Copy-trading permits traders to copy trades executed by other investors. Copy trading’s objective is that the trader has the same positions as the investor being copied. When copying another trader, one does not get the trader’s strategy layout. Their trades are, rather, simply followed sans question. This is in opposition to mirror trading, permitting one to, in fact, copy a trader’s de facto strategies.
Copy-trading was derived from mirror trading. At the start, traders copied specific algorithms developed via automated trading. Developers shared their trading history, permitting others to copy their trading strategies. This lead to a social trading network. By and by, traders began to copy trades in their trades in personal trading accounts. Rather than a strategy, copy another trader.
Copy-trading
Copy-trading is a type of portfolio management. The objective would be to look for investors that have a track record you would rather be modelled after. The copy trading process permits traders to surveil traders’ strategies. Similar to any trading system a trader determines to use, traders follow the investor prior to their deciding to risk real capital.
Copy-trading serves traders who do not have the time to follow the markets themselves. As a rule, copy trading is concentrated on short-term trading, specifically day trading and swing trading. however, there are diverse different strategies that are used to yield revenue.
Copy-trading concentrates on assets inside the forex market, besides cryptocurrencies and other complex or volatile markets. Copy-trading spells money. However, there are risks, and traders ought to remember that past outcomes in no way mirror future returns.
Copy-trading: diversification and security
There are diverse ways to copy trade with another investor. For instance, a trader could copy all transactions. This was with trade entry, taking profit, and stop loss.
Conversely, they could get notifications of trades, manually copying these transactions. This is done via either a spread betting and CFD trading account, two derivative products speculating on price movements of an underlying, sans actually owning the asset.
Copy-trading permits traders’ portfolio diversification. A trader is using multiple ways to make money. Rather than placing all the capital into a new position, strategy or asset, traders use multiple trading strategies benefitting individual markets. When copy trading, you ought to think of a few diverse trades to copy.
Another way to diversify your portfolio would be to get copy traders trading on diverse financial instruments. For instance, one could copy a forex trader or a commodity trader. They could also consider copying traders using diverse time frames.
One could be a short-term intraday trader and another might be a long-term position trader in the stock trader within the stock trader where this strategy is most common. Traders that experience high volatility on their returns relative to those that have low volatility on returns. Also, one may consider very active traders relative to less active traders.
Copy-trading business models attract money. Copy-trading businesses are subscription models. An individual pays a fee to copy traders every month. An alternative model that may be used in revenue sharing. Here, you get a specific winning trade percentage.
Copy-trading profitability
Copy-trading may lead to high profits in case the trader finds a trader to copy. However, the greatest risk a trader will face when copy trading is market risk. A trader may lose money if the trader being copied is unsuccessful.
Traders face liquidity risk in case the instruments they are trading undergo illiquid conditions when markets are volatile. Ultimately, traders may face systematic risks in case the product they are trading undergoes sharp rallies or declines.
Market risk
Market risk details the risk of loss owing to security price changes. The aim is to yield gains from an increased traded asset’s value. There is, naturally, a risk the asset will lose value. Traders may shield themselves from market risk more than they could expect to lose by using an asset location strategy.
Only a specific amount of funds are allocated to a certain trading strategy. By allocating all their assets to a single trade tsade strategy, a trader could be exposed to large losses in case an unexpected event takes place, potentially wiping away all their capital.
Liquidity risk
Here, the implication is one may not be able to exit positions at expected levels. A trading strategy’s risk management method ought to have a historical precedent. The trader, hence, can see the copy trader’s historical drawdown. A copy trader may have a 20% maximum drawdown. One may expect to lose a minimum of 20% at any point once the copying starts.
When copying traders that concentrate on certain currencies, you ought to examine the slippage incorporated into their returns significant during volatile periods. The bid/ask currency pair/security spread is not the copy trader’s returns. Copy traders transacting frequently will have high trading costs.
Conclusion
Copy trading is a portfolio management strategy where one copies another trader’s trades. There’s also an automated version of copy trading where your trades are automatically transacted..traders may definitely make money through copy trading. However, prior to starting you ought to think over the possibility of practicing manually copying trades to see if the returns are profitable as per expectations.
