What is Copy Trading?
Copy trading is a form of automated trading where investors track, follow and replicate the trades of a successful trader on their own accounts. Volatile markets, such as cryptocurrencies, are inherently difficult to consistently trade profitably. They require extensive knowledge and education as well as adequate trading skill and technique. Fortunately, copy trading ensures that investors are able to achieve profitability in the markets as they continue or expand their trading education. It is straightforward for any investor to copy trade: you select a trader whose strategy and performance you wish to replicate in your account. Thereafter, all his trades will be proportionately copied in your account and you will get to mirror his profits, and of course, his losses as well. Copy trading is an innovative strategy in the financial world that can help all types of traders to widen the scope of their profitability in the markets.
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How Copy Trading Works
As mentioned above, copy trading is a straightforward strategy in the market; put your money down, choose a trader to follow, then watch as the copy trading platform literally ‘copies’ all his trading positions in your account. A good copy trading platform will perform this in real-time, ensuring that you perfectly replicate the performance of your chosen trader. On many platforms, the signal providers are rewarded for the service they provide, which essentially means that they are given a small share of your profits.
In the ideal scenario, copy trading should always be fully automated, where no human intervention is required and trade positions are automatically copied on investor accounts. But some platforms also offer semi-automated copy trading, where an investor selects which trades should be traded and copied on their trading account. There is also manual copy trading, where an investor receives trading signals that a trader has placed, and they then manually open the desired trade suggestions.
Why Start Copy Trading?
The only reason to start copy trading is to make money. You have the unique chance of following the best performers on the platform you are using to trade. Copy trading is able to help all types of traders to earn money from financial markets that are considered naturally risky.
For new traders, copy traders provide the opportunity to earn from the markets even with limited investing knowledge, experience or technique. It also gives them the unique learning experience of watching how profitable opportunities in the market are identified and taken advantage of.
For the more experienced investors, copy trading simply helps them to expand their scope of profitability. They can learn new trading strategies or expose their portfolios to financial assets that they do not regularly trade in. In copy trading, experienced and successful traders can also sign up as signals providers, and stand to earn additional money out of the profits they generate for their followers.
Where to Start Copy Trading
Here are some of CFD brokerage firms that offer the best crypto copy trading services:
Pepperstone is an established CFD broker and they allow traders to implement copy trading strategies on all their 3 available trading platforms: cTrader, MetaTrader 4 and MetaTrader 5. The company has partnered with multiple, reputable third-party services that allow an investor to not only copy the best trades into their accounts but also to continually improve their own trading skill and experience. At Pepperstone, investors can copy trade using the following services: Myfxbook AutoTrade, a service with detailed trader statistics; Mirror Trader, a marketplace with over 3000 verified copy algorithms; MetaTrader signals, an integrated copy trading feature for MT4 and MT5 platform users; and DupliTrade, another popular copy trading platform.
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EToro is a brand that is almost synonymous with social trading. The broker was arguably the first CFD brokerage firm to pioneer copy trading in the retail CFD trading market. Back in 2009, the company launched OpenBook, a social trading feature that allowed investors on its platform to track, follow and copy the best performing traders. After continuous improvements and innovations, copy trading on the eToro platform is now powered by their own proprietary feature, CopyTrader. There, Popular Investors (signal providers) are highlighted and graded by a Risk Score tool that ensures eToro traders can pick out the best performers that will help them realize their investment objectives.
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AvaTrade is an established brand in the CFD brokerage industry. The company has partnered with the biggest companies in the copy trading space to enable investors to perform social trading with ease, convenience and efficiency. AvaTrade investors can copy trade with ZuluTrade, a renowned platform that not only facilitates real-time copy trading but also has the ZuluGuard feature that ensures investor capital is protected when the signal provider shifts to a riskier strategy in the market. AvaTrade investors can also copy trade using DupliTrade where they can pick out signal providers that have undergone a thorough audit procedure.
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Start with a Copy Trading Software
There is also the option to replicate the trade positions of successful traders using copy trading software. Here are some of the best options:
Cryptohopper is an automated trading software that allows investors to implement copy trading in the cryptocurrency market. The software links to your trading account using an API key and can be customized to copy trade your favorite traders, or ‘Signalers’ as they are labelled on Cryptohopper. There is a great selection of both free and paid signalers on the Cryptohopper system, and investors can view all their trading history as well as other performance metrics before selecting which one(s) to follow. The trading bot supports both automated and semi-automated copy trading modes, and there is also a 7-day free trial period for investors who wish to check out the system without risking any money.
