Trading 101: What Is Copy Trading?
Trading Analysis

Trading 101: What Is Copy Trading?

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Created 3mo ago, last updated 3mo ago

In this Trading 101 article, we take a deep dive into copy trading, its risks and benefits – and how to use copy trading to your advantage.

Trading 101: What Is Copy Trading?

Table of Contents

Copy trading is a trading approach that is quickly gaining popularity in cryptocurrencies, forex and stock markets. Put simply, as the name suggests, copy trading means directly copying the positions taken by another trader, usually automatically and in real-time.

There are good reasons to use copy trading, but many people are critical of the approach. Let’s look at both sides of the story and see if copy trading is something you should consider in your trading strategy!

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What Is Copy Trading?

Copy trading is a trading strategy that allows traders to copy the trades of other traders. It is a part of social trading, where a copy trading platform automatically copies trades taken by the trader you are following.

In essence, it allows you to follow other traders into their trades, and profit if they are successful — usually at a fee.

For beginner traders, it is a good tool to generate trading income, but they must be sure the person you are copying knows what they are doing. For other traders, copy trading is a great way to stay active in a market when they don’t have the time to commit to trading themselves.

How Does Copy Trading Work?

Copy trading is a concept that is applied in all financial markets. You can copy trade a forex, CFDs or stock trader, or follow a crypto trader along his journey.

There are multiple ways of copy trading other traders. Most people have copy-traded at least once in their lives, by following experienced traders on Twitter or Discord into a trade. This way of manual copy trading is available for purchase as well, with many “influencers” acting as paid signal providers, usually in private Discord groups.

In recent years though, many crypto exchanges and other third-party platforms have started to offer automatic, real-time copy trading services. While originally popularized by eToro, the service has now become mainstream.

Is Copy Trading Profitable?

In short, copy trading can be immensely profitable. We see a growing popularity in copy trading, which would not be happening if people were losing money. Nevertheless, copy trading — without a proper approach — can cost you dearly.

Whether or not copy trading is profitable mostly depends on the trader you are copying. If you are following a successful trader with consistent profits and a proven track record, you will likely be successful, whereas you will be likely to lose money when following a social media guru without any hard data proving his accuracy.

Other considerations include the fees you are paying to the trader and the copy trading platform.

How To Successfully Copy Trade

To copy trade successfully, you need to put in time. Firstly, you need to understand the trading system of the trader you want to copy. Different trading systems work well in different market environments, so understanding how your trader approaches the market will help you stick to the strategy in times when it is less profitable.

For example, a trend following system works in a trending market, and loses money when markets are consolidating. As markets are trending less than 50% of the time, this means the trading strategy will lose money often. Nevertheless, the profits of catching a trend more than make up for these losses.

If you did not know about this, odds are you would have already stopped copying the trend-following system before a trend shows up. But if you did your homework, you would be at ease, waiting for the next trending move to show up.

Another way of increasing your chances of success is by copying multiple successful traders with different trading systems. After all, diversification makes you less dependent on market conditions.

Finally, it is crucial to exercise risk management. Not only should you make sure that the traders you copy have a solid risk management system, but you should also limit your risk per trade you copy. For example, you could choose to only allocate 3% of your funds to a certain trader or use a stop loss when the trader goes more than 20% into drawdown.

What Are Trading Signals?

Trading signals are messages alerting you to potential trading opportunities. Signal providers use various kinds of analysis to bring trades to their followers, sometimes even with a take profit target and stop loss. Signals are usually not copied automatically, but manually followed by the group members.

Who Are Trading Signals Providers?

There are hundreds, if not thousands of trading signal providers to choose from. You will find signals for the forex market, crypto or stocks. Many of these providers will advertise high win rates on social media or try to lure you in using advertisements on YouTube.

No matter the trading signal provider you want to follow, it is important to research them well, just like you would research a trader to copy.

Is Copy Trading a Good Idea?

Many people say that copy trading is a great way for beginners to get acquainted with the market. However, it requires skill to figure out which traders to copy, and which ones to ignore. Essentially, you already need to be a good trader yourself, before you would ever be able to really know which traders are solid, and which ones are not.

In this sense, copy trading can be a good idea for experienced traders looking to take a step back, but it is likely unwise for people just starting out.

Copy Trading Strategy

As we discussed, there are numerous strategies in copy trading. You can copy trend-following traders or choose to focus on range-bound environments. Ideally, copy traders put together a “portfolio” of different traders to copy, so that they will always have a few successful ones running.

Crypto Copy Trading Platforms

There are many different copy trading platforms available, for different kinds of markets.

PrimeXBT

PrimeXBT is a crypto copy trading platforms that also offers stocks, forex and commodities trading, allowing crypto traders to explore other financial markets.

Bybit

Bybit is a centralized exchange (CEX) that recently launched their copy trading feature.

eToro

A platform for social trading. In addition to copy trading tools, eToro allows for community discussion, which helps traders to learn from the traders they copy.

3Commas

A platform for bot trading, offering crypto trading robots that allow you to choose your strategy.

Shrimpy

Shrimpy is a platform that focuses on portfolio rebalancing. In addition to standard copy and social trading tools, Shrimpy has a rebalancing tool that allows you to automatically rebalance your portfolio according to your preferred risk/reward.

Pionex

The free copy trading platform might not be the most advanced of the bunch, but it is one hundred percent free. What else could a degen trader need?

