Copy Trading: How a Copy Trade Works

blue and yellow graph on stock market monitor

Despite how easy certain online ads make copy trading look, this particular strategy is not one of the most welcoming ones in the world of trading. A couple of years ago, copy trading was barely known, and only select brokers would offer users the opportunity to engage in it.

Nowadays, however, a quick look at a list of Forex trading/copy trading accounts reveals how accessible this type of trading is. But, as mentioned, it’s not as easy as it looks. Even though the trader has to pay less attention to the information surrounding a particular market, they still have to mind their actions.

Let’s take a closer and more detailed look at copy trading and at how it works!

The Basics

Copy trading is often mistaken for social trading – and, in some cases, it becomes social trading without one realizing it. In short, for a trade to be categorized as copy trading, the user must rely on fully automated software and options to engage in trade via copy.

On the other hand, social copy trading implies analyzing another trader’s behavior and actions to enjoy the same success as them. Actual copy trading pairs a user’s portfolio to one of the primary users automatically, while social trading doesn’t.

Automated Copy Trading

This type of trading is preferred by many people mainly because the only thing they have to do is find a professional trader to copy.

  • Once a user chooses the trader they wish to copy, they can enable an automatic system to take care of everything for them.
  • Before activating the system, they’ll also have to choose a sum that they’d like to invest in the copy trading action. Usually, brokers allow for an investment of a maximum of 20% of a user’s portfolio.
  • Once completed, the copy trading setup will copy your chosen trader’s future trades and apply them to your trading account.
  • Naturally, a trade doesn’t just get copied when you copy trade. The automated system will make it so that it’s balanced compared to your investment and compared to the trader’s total portfolio. For example, if you wish to invest 10% of your portfolio in another trader, this doesn’t mean that the system will all of your money if the trader engages in a trade worth 10% of their portfolio. Instead, a 10% investment on the part of your teacher-trader, so to call them, will invest only 1% of the money that you decided to invest in them, in most cases.

Copy Trading Flexibility

With most brokers, the only thing you can do when it comes to copy trading is either start or stop the system. However, various brokers come with more comprehensive plans as well.

For example, some brokers allow you to close a trade before the trader you copied it from closes it, thus potentially avoiding losing money. This manual closing feature isn’t available on many brokers, so make a wise choice before engaging in copy trading.

When it comes to flexibility, it’s also worth mentioning that you, the user and trader, must also be flexible with your copy trading strategy. Don’t invest most of your portfolio in a single trader, but diversify and choose multiple traders to copy from. Remember that a diverse portfolio is a primary and best way to avoid the closing of your trading account!

The Advantages of Copy Trading

Copy trading is widely regarded as the best practical method to speak of learning how to trade. Many professional traders recommend beginners invest a minimum sum in copy trading to know what to expect from trading at a professional level.

While they invest as little as $100, the traders they copy could invest as much as $1000 or even $10k. The latter’s results will teach those that engage in copy trading how to manage their funds better and so on. 

Ultimately, copy trading allows people to learn from their own mistakes and from the mistakes of the traders they copy and probably look up to.

The Bottom Line

Copy trading is among the simplest ways of trading, probably more straightforward than binary options. All you have to do is select a professional trader, decide how much money you want to invest in them, and turn on the automated copy trading software.

However, it’s still recommended that you look into the trader’s portfolio and history that you want to copy. Instead of checking some of their recent successful trades, take a close look and make sure that they’re not just experiencing a moment of good luck after a downwards slope of losses.

If you pay attention to your behaviour and theirs, you’ll learn to trade on your own in no-time!

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