
Copy Trading is a double-edged sword.
You enter every single trade that is processed by the person you follow, so you will profit when they profit and lose when they lose.
Practically speaking, you become a manager of traders instead of a trader that manages their own trades.
They can do all the heavy lifting, the analysis, and the trading.
All you have to do is monitor their performance and ensure you are getting a return.
Is Copy Trading illegal?
No, copy trading is not illegal and is well regulated in most countries.
It is advised to stick with thoroughly regulated companies for all forex brokers.
Is Copy Trading Safe?
Yes, copy trading is safe.
Just like in trading, you have to do your own research to uncover which traders to follow.
You can view their entire performance history and judge whether or not you should copy their trades.
Furthermore, the copy trading platforms allow you to set your own trade size, risk and reward levels.
So even though you will follow them into a trade, you can adjust your own risk to what you want.
(Which I highly recommend you do IF you choose to use a copy trading platform).
Is Copy Trading Profitable?
It can be.
If you find a trader that performs well consistently.
You must understand that copying another trader is not free.
You either pay a performance fee, or higher spreads, which compensates the trader you follow and the platform you invest through.
(Nothing is never free, is it?)
You must weigh up the cost vs. profit potential before you take any action.
Key Warnings: Should I Use Them?
Always do your own research (you must do as you found this article!).
However, I am personally against using these services — just as much as I am against using Stockbrokers.
The biggest red flag for me is that the psychological toll on the trader who has many followers will be heavy.
These are RETAIL traders following RETAIL traders.
No expertise in managing money.
PLUS they get paid on the side for each follower/transaction.
So if the person you follow has a bad day, then looks at their followers drop, what’s to say they’re going to chase their losses?
What’s also to say if the prospectus trader you want to follow has plenty of open trades that are at a loss?
Did you know most platforms won’t record them as losses yet?
This is one of THE biggest ways people get scammed in forex (not just with copy traders, but with signal services and trading performances for courses).
So you could be giving your money to someone with an incredible performance, yet has 50 open trades at a loss.
Remember, they get paid per follow for this.
Also, the platforms you invest through tend to have higher than industry standard spreads.
This is just food for thought.
I’m sure all of this is overthinking, but you always have to ask questions and think about what is in it for them.
I’m also confident that platforms have policies and security in place to prevent traders from being defrauded through their performances.
Nevertheless, I’m not a big fan of this approach.
However, if you’ve done your due diligence and you really cannot be bothered learning to trade for yourself, and you want to seek returns in the forex markets – then go ahead.
And remember, you are dealing with a RETAIL trader who’s signed up to get followers, NOT a professional trader.
How Do You Copy Trade?
So you want to follow other traders to grow your capital? Good!
The key benefit of copy trading is that you don’t have to know exactly HOW to trade and you can still reap the rewards.
Step 1: Choose a copy trading platform
Find a platform and broker that offers you to copy trade. Make sure that they are regulated and that their fees are not too high.
Remember, you will be paying a premium in order to use their services to follow another trader.
Step 2: Verify your account
Once you’ve chosen your broker and platform, get your details verified.
There is nothing you can do until they are verified due to laws and regulations.
So verify ASAP.
Step 3: Review the copy trader library
Each copy trading platform is different but should be easy to navigate to the library (or marketplace) full of traders that have signed up to be followed by traders like you.
Each eligible trader to follow will show you:
- What they invest in
- Their trading performance
- Their fees
- A bit about themselves (this is to explain their strategy)
I’d take good care of reviewing this.
What I have seen on some platforms is you can copy traders using a demo account.
Maybe copy their trades on a demo account first to see how they do in the real-world.
Don’t think of it as an opportunity lost if they perform well.
Think of it as data received and confirmation that they do actually what they say.
My piece of advice for demo accounts is to ALWAYS “deposit” and trade the same size as you would on a live account.
Be realistic, don’t open an account for £100,000 IF you are only going to deposit £500.
Step 4: Select a trader to copy
Once selected, you can allocate your funds to them as a proportion.
This is a great way to limit each trader and prevent them from blowing up your account in one go.
You can then set your risk management on a per-trade basis.
Then you can set your absolute loss (drawdown) tolerance level too.
For example, let’s say you invested £5,000 with a trader and they have been performing badly. That £5,000 is now trading at £3,500.
IF you give a maximum loss threshold of say £3,000, the platform will automatically monitor your account based on this level.
If the performance continued to fall from £3,500 to £3,000 then the moment your account balance drops to £3,000 – all of your positions would close and you will no longer follow any of the trades.
You would be in effect, frozen out of copying their trades, until you have reviewed your account again.
This is a great mechanic to use as a “hard stop-loss” and allows you to really control the maximum loss of your account.
Likewise, if the trade performance picked up from £3,500 to £4,000 onwards, you’d still have all your trades as normal.
So the maximum drawdown limit only kicks in IF you are at that particular level of losses.
Step 5: Build a portfolio of traders to copy
There is nothing stopping you from investing in multiple traders, this potentially spreads the risk.
You don’t have to but you could spread your money and mirror traders that invest in forex, crypto, fixed income, indices and stocks.
Here is an example from eToros website:
For example, you could spread your capital across different traders who specialise in different assets like so:
- 10% Crypto
- 10% Forex
- 20% Indices
- 20% Fixed Income
- 40% Stocks
Of course, do whatever you want. The above is just an example for educational purposes only and is not financial advice.
Step 6: Review and manage
Once you have successfully invested/set up copy trading, you will have all of the information to track and monitor each traders performance in your own portfolio.
Monitor this and adjust based on performance.
That is it.
Best Copy Trading Platforms
If you are going down this route, here are a few of the best copy trading platforms your should research before you get started (no particular order):
Do your own research on these with their fees and where the better traders are to follow.
Copy trading is a growing side of investing and an alternative to investing through funds to order to seek capital growth that outperforms the markets.
Although it is an easier approach, it is not risk-free or hands-free, as you still must manage your decisions based on the performance of each trader you follow.
Overall, you pay a premium to follow traders with a track record but you do get to essentially piggyback of their trades.
If you are someone who doesn’t want to know how to learn forex trading and would like someone else to “just do it” for them, this could be a reasonable avenue to go down.