What is Forex Copy Trading?
Copy Trading enables forex traders, new and experienced alike, to safely enter the financial market without necessarily having to scan the fast-paced forex market. A result of the fin-tech revolution, the basic premise of Copy Trading is quite simple. Using a regulated online platform, it allows you to copy the real-time forex trades of existing investors. Every time they try to speculate and earn profits, you automatically ‘copy’ their orders in your brokerage account. To do this, you connect your account with that of another investor. Copy Trading thus helps you make money using someone else’s expertise by copying their positions in the market — so much so that you end up imitating their wins in addition to, unfortunately, their losses. This doesn’t necessarily mean that you lose control over your own account. In fact, depending on the flexibility of the platform you’ve chosen, the ability to open, close, and moderate the outcome of the trades remains with you. Copy Trading thus offers an easy solution for people who seek to trade and invest money but lack the time or the expertise to invest on their own.
How does Copy Trading Work?
Process – You need to open your account and connect it to that of another trader on the Copy Trading platform. Once this is done, all of their opened trades are automatically copied to your account. You can then choose a certain sum to invest; the platform of your choice may have strict limits on the sum of investment as well as the quantum of traders you can copy. In most cases, you can’t invest more than 20% of your entire portfolio in one trader.
The mechanism – Once you assign a portion of your funds to the trader you’ve chosen to copy, their trade gets copied to your account as soon as they make a trade in the same proportion. This means that if the trader uses 10% of their funds to make the trade, your account will reflect the same trade by utilizing 10% of the funds that you initially allocated to the chosen trader. This mechanism is automated and doesn’t require your contribution. To reduce the risk of big losses, it is advisable to diversify your portfolio and not invest a large sum in one individual trader. If your platform allows, you can choose to reduce or increase your investment in a trader at a later date according to their overall performance.
Social Trading and Copy Trading — is there a difference?
Copy Trading can be termed as a subset of Social Trading. While Copy Trading helps new traders by directly replicating the trades of a seasoned investor, Social Trading relies on the information shared by other traders and allows new traders to invest without having to carry out the market analysis by themselves. Social Trading is an umbrella category and doesn’t facilitate the automated management of trades. It enables you to communicate with other traders and form your decisions on the basis of that information such that the ownership of the ultimate decision lies with you. On the other hand, Copy Trading links your account with that of another trader such that their current trades reflect in your brokerage account. This process is automated and once you’ve chosen to copy another trader, you don’t have any control over their trades — the only option you have is to perhaps stop copying the trader (however, some platforms may allow you to reduce or increase your investments). If you are new to trading, it is very crucial to understand the distinction between the two categories in order to avoid the unforeseen risk of losses.
Copy Trading or Managed accounts?
Traditionally preferred by high-net-worth individuals, a Managed Account allows a hired professional manager to trade funds on behalf of the individual investor who holds the ownership of the account. There needs to be a sense of trust in the manager and his capabilities to safely invest your funds. Copy Trading is a powerful investment tool that links your account with another trader and allows you to copy their active trades. Essentially, Copy Trading allows you to piggyback on another trader’s expertise and proven track record, something you would normally take months or years to accumulate. While both methods facilitate a relatively easier and stress-free trading experience for individuals with less time or expertise on their hands, Managed Accounts have higher costs associated with them in terms of the fee involved Moreover, Copy Trading gives you more control and autonomy over your own funds and investments.
Final Thoughts
Copy Trading offers the perfect platform for a new trader to start off in the market. By replicating trades from seasoned players, Copy Trading gives you the unique opportunity to directly learn from someone else’s wins and losses. However, Copy Trading does carry its own set of risks. Since you are tying your portfolio to a perfect stranger’s, you must also be very cautious in choosing the investor you want to copy trades from. Oftentimes, experienced traders have received flack for seeking to influence a market for their own financial gains. Moreover, you must carefully choose the platform to trade on and be aware of the various conditions put out by them.
