Copy trading allows traders in financial markets to automatically copy positions opened and managed by other traders. Copy trading means traders can copy specific strategies and ties a portion of the copying trader’s funds to the trader’s account that is being copied.
Copy trading is popular with those who don’t have the knowledge or desire to learn to trade for themselves, however it comes with risks that we’ll discuss in this article.
In this guide I’ll explain:
- What copy trading means
- Who uses copy trading and why
- Whether or not copy trading works
- How much you could make copy trading
- Which platforms to use for copy trading
I’ll also answer some of the more frequently answered questions at the end to deepen your knowledge on copy trading.
What is copy trading?
Copy trading can be great for people who wish to follow traders with a track record of success.
The first step is to find a trader or investor with a track record you want to copy. The second step involves monitoring their strategies before committing real capital – thereby minimising risk.
It’s important to check that the account you want to copy hasn’t got lucky by going all in on a few trades! You can do this by looking at their portfolios and also past trades.
Copy trading isn’t a magic bullet. Rather, it’s a short-term strategy designed with day or swing trading in mind. I also need to point out that copy traders usually work in volatile or complex markets like forex. This is because large inflows of capital following the same account can move the price – therefore liquid markets are a necessity. For this reason, leverage is often used in copy trading. Leverage is also considered high risk as most retail investor accounts lose money when using leverage.
Can you generate strong revenue by copy trading? Yes – but not without risks. Also remember that another investor’s track record of success doesn’t automatically mean you’ll enjoy the same returns. You also need to factor in potential volatility too.
So, how do you copy another investor’s strategy? Let’s look at the process.
How to copy trade
There are many ways to get started. I’ve listed a few of them below.
1. Follow more than one trader
Putting all your eggs in one basket is a high-risk strategy. That’s why if you’re going to copy trade (I personally wouldn’t) then look at following several accounts – each of which will adopt different approaches to make money from their chosen markets.
Think about it this way: risking all your capital on one strategy, asset, or position is like betting everything on black in a casino. You could lose it all in a single roll of the die.
Instead, spread your risk by diversifying your capital.
2. Learn different financial instruments
Copy traders use various financial tools. A short-term intraday trader will think short-term. Contrastingly, a position trader will consider the bigger picture. Some will be extremely active. Others, less so. For example, one trader might specialise in trading GBP/USD, or EUR/USD.
3. Speculate on price movements
Maybe you’d like to receive automatic notifications of trades then copy those transactions for analysis. You could do this by setting up aCFD trading or a spread betting account. These tools let you speculate on the price movement on an asset – even if you don’t own it.
Is copy trading a good idea?
Personally, I think copy trading is a bad idea. Why?
If you want to trade, then learn to trade with your own trading strategy. If you don’t want to be involved in trading or investing then buy a low cost passive tracker fund.
This means you’ll get the upside of the financial markets without having to be involved.
Does “copy trading” really work?
The system works but isn’t infallible. Even experienced traders can lose money if their approach is unsuccessful.
For example, a trader might:
- lose money if the product or asset they’re trading rapidly (and unexpectedly) declines
- become illiquid if their financial instruments are exposed to volatile market conditions.
When copying you’re only as good as the investor you’re emulating – so try to exercise judgment wherever possible.
Is copy trading safe and profitable?
As I mentioned, even successful traders lose money. So, copying them isn’t a fool proof strategy. To help you decide whether copy trading is right for you, I’ve listed some pros and cons below.
- If trading isn’t your day job you can make money without constantly monitoring market movements
- You could make a living from the financial markets – even without experience
- Copying lets you experiment with different styles so you can find an approach best for you
- A successful trader today might have been bottom of the leader board yesterday
- The investor you’re copying could start taking bigger risks – are you okay with that?
- You could lose capital due to twists and turns in the market or provider error
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Developing a successful trading strategy
How much could you make by copying another investor’s trading strategy? Unfortunately, there’s no magic figure. And the chances of getting rich overnight are low.
