Copy trading is the act of copying trading, allowing less experienced traders in the financial markets, forex, cryptocurrencies to copy the trading positions of experienced investors into their portfolios.
Table of Contents
- 1 What is copy trading?
- 2 How does Copytrade work?
- 3 Advantages of copy trading
- 4 The risks of copy trading
- 5 Criteria for choosing a copy trading account
- 6 Conclude
What is copy trading?
As the name suggests, copy trade means copy trade. This is a form of trading in which you will proceed to copy the trading position of another professional investor (pro trader or master) in the market to be able to set up a portfolio similar to them.
If the person you choose to copy is a reputable and experienced investor, then you can completely get attractive profits without spending time and effort on market research. On the contrary, if they are poor traders, the risk of your account being lost is extremely high.
Therefore, if you want to invest according to a pro, you also need to learn information, trading capabilities, drawdown … From there, you will make better judgments and decisions.
You find a good investor and want to make a copy trade according to that investor’s portfolio. With a capital of $200,000, this investor successfully traded and made a profit of up to $250,000.
If you also have an initial capital of $200,000, your profit will also be equal to $250,000. But if you have less capital, such as $20,000, you can still execute a copy trade, but the amount of money will be less.
Entities involved in copy trading:
For a copy trade transaction to take place completely, it is necessary to have the participation of 3 main entities: investors (copyers – followers), pro traders/masters (professional investors) and brokers (exchanges). transaction).
Investor : select master to copy and determine the amount of investment capital; track and copy the master’s trading positions. If the transaction is profitable, you must pay a fee according to the percentage of profit to the master that you copied the trade.
Pro trader/Master : conduct transactions; order and portfolio management; receive a percentage of the profit from the copy account if the transaction is successful; receive commission (commission fee) from the broker if trading with large volume.
Forex trading platform : provide copy trading platform; collect account management fees and trading fees from professional investors and copy investors; pay commissions for professional investors (depending on the policy of each exchange).
How does Copytrade work?
Basically, the Copy Trade platform offered by different brokers will also be different. However, copy-transactions typically take place in the following general sequence:
Step 1: Sign up for an account.
Investors: select one or several Leader accounts that you want to copy trade and register for a Follower account.
Professional investors: Sign up for a Leader/Master account… Then, publicize account information such as experience, capital amount, trading strategy…
Step 2: Divide the trading capital.
Follower: Allocate capital appropriately and set up a few parameters for your copy trading account: maximum trading volume, copy stop rate, etc.
Master: Publish trading strategies, risk management strategies, capital management strategies, etc. clearly and specifically.
Step 3: Conduct the transaction and copy the transaction
The masters execute buy, sell, stop loss , take profit orders . After that, the follower account will immediately be able to copy the trade according to the respective capital ratio between the 2 accounts or according to the follower’s own settings.
Followers will not be allowed to influence or modify the commands of their master or clone account. However, they can still stop copying or exit orders on their follower account if they feel that the master is trading inefficiently.
Step 4: Copy transaction results
When the Master closes the orders and ends the transaction, the profit or loss will be shown on the account of the Followers.
In case of successful trading, both master and follower accounts are profitable, in which master account will receive an additional % of profits from Followers. On the contrary, if the trading fails, both accounts will lose, and the Master account will of course not receive any copy fees from the Follower account.
Advantages of copy trading
In general, copy trading is a form of portfolio management aimed at making large profits based on the trading strategies of other experienced and professional traders. However, when considering certain aspects, copy trading offers many other great advantages that investors need to keep in mind. Specifically:
– Useful for investors who do not have time, do not have both knowledge and experience.
No time: If you are too busy and do not have time to learn about forex investing but still want to earn more income from investing, then copy trading is really the perfect choice for you. All you need to do is register for a Follower account, choose a master you want to copy, deposit money into your account and wait for the results.
No forex knowledge: Similarly, if you don’t spend time learning forex, you definitely won’t have enough knowledge to trade profitably on your own, let alone the possibility of a serious account fire. To trade effectively, you need to learn a lot of specialized terms and different investment strategies such as: risk management, capital management, emotion control, etc.
And in fact, when choosing copy trade, Forex experts will take care of all of the above problems for you.
