What are the Pros and Cons of Copy Trading?

Copy trading has become increasingly popular in recent years. It involves automatically copying the trades of an experienced and high-performing trader for a small fee. While this technique may seem somewhat redundant for seasoned traders, it can be incredibly beneficial for novices as it allows them to make a profit while gaining experience and observing developed strategies in action. Even experienced traders use it to diversify their trades and operate in sectors they are less familiar with.

Understanding Copy Trading

Copy trading is a relatively straightforward concept. It involves allowing an experienced trader to execute trades in their account, which are then mirrored in other traders' accounts. The experienced trader is often referred to as the 'master,' while the copying trader is known as the 'copier.' Initially developed to help new and inexperienced traders make money in the market, many experienced traders now also open copy trading accounts to maximize their returns.

Key Participants in Copy Trading

There are three crucial parties in a copy trading environment:

  1. The Online Broker: Provides the platform or ecosystem for trading. Not all brokers offer this service, so you need to find one that does. The broker connects traders in the environment, provides tools to help copiers analyze the master traders' activities, and vets individuals who can become master traders on their platforms.
  2. The Master Trader: An individual with many years of experience in the trading industry. Their role is to execute trades, which are then mirrored to other traders. They make money by generating a profit in their accounts and taking a small commission.
  3. The Copiers: Individuals who subscribe to master traders with the goal of generating returns by following experienced traders' strategies in return for a small fee.

How Copy Trading Works

Copy trading works in a relatively simple way. A copier finds an online broker that offers these services, agrees to the terms and conditions of the copy trading platform, and is then given access to a portal where they can analyze the performance of the master traders. In addition to performance, they can also look at the trading strategies used by these traders and the commissions they take. Finally, they deposit funds into their accounts and start copying. Any time the master trader opens a trade, it will be mirrored in their trading accounts. As such, they will only be successful when the master makes profits.

Assets You Can Copy Trade

It is possible to copy most financial market assets, as it mostly depends on the broker. Some of these assets include Forex, Stocks, Cryptocurrencies, Indices, and Commodities. Some master traders focus on individual assets, while others are experts in all of them. They will always execute trades based on the assets that are performing well.

When Copy Trading Works (And When It Does Not)

While day trading is a good strategy, it does not always work. Its performance typically depends on the master trader. If they are having a successful winning streak, then you will become successful. Therefore, some people mitigate this situation by copying trades from multiple traders. This is a good way of diversifying the trading. Also, at times, the performance depends on the motivation behind the master traders. At times, the master will make more money in their “assets under management” instead of doing the real trading. Some even make over $1 million from these fees alone.

Pros and Cons of Copy Trading

There are several benefits of copy trading:

  • Easy to Adopt: It is an easy strategy to use since all you need is an account and access to master traders.
  • Diversify Your Returns: It is a good way to diversify your returns.
  • Working Even in Longer Periods: It allows you to make money for a longer period.

On the other hand, there are cons such as:

  • Market Risks: There are always market risks involved.
  • Liquidity Risks: There are liquidity risks, and liquidity is a key data to watch.
  • Master Trader Mistakes: Master traders are not always perfect. Your success will only depend on that of master traders.

Copy Trading vs Social Trading

Copy trading is a form of social trading. The difference is that in copy trading, you simply copy trades from one trader known as a master. With social trading, you use social media tools to execute trades.

FAQ

Is Copy Trading Safe?

Yes. Copy trading is a safe trading strategy since the master trader does not have access to your trading funds. So, they cannot just take it and disappear.

Is Copy Trading Legal?

Yes. Copy trading is a legal way to make money in most countries. It is unclear whether there are any strict guidelines that target the industry.

Is Copy Trading Profitable?

Yes. Many people make money copy trading. But it is not without risks.

Conclusion

Copy trading can be a great way for both beginners and experienced traders to maximize their returns in the market. However, it is not without its risks. Market risks, liquidity risks, and the potential for master trader mistakes are all factors that need to be considered. Ultimately, your success in copy trading will depend on the success of the master traders you choose to follow.


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