Technological advancements have created new trading styles. In addition to automated trading, copy trading is a trend that has slowly taken shape in the financial markets over the past decade. This style of trading is promoted by leading brokers like eToro and allows individual traders to delegate the management of their accounts to other traders.
With copy trading, individual investors tend to follow and imitate more experienced traders. This is like receiving trading signals, but instead of manually analyzing and placing orders, positions are opened directly into the investor’s account.
Table of Contents
- 1 The best platforms or exchanges to do copy trading
- 2 What is copy trading?
- 3 How does copy trading work?
- 4 Copy Transaction Types
- 5 Example of copy trading
- 6 How to choose the best platform or exchange in copy trading?
- 7 Pros and cons of copy trading
- 8 Copy trading for whom?
- 9 How to copy trades with the best 3 exchanges or platforms
- 10 Is copy trading safe and regulated?
- 11 Conclude
The best platforms or exchanges to do copy trading
Online exchanges offer copy trading in different forms: using their own platforms or through third-party platforms.
eToro offers the most comprehensive copy trading solution. With over 17 million users, it’s not hard to find signal providers for all types of markets
What is copy trading?
As the name suggests, copy trading is copying the positions of other traders. We’ve all been taught not to copy classmates’ work, but there’s nothing wrong with taking investment advice. After all, that’s exactly what most financial institutions do – give investment advice. In other words, copy trading is a system that allows a trader to copy the trading activities of another trader to his own trading account.(Read more : Day Trading for Beginners)
Copy trading became popular on online exchanges, which provide solutions to facilitate trading. Among them, eToro is the leading name and it can be said that it is the largest copy trading platform.
Copy trading has democratized investing in the stock market. Previously, a large amount of capital was required before handing it over to the fund manager. Today, retail traders can help each other by sharing positions across different trading accounts. Retail traders can delegate the management of their accounts to other retail traders for a fee.
How does copy trading work?
The operation of copy trading is very simple. The exchange provides a centralized system, allowing it to connect different accounts of traders. For this purpose, it has two groups of participants: signal providers and followers. A trader can join both groups at the same time. Signal providers share their positions and followers can copy directly to their accounts.(Read more : OTC market)
Copy Transaction Types
Copy trading is usually done automatically, but can also be manual.
Automated copy trading
The most common form of copy trading is when a trader deposits his positions into followers’ accounts without requiring any confirmation from them. Positions are automatically copied to all accounts of traders who have subscribed to the signal provider’s services.
The advantage of this system is that the registrants do not miss any opportunities because trades are done quickly. Therefore, for copy trading platforms that use third-party software such as MT4, the use of a VPS may be necessary to keep the relevant trading accounts active 24 hours a day.(Read more : Scalping trade)
Manual copy trading: trading signals
Followers may also receive positions from signal providers as trading signals and are responsible for manually validating trades in their accounts. Please read our guide to trading signals.
Example of copy trading
User “Hyjbrighter” on eToro is one of the platform’s best traders in 2020, with 80% performance for the year. That’s a good performance.
The person in question is Yujie He, a computer scientist living in Ireland and a part-time trader who obtained a CFA (Chartered Financial Analyst) level 3 in 2018.
Yujie only invests in companies with a successful business model and doesn’t use leverage, which allows his followers to save fees when he buys stocks or ETFs with 0% commission.
This trader has over 8,000 investors who copy his positions with more than $5 million (about VND 115 billion) under management. Yujie mainly trades tech stocks like Nasdaq 100. He seems to be day trading and targeting a few points per position.
How to choose the best platform or exchange in copy trading?
Now that you know where to find copy trading, next let’s see how to find reliable traders to copy their positions. There are many factors to consider but here are the most important ones.
Verified transaction history
It is not uncommon for a trader to have a long streak of winning trades but no strategy that is truly profitable. However, this only lasts a few weeks or months, depending on the strategy.
In general, you should only follow traders who have a verified track record on trading platforms and have been active for at least a year, the service lasts as long as possible. You should also look for stability in the person’s trading activity. For example, it is better to follow a signal provider that consistently earns 5% per month than one that earns 20% in a given month and then loses it all the following month.