No experience : On average, it takes 3 to 4 years for a trader to master and fully understand the rules of the forex market. Moreover, they also have to trade a lot of effort, money, and mind to trade profitably, let alone become a good trader. Therefore, copy trading is the best solution for inexperienced traders who take risks to earn big profits.
– Copy trade helps followers (copy investors) have a more efficient investment portfolio, from which the income source is also more stable and secure.
– Minimize potential losses that may occur and create a safe and confident psychology for copy investors.
– Followers have the opportunity to learn a lot of knowledge, experience and investment tactics from professional traders; thereby contributing to improving their trading style to become more efficient.
– Professional investors (masters) also earn additional income from the commissions of followers and brokers when selected to copy trade.
– Profits from copy trade are on average 15%/year or more, much larger than bank interest rates (6 – 7%/year).
Copy trade is a form of free trade on time, very convenient for you to trade at any time.
The risks of copy trading
In fact, profit is always a factor that comes with risk. That is, if you want to get big profits, it means you have to accept risks that can happen at any time. Therefore, in order to copy trade effectively and safely, investors need to understand some of the following risks from copy trading:
Risks from the market
This is the biggest risk that traders face whether you trade yourself or do copy trading. Market risk is defined as losses from large adverse movements in currency pairs.
Moreover, copy trade is a passive form of trading, if the trading strategy you are copying does not adapt to market fluctuations, it is likely that you will be unable to keep up and risk burning your money. account is very high.
Risk of choosing an account to copy trade
This is the risk that many inexperienced investors are most susceptible to when doing copy trading. In some cases, a master account that is consistently making big profits doesn’t mean they are good investors, maybe it’s just an unsustainable result of a period of “hot” growth.
Moreover, copying trades makes it easy for followers to depend too much on professional traders. To be precise, you are leaving your fortune and life to a stranger to decide.
A professional trader, no matter how good, cannot avoid losing trades, because no one can win forever in the market. It is extremely risky to do a copy trade when that pro trader is starting a losing streak. Therefore, remember that nothing is 100% absolute.
Risks due to improper capital allocation
Although copy trading is a very potential form of trading, it will be very dangerous if you pour all your capital to copy. It is best to invest with a certain percentage of capital and keep a part for yourself to hedge against risks.
Besides, setting a copy stop rate is also a safe method to help you preserve your capital. Because you can make several hundred dollars with dozens of winning trades, but you can lose everything with just one losing trade.
Risks from the broker
The growing society is also a catalyst for fraudulent activities to proliferate. In the market, there are always many fraudulent and unreputable brokers with the aim of taking advantage of inexperienced investors.
Therefore, verifying the broker thoroughly before choosing a transaction is the best solution to limit this risk.
Criteria for choosing a copy trading account
To ensure effective copy trading with attractive profit potential, investors need to keep in mind a number of copy account selection criteria as follows:
Stable profit results
A good master account or a professional trader will have a regular monthly income. The monthly profit may not be high, but it will always be positive. In contrast, an underperforming master account is an account that has a steady, high income for a few months but loses the rest of the months.
High win percentage
An account where the profit margin is greater than the loss is a good account. The higher this ratio, the better the account.
Diversified investment portfolio
Often, portfolio diversification is a criterion that helps reduce risk. Therefore, if the master account has a high profit rate and meets this criterion, you should prioritize following.
Minimum actual trading time is 1 year
More or less trading experience will largely depend on the number of years of operation in the market. It demonstrates the professional investor’s understanding and ability to react to unexpected exchange rate fluctuations. Therefore, for safety, the ideal trading time of the master account you can choose is 1 year or more.
Large number of followers and responses
The more people copy, the more it proves that the trader is a professional master, the percentage of profit is very high.
Good background (profile, referral information), clear trading strategy
The more complete the profile of the master account, the more it shows that the person is a good trader. So, take the time to learn to make sure that the master account you choose has effective capital management and investment strategies.
Thus, through the above article, you must have clearly understood what copy trading is as well as the great benefits that copy trading brings to investors. However, having invested always comes with risks, before entering a trade you need to determine in advance the risk mentality that can occur at any time.
If you know how to choose a good and reputable master account to copy, surely the loss rate can be reduced to a low level.
Remember, immediate profits do not determine future results. Good luck with your chosen goal!