What Is Copy Trading? – The Best Copy Trading Platform
Beginner traders are confused about what copy trading is and what are the best copy trading platforms. Copy trading, mirror trading, and social trading were all introduced for making trading simple and profitable for novice traders.
Due to high demand, there has been a surge of copy trading platforms and it becomes difficult for the inexperienced trader to make a choice.
In this article, we will explain the concept of copy trading, how it works, and the criteria for choosing the best copy trading platform for you.
What Is Copy Trading?
Copy Trading is the trading method by which a trader connects his personal account with the account of the trader that he wants to copy from.
The copier is usually a new/inexperienced trader and the trader that provides the trading signals is an experienced trader.
The terms copy trading and mirror trading are very similar and often confused by many.
In mirror trading, the strategies are applied automatically using auto trading. Meanwhile, in the case of copy trading, the copier connects his trading account with the account he wants to copy from.
How To Copy Trade?
You don’t need any prior experience in trading to engage in copy trading. You can perform copy trading without even understanding the complexities of market or asset prices.
To start copy trading, the first thing you need is a reliable copy trading platform. There are a lot of factors to consider when it comes to choosing a copy trading platform.
We will discuss how to choose the right platform for you later in the article.
Next, you have to choose a broker through whom you will conduct all your trading. Some social trading platforms act as brokers themselves. Therefore, you won’t have to go through the hassle of choosing a separate broker.
Even when choosing brokers, there are certain things you have to check before you invest your money. You can read about it here.
The next step would be to go through the social trading platform and look for traders that you want to copy.
Most platforms list the trader’s past trading history and trading performance for transparency. Go through the list of top traders and choose the one you want to follow.
You can interact with them and if you have any queries, you can ask them for clarifications. Once you have chosen your preferred trader, you can link your trading account with theirs.
Most copy trading platforms don’t allow you to allocate above a certain percentage of your investment at the hands of a single trader.
This is a good security measure because even experienced traders can face losses sometimes diversifying your risk seems like a smart idea when starting out.
As you progressively make money off of copying people, you will notice the analysis tools and techniques they apply to consistently make money.
With the passage of time, you will grasp trading strategies and tricks that the top traders apply and understand the market conditions.
This is a gradual process and takes a long time to master. Once you are confident about trading, you can start trading yourself and eventually, become a signal provider yourself thus completing the circle of trading.
Being a signal provider has its benefits as you will earn additional income if your copiers make money too. Copy trading is all about sharing and learning whilst earning.
What Are The Benefits Of Copy Trading?
Here are the unique benefits of copy trading:
Earn passive income
Copy trading is an excellent source of passive income for new traders. I used the word passive because all they have to is connect their account with the signal provider’s account and start copying.
They sit back and relax while making money from copy trading. Copy trading allows inexperienced and casual traders to experience the thrill and excitement of forex and CFD trading while making money at the same time.
Saves time
Copy trading saves a lot of time in a lot of ways. Before the advent of mirror trading, copy, and social trading, traders used to trade the conventional way.
They learned the basics of trading, learned about market conditions, and practiced their trading skills on a demo account. All of this took a considerable amount of time.
Copy trading eliminated the need for all that. The learning process became much quicker as traders learned on the go.
They observed what the top traders did, what strategies they adopted, what time they traded on the market, and tried to replicate that.
Learning directly is more impactful and faster compared to the conventional method of learning. It takes less time and effort to achieve profitable trades using copy trading.
Additional income for top traders
The signal providers are traders who use their years of trading experience and expertise in the financial market to perform trading.
If you have been wondering if these top traders help other traders for free or money, it’s the latter.
This is one of the best benefits of copy/social trading. Signal providers earn money every time a copier makes money by copying them. It depends on the platform to platform how the signal provider gets compensated.
It may be from a percentage of copier’s profits or a fixed income. Copy trading is financially profitable to both the signal provider and the copiers.
Risk Management
With copy trading, you are able to manage your trading risks more effectively. First of all, you are eliminating all the major risks by not trading yourself.
You are following the top trader and therefore, are less likely to lose money. Copying them is not a guaranteed profit every time; even they can lose trades occasionally.
With copy trading, you also get access to market sentiment. This way, you can know what the other traders are doing.
Copy Trading is free
To copy trade, all you need to do is sign up with any of the popular copy trading apps that are available and make an initial deposit.
The process of copying trades is absolutely free. When you copy trade, you are investing your money by following the signal provider but you are not charged any fee for copying them.
What Are The Cons Of Copy Trading?
Along with the benefits copy trading provides, there are some disadvantages to copy trading that we’ll discuss here:
Trading success is not guaranteed
Just by following the top traders, you can’t guarantee profits every time. Choosing the wrong trader can be more harmful than you think.
You will face the same loss as them. But the amount lost may not be that significant to them but to you, it may be a huge loss.
Top traders are willing to take big risks, but as a new trader, you should not indulge in big risks when starting out.
False sense of confidence
When you consistently make profits from copy trading, you gain a level of confidence and you think you can carry out those trades yourself from now on.
The experience and knowledge you gain from copy trading are beneficial but it may not necessarily mean you can trade by yourself.
Many new traders switch from copy trading to trading themselves. They even start providing signals. They are risking their money along with others.
Not all top traders should be followed
In copy trading platforms, the top traders are displayed according to their performance i.e. their profit gain.
New traders will most likely follow the trader that has had the highest profit rate. This may not seem like a wise decision because their strategy and risk-taking tendencies may not suit your style of trading.
