What Is Copy Trading & How Does It Work?
Copy trading is a recent concept that has been created for new investors or those who do not have time.
Often referred to as social trading it allows investors or those wishing to explore investment opportunities by copying trades of successful traders.
Copy trading is increasingly becoming seen as an ideal introduction to markets such as the forex market and online currency trading areas where price movements are often at a high pace and require a level of attention to ensure trades are carried out in a timely manner. Such is the pace of these markets that many people can simply not commit the time to them to ensure optimal profit.
Access Top Traders
Copy trading allows access to some of the best traders in the world to handle trades for those who simply do not have enough time or knowledge to spare.
This method of trading has revolutionised the mirror trading concept that has been in use in the foreign exchange markets since the early 2000s. Mirror trading allowed the less market savvy investor the opportunity to benefit from the experience of other traders with more experience or a higher level of success.
If you’ve looked into mirror trading before, you’ll know that choosing a trader or traders to copy allows you to benefit from their trading strategies and investment objectives; however, the jargon involved with such trading could be bewildering.
Copy trading seeks to overcome this with a friendly social networking style platform that even the most inexperienced trader can follow.
The development of a user friendly social trading platform where it is possible to follow traders, see their activities in real time, through a live trading feed of people and assets you choose to follow makes it easier than ever to benefit from other people’s experience and market knowledge.
However, it is not simply a chance to look; copy trading platforms in addition offer the ability for you to either manually or automatically copy the trades and strategies of those you choose to follow; essentially allowing you make similar levels of profit to more experienced traders.
Who offers copy trading?
eToro offer commission free trading for UK and European traders on shares and ETFs.
eToro is the world’s largest community of traders and investors, numbering more than 10 million from more than 140 countries.
When you trade, a minimum deposit of $200 is required. eToro do charge fees if you are inactive for 12 months with a fee of $10 pm. There is also a $5 fee whenever you withdraw funds from your account.
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How does copy trading work?
The basics are similar to that of mirror trading, in that you choose to copy the deals placed by traders of your choosing, replicating the positions they take in your own account. You are able to trade in financial markets by mirroring their actions. Copy trading platforms, unlike mirror trading ones, come with a host of social features that have revolutionised online trading.
Essentially, a copy trading platform works as follows:
A trader will open a position and will then broadcast their position to other traders. Those traders will then either manually choose whether to adopt the same position or not, or will, depending on the settings of their automated trading platforms, automatically adopt that position.
Why it’s popular
The primary trader broadcasting their position is likely to have experience in the underlying market, offering the benefits of their expertise in specific markets and the hours they have likely spent on researching trends and world news to make their decisions.
Copy trading platforms have been designed to make the complicated seem simple and the long-winded method of benefiting from market news quicker. Charts that may have seemed baffling are presented in a user-friendly way, and it has been designed to look more like a social network than the trading platform it is. Some platforms, for example, show you a live trading feed, with the activity of people and assets you choose to follow.
This copy trading technology allows you to choose who to copy and whether you want to automatically copy the positions of successful traders you identify. In choosing traders to copy you will open up similar positions to them. They may be investing £1000s in their portfolios and your copy will mirror the percentages invested in your portfolio. You may not be investing as much, but you’ll be benefitting from their experience and likely knowledge of the markets they choose.
Automated trading is ideal for those who do not have the time to do more than just check their account for results intermittently, make sure to set stops and limits to manage your risk and set any required stop loss or stop entry orders that you wish to adhere to. Simply put, it’s a good option if you’re time-poor but still want to invest.
Opportunities to fast track learning
Copy trading is an ideal introduction into new markets too. There is a lot to be gained by taking an interest in why your chosen trader takes the decisions they do. Following those who have the time and knowledge to make investment decisions in markets that are unfamiliar to you is an instant way to benefit from the often hours of research into the markets and investments they make.
A trader who rises to the top of the copy trading platform for you to copy will have likely spent time identifying market trends and being on the button to take advantage of sudden rises and falls in the markets or prices of their investments. You, could choose your trader based on their results, history, and attitude to risk, their personal bio and other factors that these platforms offer to highlight the successful trades that they have registered. Your investment is carried out proportionately to the trader you copy, allowing you to benefit from their investment strategy.
You may initially choose traders who have success in diversified markets and view investing with a managed risk strategy that meets your ideals, before learning from their decisions to make your own positions as you learn more about the markets you’re interested in.
Ensuring your investments are diversified over a wide range could be a wise decision, in order to spread risk. You could also choose a trader to copy that matches the level of risk you’re prepared to take in these new markets.
How are the traders I can copy chosen?
In much the same way as mirror trading, traders open accounts with the provider and bring their trading successes (and failures) to build a reputation and history within the platform. Copy traders then are able to choose traders they see build up a history of impressive performance and show a proven track record in their chosen markets. The incentive to the experienced trader is often by means of a free dealing account for them to carry out their transactions, thereby saving on dealing costs for them.
The choice of traders to follow is ultimately down to you. However, we would recommend that you learn a little beforehand of the markets you are interested and plan to become involved with before handing decisions over to them. As a minimum, it would be prudent to keep an eye on world events to see the effects they have on world stock and financial markets and learn how prices rise and fall based on both company and world news.
Is copy trading a regulated activity?
Yes, activities on copy trading platforms are authorised and regulated by the financial conduct authority to monitor and ensure integrity.
Are there any downsides?
Whilst copy trading could be beneficial to new, inexperienced or time-poor traders, it would be wise to start slowly.
You are still investing your money, and therefore as with all stock market and financial market investments, you run the risk of losing some or all of your money. The adage of “Investment values may fall as well as rise” is certainly to be remembered, and any investment strategies should not be taken with the view of short-term gains, you should be prepared to invest for the long term and the need to ride out lows to get back to highs.
Before committing your real capital to the copy trading platforms, where your capital investments will be made on the advice of other market participants you should seek to carry out some analysis of your own and learn about the markets that you wish to venture into.
It is important also to remember copy trading does not eliminate risk, and that trading boards may be used by traders looking to influence and manipulate market pricing for their own gains. Therefore, choose your traders to copy wisely. Look at the history of the traders concerned, their attitude to risk management in comparison to your own risk profile, before committing to copy any given trader and try to gain a basic knowledge of the markets you choose.
In essence, do a little research at least, spread your risk, be prepared for the long term and never invest more than you can afford to lose.
If you’d like to get started with copy trading, or would like more information on what other investment or trade opportunities you could benefit from, consider speaking to an investment and savings specialist to find out what approach could be appropriate for your needs.
Important Risk Information: This website contains information only and does not constitute advice or a personal recommendation in any way whatsoever. The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. The tax efficiency of ISAs is based on current tax law and there is no guarantee that tax rules will stay the same in the future. Different types of investment carry different levels of risk and may not be suitable for all investors. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment and should read the product literature. If you are in any doubt as to the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice. * Details of how the Financial Services Compensation Scheme applies to investment firms can be found at fscs.org.uk.