An experienced trader could enjoy returns of 5-20%. Returns of 70% are not unheard of either. But success stories like these are often down to luck or the result of taking a huge risk.
Talking of risk, how much you invest will determine your return. 10% might sound like a lot – but if you only ventured £2,000 your gains will be relatively small.
I’d urge you to take a step back and ask yourself: ‘as a novice social trader how much money do I have to start with?’
If you’re not wealthy – and have only a small amount of disposable capital – expecting your trading strategy to yield instant riches is unrealistic.
You should also set a maximum drawdown as a way to stop so that you don’t lose all of your capital.
Copy trading platforms
Specific platforms exist which beginners – and even busy investors – can use to emulate successful trading behaviours.
No knowledge is needed to use these platforms which claim to shorten the learning curve, accelerating the journey of novice to experienced trader quite rapidly.
Broadly speaking it works like this:
- you subscribe to a trader – or several trader’s – channels
- next you start to watch their broadcasts via a live feed
- you can then decide which behaviours to replicate
In most cases, these platforms charge a fee based on deal spread, real time prices, and even how many payments you receive in a month.
Opening a copy trading account
I’ve listed three examples for reference only. Before subscribing, compare several copy trading platforms, read the small print, and seek advice if in doubt.
This platform has a track record spanning ten years and requires a deposit of $50.00 to get started. If you want to keep risk low eToro lets you buy 0% commission stocks.
However, these products are CFDs and so what eToro doesn’t tell you is you pay an overnight financing fee.
Trade.com offers a platform with more than 2100 financial instruments available. It also has a free demo account and zero commission on withdrawals and deposits.
This should be standard, but most copy trading platforms charge fees for this.
Like Trade.com you can open a free demo account first – meaning you can practise without taking risks. As before you won’t pay anything on commissions or deposits made.
Do trading signals matter?
Trading signals and copy trading are marketed as viable money-making solutions. How are they different? A trading signal indicates when to buy or sell. However, you’ll still need to interpret the data – and signal providers often charge high fees.
What is the best copy trading platform?
There are hundreds of copy trading platforms. Some are independent and others are brokers. Choosing one that suits your investment aims – and which is fully regulated – is essential.
If I had to choose any, I’d choose eToro.
It’s the most well-known and has been around for a long time.
Is a mirror trader the same as a copy trader?
The term ‘mirror trader’ describes a trading behaviour that uses a range of automated signal services. Copy trading allows inexperienced or busy investors to directly copy experts without the need for complex analysis.
Will I be protected by a regulatory framework?
The level of protection will depend on which instruments you use. Cryptoassets, for example, fluctuate greatly in value within short timespans and aren’t usually protected by a regulatory framework.
Remember, using leverage requires complex instruments and you should understand how CFDs work. You should also understand how the underlying asset moves, for example the key drivers in currency pairs.
In the UK, brokerage accounts are protected by the £85,000 limit. If your account has funds in it worth more then your funds could be at risk if the broker goes under.
What minimum deposit will I be expected to pay?
The minimum deposit needed will depend on the broker. As covered earlier, eToro requires £50.00 – but competing platforms might ask for more.
Is trading CFDs worth it?
CFDS are complex, volatile, and risky. Even experienced traders lose money trading CFDs – so think carefully before copying the experts.
Does trading forex carry risk?
Trading forex requires great skill. It’s also extremely liquid and one of the largest markets in the world. Make sure you copy a trader with provable experience in this area.
Can I use a mobile app?
Most popular copy trading platforms can be downloaded as a mobile app – allowing you to follow your chosen investors while on the move.
Does past performance matter?
Past performance doesn’t guarantee future results. But I do think profitability depends on following the right traders – so take time to assess an expert before deciding to copy them.
Why make things harder?
If you’re just starting out, going it alone in the world of investment can be intimidating. After all, there’s so much to learn.
As a full-time trader I can help you understand the pros and cons of copy trading and learn other skills that’ll help you trade more profitably in the UK stock market.