Kryll

Kryll has a drag and drop strategy builder. This allows you to create your own trading strategy and automate it. It allows users to automate their approach to the markets.

Coinmatics

Coinmatics allows you to choose whether you want to copy automatically, or manually. This flexibility allows you to keep greater control over your risk, and makes it one place to get started if you're not sure about copy trading just yet.

CopyMe

Contrary to many platforms, CopyMe allows you to copy trade multiple traders at once. Diversification in trading is a known way to minimize your risk.

Gate.io

Gate.io is a CEX that allows copy trading with high leverage, with over 1,400 cryptocurrencies listed on the platform.

MoonXBT

MoonXBT is known for its incredible speed of execution, according to its team. MoonXBT allows you to copytrade low-timeframe scalpers.

WunderTrading

WunderTrading offers a platform for copy trading that supports Binance, FTX, Kraken, Bybit and many more exchanges.

Zignaly

Zignaly differs from the rest because of its profit-sharing feature. With this tool, you can copy trades and only pay trading fees when profits are made. This minimizes your costs, while maximizing your profits, according to the project.

Benefits of Copy Trading

There are many benefits to copy trading. For example, copy traders can profit from the market without having to spend much time on analysis. After you have found the trader to copy, everything else is automated.

Moreover, copy trading allows you to cut out the emotions of trading. Letting someone else worry about the execution allows you to focus on other things and prevents you from making emotional decisions during volatility.

Copy trading can also help you get familiar with new strategies, as paying attention to the trades you copy might show you new tricks to use in your own analysis.

Finally, copy trading allows you to get exposure to markets you are not familiar with yourself. In this, even a crypto trader can easily take advantage of the volatility in stocks or forex, without having to learn the ins and outs of the industry.

Risks of Copy Trading

Copying other traders does not come without risk. These risks are divided into three categories: market risk, liquidity risk and systematic risk. Let’s take a brief look at the different categories to see what you need to look out for.

Market Risk

Market risk is a major risk to any trade, be that a copy trade or not. Market risks are associated with changing interest rates, commodity prices, exchange rates or even stocks, and how these changes may affect your investments.

For example, the news of interest rate hikes has caused volatility in crypto markets before, which could cause your position to get stopped out. It is important to consider these factors in trading. Copying a trader that takes these factors into account will help you survive during times of uncertainty.

Systematic Risk

Systematic risk is a risk you cannot really protect yourself against; this risk is present in any market. It deals with the risk of surprise events, or black swans. The outbreak of the coronavirus, or the terrorist attacks of Sept. 11, 2001, are good examples of these events, which caused large losses for many traders.

Liquidity Risk

A third major risk category is liquidity risk, the risk that you are unable to close a trade at a reasonable price, because of insufficient buying or selling interest. This happens in markets with little interest, or outside of regular trading hours. This risk is often forgotten about when talking about copy trading risks but is still one to keep in the back of your head.

On top of these risks, there is the risk of bad trades. The trader you are following may not be as successful as you thought him to be, and therefore lose you money. If you want to get into copy trading, make sure you do your research!

The Rise of Copy Trading — A Brief History

Copy trading has been around for a long time. Back before social media platforms, some traders ran newsletters where they discussed their trading ideas. Followers could then manually join on to the trade or decide against it.

As the internet grew, online forums and trading rooms took over this role, where traders could announce their trades in chat rooms and paid platforms.

Many companies realised the business opportunity and started to build automatic copy trading services, where users could automatically copy the traders of other successful investors.

These days, many different platforms offer copy trading services and the concept has become indispensable in trading.

Social Trading vs Copy Trading

An alternative to copy trading is social trading. In social trading, traders exchange ideas in a community, to benefit all members of the community, whereas copy trading is more transactional and automatically copies the trades of others.

The community-sharing of ideas is a great way to improve your trading, boost your performance and to learn new things from like minded people. Exchanging different viewpoints will generate insights that you will never find on your own.

However, social trading is time-intensive and will still require you to take your own trades. Instead of automatic trade execution, social trading is meant to improve your trading skills and help you become a better trader of your own.

In short, social trading will take considerable time, but you will become a better trader in return. The return of social trading is not made in cash but will likely result in a better trading performance overall.

Mirror Trading vs Copy Trading

Mirror trading is a sector in copy trading, which is slightly more complicated than plain copying of other traders. Unlike copy trading, mirror trading allows you to follow a specific trading strategy, often executed by algorithms.

These algorithms have been built and perfected to execute trades based on many different inputs, and process these inputs way faster than any human will ever be able to. Because of the algorithmic nature of trading, it also runs 24/7 and is not affected by emotions.

This makes many people favour mirror trading over copy trading, as all human error is removed from the equation. Nevertheless, mirror trading is not without risk. For example, the markets are constantly evolving, which may result in the algorithm running on outdated assumptions. When this happens, the algorithm will take trades that no longer work in the current environment, quickly blowing up your entire trading account.

Closing Thoughts

This concludes our write-up on copy trading — its risks, benefits and history as well as strategies to use in copy trading. There are reasons to use copy trading, and reasons to stick to trading on your own.

As always, it is important to do your own research before investing your hard earned money; never invest more than you can afford to lose. Trading is risky and letting other people do it for you may do more harm than good.

No matter if you choose to copy trade, trade yourself, or join a social trading community, we wish you the best of luck in your journey.

Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form.

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