Most exchanges or copy trading platforms disclose the trading history of their providers, so it is easy to analyze their trading activity.
What is a trader’s strategy?
It is important to follow a trader with the same goals as you to avoid any confusion. Let’s say the goal is to invest to create long-term assets. In this case, you should follow a trader who takes little risk and can easily achieve monthly or quarterly profits.
On the other hand, if you are willing to take more risk for short term profit, you can choose a trader who tries to make more than 10% per month. But please note that the loss will also be large.
How many followers do signal providers have?
The number of followers a trader has is an important indicator of his or her past performance. The higher the number, the more power the trader has. Generally, these are traders who have been offering their copy trading services for several years.(Read more : forex broker)
If the copy trading platform discloses the total amount of funds managed by the trader, this is also a major indicator of his or her reputation. A large capital amounting to tens of thousands of euros is a sign of the trust the followers have in the trader. On eToro, the most popular traders have surpassed the million dollar mark.
Please make sure that the signal provider does not use a demo account. Some platforms like MyFxBook allow traders to send signals from demo accounts. It is important for traders to send signals from a real account.
What is the drawdown?
Drawdown is the difference between the high and low of the account balance. A low capital loss means that the trading capital will not go too low, while a capital loss higher than 20% indicates that the strategy the trader is using is high risk. The capital loss rate is one of the important indicators to watch because it is closely related to the risk that the signal provider is exposed to.
However, one must also be careful with the capital loss being too low. This can be a sign of a martingale strategy, as the trader never closes losing positions.
What is a rose?
Copy trading fees should always be lower than what you can earn. Usually, the total copy trading fee is about 20-30% of the profit earned. This is a pretty reasonable level. However, there are services that still charge regardless of performance. In this case, you have to make sure that the potential profit is much higher than the flat fee. For example, you would not want to pay $200 (4.6 million VND) per month if the trading capital is only $500 (11.5 million VND).
Pros and cons of copy trading
Before starting copy trading, it is important to understand the pros and cons of this style of trading.
Advantages of copy trading
Diversify your portfolio with assets you don’t know yet
It is impossible to guarantee that every trader has in-depth knowledge of all asset classes. Some traders are good at stocks, while others understand crypto better. For example, you don’t want to miss the growth of the cryptocurrency market but don’t understand its assets, you can use copy trading.
Besides your activity, following cryptocurrency market experts allows you to diversify your personal portfolio. Therefore, copy trading allows you to expose yourself to many markets without having to research or analyze instruments that are outside of your comfort zone.
Invest without experience
For example, in the Forex market, about 70–80% of traders lose. Statistics also show that people who lose money tend to be beginners, who are often tempted by the desire to make a quick profit.
Research has shown, on average, it takes 5 years or more to become an expert in a given market. But what if you can’t wait that long? Copy trading provides a solution for beginner traders to take advantage of the financial markets while learning how to trade. You should be able to invest through an experienced trader.
When you’re ready to trade on your own, you can get started without assistance. Don’t wait any longer to start your own copy trading service!
Improve the performance
Not all traders are equally qualified. Copy trading can be useful for diversifying investments even if you are already trading on your own. During times of capital drawdown, copy-trading capital can help you minimize your losses.
Let’s take for example a trader who earns 5% monthly profit from his own trades, but wants to make more money while taking no extra risk. He can learn reliable copy trading service with average monthly profit of 10% to increase his monthly income.
Disadvantages of copy trading
Copy trading may seem like the perfect solution for investors, but that doesn’t mean it isn’t without its downsides. The main disadvantage of copy trading is that you do not have full control over your trading, although copy trading platforms do offer risk management tools.
While it is possible to limit the capital loss to a certain percentage, it is not possible to adjust the strategy adopted by the trader you follow.
Furthermore, even the impressive past performance of a signal provider does not guarantee success in following them.
Copy trading for whom?