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Developed by HaasOnline, HaasBot is a comprehensive automated trading system that allows investors to efficiently trade their favorite crypto coins and tokens. HaasBot is integrated with over 20 top crypto exchanges including Binance, Kucoin and Poloniex. The entire system features 4 components: Bots, multiple customizable trading systems; Technical Indicators, multiple analysis tools for investors to try different combinations; Insurances, a set of tools to protect profits and limit losses; and Safeties, algorithms designed to prevent crypto losses when asset prices make sudden big changes. When using HaasBot, investors can customize their systems and also determine which copy trading strategies to implement in the crypto market.
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MetaTrader 4 is undoubtedly the most popular trading platform for retail traders speculating on financial assets online. Copy trading on the platform is conducted via the Trading Signals service. All MetaTrader 4 clients can access the service by clicking on the ‘Signals’ tab on the MetaTrader 4 official website. For ease and convenience, over 3000 signal providers are sorted by their trading performance, with their portfolio growth, reliability and support for algorithmic trading highlighted. Investors also see how much it will cost to copy trade any signal provider. Other performance metrics, such as Sharpe Ratio and Profit Factor, can be analyzed by clicking on any signal provider.
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MetaTrader 5 is the latest version of the MetaTrader platform, and it features an enhanced integrated automated trading functionality. A major difference between MT4 and MT5 is that the latest iteration supports speculation of additional financial assets such as cryptocurrencies, whereas the former was tailor-made for the forex market. To copy trade on MT5, an investor must have a MQL5 account that is funded or they can pay for any subscription using a bank card or popular eWallets. The signal providers are listed on the ‘Showcase’ section, with all their major performance metrics highlighted. Choose your favorite signal provider to copy trade and their trades will be replicated in your account.
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How to Build a Copy Trading Strategy
Copy trading is fairly straightforward, but while it seems a simple way to make money trading financial assets, it is not that easy. It requires great skill to build a copy trading strategy that will consistently earn profits out of the market.
Here are some tips on building a solid copy trading strategy:
- Choose the Best Trader to Copy
The most daunting task in copy trading is choosing ‘who to copy’. This is because their performance will determine your overall success, or failure, in the market. Choosing the best trader to copy goes beyond mere profits and you must consider other factors such as historical drawdown, risk level, number of followers as well as consistency. Your chosen trader must show the consistent application of strategy and also inspire confidence by trading on a real account (risking his own money) rather than on a demo account.
In investing, diversification serves to limit risk exposure and ensure long term profitability. This is also true in copy trading. It is important to assess the underlying strategy as well as the financial assets that your chosen trader is trading in the market. You should pick traders who trade various asset classes such as Forex, Stocks, Indices, Commodities and Cryptocurrencies. You can also try out different strategies such as Scalping, Swing Trading and Position Trading. This will result in a balanced copy trading portfolio that will limit risks and enhance long term profitability.
- Follow and Unfollow
An important element in copy trading is to know when to follow and when to unfollow a trader. Markets are inherently uncertain, and this can be reflected in the performance of various traders. It is always prudent to follow a trader with few recent drawdowns and few open trades that have ripe potential. On the other hand, no matter the historical performance, if a trader has many open trades in the red, it may be time to unfollow him.
Pros and Cons of Copy Trading
Here is why every investor should consider copy trading as a strategy to trade their favorite financial assets online:
- It offers the opportunity to earn from the markets even with limited investing knowledge, experience and technique.
- It frees time for all types of investors. Everything is automated after you choose your desired trader to follow.
- It allows investors to choose traders whose trading styles and strategies fit their risk tolerance and profit appetite.
- It allows for efficient diversification of risk when trading financial assets.
Copy trading may seem like an easy way to make money, but it also carries its risks. Here are some of them:
- It is not easy to choose a reliable trader to follow. A trader may top leaderboards but the statistics are always based on closed trades rather than open ones.
- Basically, when copy trading, trading decisions are made by a third party, but you suffer full liability if anything goes wrong.
What is Social Trading?
Social trading operates like a social network. Investors are able to watch and follow the trading strategies of their fellow investors or other top performers. Social trading allows investors to participate in the financial markets even with limited knowledge and experience. Because the best traders can be followed, social trading is a perfect democratic alternative for traditional fund management institutions. Social trading helps to build a community of investors and can be a good avenue for those that wish to earn profits while continuing their investing education.
What is Mirror Trading?
Mirror trading is a form of social trading where investors select their preferred strategies and the trading signals generated will automatically be executed in their trading accounts. Unlike copy trading where accounts are linked, in mirror trading, trading patterns of best performers are coded into algorithms and the best trading signals are executed in investor accounts. Mirror trading helps investors to eliminate emotions out of their trading activity and to apply proven strategies in the market.
Copy trading has been an incredible innovation in the financial markets. It has literally levelled the investing arena and accorded investors the opportunity to start earning profits in complex trading markets by gleaning from the knowledge and expertise of successful traders. Investors do not have to prepare for success in the markets; with copy trading, they can enjoy their profits from the word go.