Copy trading, just like the regular one, can sometimes be a gamble. Sometimes you win, other times you lose. It is true, however, that you can have an important contribution in the way things develop. This mean that you can influence your winning chances by making wise decisions.
For example, be careful which traders you want to copy from. Choose those who are experienced and who know how to lower risks. Keep reading to discover everything you need to know about copy trading.
What Is Copy Trading?
Copy trading is a strategy used in the financial markets through which traders are allowed to copy opened positions. This technique is usually developed within a social trading network. Some people confuse copy trading with mirror trading. They are two different approaches. The second one enables traders to copy certain strategies. Copy trading creates a connection between the trader’s funds and the copied investor’s account.
In the trading industry, this type of strategy is also called “people-based” portfolio because you rely on other users to create your own investment portfolio. Copy trading is a modern approach as opposed to the traditional trading instruments. This particular technique has become popular since 2010.
Can You Make Money from Copy Trading?
The main goal of all traders is to gain profits, no matter what strategy or method they use. Both regular and copy trading share the same principles. You invest in a specific trader and copy his/her trades. Everything happens in a percentage-based manner. Long story short, the answer is yes. You can make money from copy trading but, at the same time, you must be aware of the risks. There will be cases in which you will win money, and there will be times in which you will lose your investment.
Why People Lose Money When Using Copy Trading?
- Unrealistic expectations. At first, people are attracted by this opportunity because they think it will make them gain large profits with little investments. All copy trading commercials highlight the advantages of this method. What traders fail to see is that when there are high chances of big gains, there are also potential losses involved.
- Lack of diversification. Great copy trading happens when you diversify your investments. Don’t put all your eggs in the same basket. You shouldn’t choose one trader and invest all your money with him/her. Pick several brokers. This way, your overall risk will be reduced. You can apply the diversification strategy even on different networks.
- No effort input. Nothing can be achieved without effort. The more time you invest in copy trading, the higher are the chances of winning huge profits. Ads will show you how easy copy trading is. They might even promote the idea that you can sit back and relax because others will work for you. Well, this is not entirely true. Traders who work less tend to face higher risks. In other words, you should always monitor your investments.
- Poor risk management. This is a real issue that can lead to significant losses. First of all, you should always be informed before starting the trading activity. Do your research. Find out what is all about before making an investment. Information is power. Also, learn the features of the platform you want to use. Most of them provide a practice account. You should definitely open a demo membership before making trades on the real account.
- Lack of patience. Even though you rely on others’ expertise to make these trades, you should be aware that occasional losses are to be expected. Not many investors reach up to more than 85 percent winning rate. Even though you are required to make assumptions, nobody can actually predict what will happen in the future. When you choose a certain trader, give him/her a couple of months to see his/her worth.
Pros and Cons of Copy Trading
Advantages of Copy Trading
- There are higher chances to win big profits as long as you are willing to take risks.
- You don’t need to know a lot about the trading market or have financial knowledge.
- It will provide you with a way of earning passive income. It requires less effort and time.
- Copy trading is good for emotional traders because they don’t like doing transactions on their own.
- You can follow expert traders, which helps you better manage the risks.
Disadvantages of Copy Trading
- The entire Forex market can sometimes resemble gambling. Whether you choose copy trading or other trading forms, you will still have to face risks.
- The main uncertainty (with potential risk) is to choose the best expert on the market. There are plenty of professional traders with impressive profiles. Make sure to avoid those who are reckless and way too risky.
- A worrying percentage of traders don’t make profits from trading on the Forex market.
- There is no way to make an accurate prediction about how things will turn out.
- Usually, copied traders don’t really care about those who copy them. They are only interested in their commissions.
Tips to Consider If You Want to Use Copy Trading
- You should diversify as much as you can. Invest in more than just one trader, and pay attention to which of them have the best strategies. Don’t quit copying their trades if they have a bad week. All brokers face risks. This is why following multiple networks and traders is a wise decision.
- Don’t be a spectator. Get involved in your trades. Monitor them and make sure you reduce risks. Evaluate how well your copy trading strategy works and make changes, if necessary.
- Be prepared. Do your research before starting your trading activity. Doing your homework helps you lower the risk.
- Pay attention to who you copy. The first risk of copy trading appears when you choose the person you want to inspire yourself from.
What to Look for in A Trader Before Copying from Him/Her?
You should look for those traders who have plenty of experience in this field and who are also skillful, accomplished, and tested by others. You can even ask for references or recommendations. Search traders that have the following traits:
- Someone who is cautious in their actions. The best ones are those that don’t invest all their money on just one position.
- Choose a trader who takes baby steps instead of going for those who like to jump in the water even though they don’t know how to swim. Bottom line, avoid those traders who are too risky. A little risk is ok, but don’t overdo it.
- Search for those traders who are truly experienced. If they already gained big profits multiple times, it means they know what they are doing. This kind of trader is always better than one that has gained a lot more but only a few times.
- An active trader is always a better choice than one who invests only now and then. Pick one who makes frequent trades.
Putting It All Together
Many people think that copy trading will truly revolutionize the investment market. The way you invest your money says a lot about you. Also, it influences both your winning chances and your losing risks. Make sure that you are well-informed before making any decision. This is why it is best to open a demo account first. Once you get the hang of it, you can trade in the real market. I hope our recommendations and guidelines will be helpful for you, and will support you in choosing the best trader for your needs and preferences.