Over the past decade, copy trading has grown rapidly and has become a major selling point for online exchanges. Nowadays, most online brokers offer copy trading systems because they know there is a level of demand for copy trading among novice traders. Those who do not have deep experience in the market are the audience that copy trading is mainly aimed at.
Therefore, copy trading allows those who are not familiar with the financial markets to learn from the experts and take advantage of their strategies. In the process, beginners can also learn more about how financial markets work.
No time to trade
Copy trading is also convenient for those who do not have enough time to analyze the financial markets. Today, there are many instruments you can choose to invest in: currency pairs, stocks, indices, and more. You just need to spend time searching for the right market, then need to choose the tools that you will specialize in.
If your personal and work life does not allow you to spend a few hours a day in the markets, copy trading is a suitable solution.
It is possible to launch your own copy trading service on the platforms we mentioned above. If you have developed a proven profitable strategy in a few months or even years, you can trade for other investors and you will be paid a portion of the profits you make for them. Surname.
How to copy trades with the best 3 exchanges or platforms
More or less every exchange has different platforms for copy trading.
You need to create an account on eToro before you can start copying trades on the platform.
You can access the list of signal providers by clicking on the “Everyone” button. At this page, you can sort the list by different parameters, such as investment period, monthly profit. Once you have selected a trader you want to copy, you will be redirected to their page. There, you can analyze the person’s performance and portfolio assets to determine if that’s right for you.
In addition, eToro also offers CopyPortfolios that work like an ETF, covering multiple assets. Investing in CopyPortfolios is an easier way to get into one sector and invest in multiple assets at once.
To get started, click on the “CopyPortfolios” button on the left side of the platform, where you will find a list of investment options. Once you have selected your preferred CopyPortfolio, click “Invest” in the upper corner, then you will be prompted to enter the amount you want to invest.
Refer to the link below to learn about the different copy trading features on the eToro platform.
Unlike eToro, AvaTrade does not have a social trading system. Instead, the exchange has partnered with two other copy trading platforms – DupliTrade and ZuluTrade. These two independent platforms allow traders to send signals to each other.
On DupliTrade, you copy trading signals based on the trading strategy, not the trader. The platform monitors all signal providers to ensure their performance is even.
To copy trades from DupliTrade, the minimum required capital is $2,000 (VND 46 million). Then follow the steps above to start copying positions from AvaTrade.
ZuluTrade’s process is similar, except that the minimum deposit required is $300 and you can copy individual traders. To get started, create an account on ZuluTrade so you can define your preferred signal provider.
The image above shows the profile of a signal provider. Once you have decided to follow a trader, simply click “Follow” and follow the instructions. You will also need to connect your ZuluTrade account to your AvaTrade account by following the steps shown below.
AvaTrade has also created a copy trading application – AvaSocial. From this app you can quickly find other traders and discuss trading ideas. It is also a forum for traders and can be thought of as a social trading application.
Like AvaTrade, Vantage FX also does not have a built-in copy trading system that uses AutoTrade (by MyFXBook), DupliTrade or ZuluTrade.
Is copy trading safe and regulated?
Copy trading is a system that allows traders to connect with each other, but it is not regulated; like Wall Street trading algorithms are also unregulated. As explained in previous sections, exchanges often facilitate copy trading, connecting traders with investors on their platforms. Only exchanges can guarantee transparency in copy trading activities.
Make sure you choose an online broker that is licensed by a trusted financial regulator with a good reputation. Regulatory bodies in the UK (FCA), Australia (ASIC), USA (NFA) and Europe (CySEC) are among the most prestigious in the world. The exchanges we have reviewed are all regulated by some of these institutions.
It is important to note that these organizations do not audit the trading activity of signal providers.
In addition, there are also non-exchange and unregulated copy trading platforms. They only provide solutions that allow you to independently connect different platforms like MT4. The lack of management leads to less transparency. Therefore, it is important to research the platforms in question: customer reviews, reviews on specialized websites, etc.
Copy trading is now widely accepted in the financial markets. The new generation of traders love social trading and the solutions offered by exchanges like eToro become relevant to the millions of traders who prefer to entrust their trades to their participants. more experienced market