New traders primarily lose money by choosing the wrong trader to copy.
Bad trading habits
Copy trading instills some bad habits such as lack of patience in trading. The trading game is a slow one.
If you do not have the sufficient patience required, you will fail eventually. In copy trading, the signal provider sends the signal, sets the stop loss, monitors the trade, and closes when he feels the need to do so.
Basically, he is doing all the hard work and the copier is passive trading. By trading this way, he is not developing the required temperament and patience to trade by himself.
Popular Copy Trading Assets
You can copy trade almost all financial assets but the most popular asset is by far, forex pairs.
The forex market dominates over all other markets with over $5 trillion in daily transaction volume.
Forex copy trading is popular because of ease of access to currency markets and demand and supply of currencies.
Other popular assets include copy trading crypto, stocks, and commodities.
How To Choose The Best Copy Trading Platform?
Due to the high demand for copy trading platforms, there are many such platforms that are available now.
But how do you know which platform will be the best for you? There are certain factors to consider when it comes to choosing a copy trading platform.
We have listed the most important factors down below:
Company’s size and statistics
The main purpose of copy trading is learning and following other traders. Therefore, it is crucial to know how big the company is, how many active traders conduct trading using this platform, and what are the monthly profits of these traders.
Based on these statistics, you can decide if you want to invest your capital with the company.
Generally, you should go for the platform that has a larger trader base so there are diversity and choices for you to explore.
Asset Index
The next thing to look for is their list of assets. How many assets are in their asset index determines diversity and opportunities to trade.
More assets mean the traders can diversify their portfolio and decreasing their risk as a result.
The Broker and the features they offer
You have to check the brokers that are partnered with the broker. Some platforms act as brokers themselves.
This is both beneficial and limiting at the same time. You don’t have to look for outside brokers and trade directly through them.
On the other hand, if they are partnered with outside brokers, you have the luxury of choosing your own preferred broker.
The features you have to look for in a broker include regulation, minimum deposits, transaction methods, security, demo account, fees, etc.
Incentives for Signal Providers
Signal Providers get rewarded when their copiers make money by copying them. Different platforms have different ways of compensating these traders.
Some platforms such as ZuluTrade offer a fixed commission to signal providers, while eToro, a popular social trading platform uses an elaborate eToro popular investor program to reward its top traders.
They reward 2% of the copier’s AUM to their top performing traders. eToro copy trading has gained huge popularity because of this.
If the top traders don’t feel their compensation to be rewarding, they will most likely switch to another platform.
Trading Platform
The trading platform is equally important as these other factors. Depending on the platform you choose, you will either be trading using a proprietary trading platform or using a popular platform such as MetaTrader 4.
In the case of copy trading, it is better to use a proprietary trading platform as that platform is made specifically for copy trading.
Copy Trading MT4
Even MetaTrader is intended for general trading, you can also perform copy trading with the help of an MT4 expert advisor.
There are plenty of expert advisors on MT4 that you can choose from. You can also auto-trade on MT4 if that’s your preference. This brings us to our next point.
Is auto-trading allowed?
Traders might have different trading preferences such as some traders prefer manual trading where they can control every aspect of their trading whereas some traders are novices and prefer to auto trade.
Even in auto trading, you can control certain aspects of your trading such as setting a stop loss.
Make sure your copy trade software offers both of these so you have the flexibility in your choice.
Fees and Commissions
This factor is dependent on the broker you select but it still holds relevance as previously, we have discussed that some platforms act as brokers themselves.
Copy trading and social trading platforms generally charge more spread fees and commission fees than regular trading platforms.
This holds true for all social trading platforms. Forex copy trade software should have a competitive spread (i.e. low pips).
Transparency and clarity in trader information
Who you follow depends on the trader information that is available on their profile. This information is important to determine if the trader meets your criteria to follow.
Some of the information that the copy trading platform should make clear is the trader’s profit over a certain period of time (6 months or 12), trader’s current strategy, their daily statistics, their trade portfolio, risk level, and other trading related statistics.
Make sure the platform you choose displays these statistics.
Displaying these statistics builds trust amongst traders and makes the whole copy trading system transparent.
Does Copy Trading Work?
Copy trading is a great invention and blessing for traders all over the world. It has certainly made trading easier for new and inexperienced traders.
Due to all the attractive features that copy trading offers, new traders flock to it in hopes of making money.
But not all succeed. Is that to be blamed on copy trading? Most certainly not. Copy trading has been proven as an effective source of income and trading knowledge for beginner traders.
Then where does the problem lie? New traders commit certain mistakes and later blame it on the method or the platform.
Some of these common mistakes include not diversifying your investments, not following the correct signal provider, leaving the trading entirely to your signal provider, and being ignorant about trading in general.
To answer the question, yes, copy trading does work. And it works very well indeed.
Conclusion
In this article, we explored copy trading in detail. We first understood the concept of social trading.
Then we understood how copy trading works. This included the role of signal provider, copy trading platform, and the copier.
Next, we went through the pros and cons of copy trading. The next important section of the article was to help traders choose the best copy trading platform for them.
We listed the main criteria that traders should look for when choosing a copy trading platform. A reliable and performing copy trading platform is crucial for a trader’s success.
In the end, we answered the question that many traders had in mind about copy trading. Due to mistakes by novice traders, doubts regarding copy trading emerge. It is an effective method of trading.
Even before copy trading, there was mirror trading. Then copy trading came along and now, finally we have social trading.
This is a field of constant innovation and improvement but we can certainly say these will be the future of trading.
