Copy trading is literally about ‘copying’ a trading style. It is a trading style option where traders copy the trading activities and styles of successful traders. Certain Forex brokers allow this kind of trading.
How Copy Trading Works?
Seasoned traders publish their trades live and interested traders can have those trades copied straight to their accounts.
This method is becoming popular, especially among neophyte Forex traders. But just like other trading methods, it comes with pros and cons.
Let’s have a look at the benefits and risks of this growing trend in the Forex industry.
Benefits of Copy Trading
Earn and learn
Copy trading reduces the risk of losses in Forex trading. Beginner traders are making trades while learning the ropes. This method may take too long—and a large sum of money may be lost before they can achieve enough learning.
On the other hand, copy trading can shorten the learning curve of new forex traders by allowing them to copy the trading moves of seasoned traders. New traders can free themselves from the complexity of trading and instead, ‘watch and learn’ the techniques and precautionary measures of experienced traders.
Learn from the Technical Experience of Traders
You can almost call it passive-learning. Various copy-trading platforms come with chat features that enable traders to interact with each other. But even without interactions, neophyte traders can learn from seasoned traders by watching the different manners of their trading.
For example, a new trader watches how a seasoned trader takes a position when there’s pending news. He can also observe the sizes that the seasoned trader makes when the market looks uncertain.
Everything is an open book, and it’s up to new traders on how they can take advantage of these abundant learning opportunities.
No Time To Trade? No Problem
Since you can reflect a particular trader’s activities to your account, you can trade while attending to the demands of your day job. But be sure to choose a respected trader with a strong and impressive trading background. This selection is essential because the rise and fall of your money will depend on your chosen trader’s decisions.
Risks of Copy Trading
Copying a Wrong Trader
Perhaps the most significant risk of copy trading is choosing a wrong trader to copy. There’s a need to go ‘high and low,’ so to speak, to find a reliable and seasoned trader to mirror. You must also seek advice and feedback from other traders.
Above all else, you need to carefully review the trading history of the account you are planning to copy. Whatever you see inside the account is a reflection of how it will directly affect the money you’re planning to pour in.
Having an insincere broker
A sincere broker, aside from offering copy trading facilities, would meticulously search for a reliable trader for you to copy. The not-so-good brokers would quickly recommend any trader without having a thorough background check on his/her past trading activities.
Traders that sincere brokers should recommend to other traders, especially the new ones, are those who have a long history of stable profits. The ‘one time, big time’ kind of traders are just too risky to copy.
Mirroring trades from too many accounts
Too much of everything is dangerous, and mirroring is not an exemption. Having too many accounts to mirror will lead to overtrading, and it can work against you – big time.
The collective decisions of the traders you’re copying will severely impact your profits when most of these decisions are wrong. It is advisable to keep the accounts that you’re copying at a minimum. Also, keep on altering the mix, depending on the progress of their performance.
These precautionary measures help minimize the risk of losing too much money.
Copy trading is such an exciting option to try. But traders, especially the new ones, must do their homework and have a careful look at this trading method. Yes, it comes with benefits, but as with everything else, they must also be aware of its risks.