You heard about Copy Trading and what you can do with it, and you are wondering whether Copy Trading is legit and legal?
Here’s all the simple and clear answers you need.
But first, let’s specify what Copy Trading is.
What is Copy Trading?
Copy trading is a highly innovative form of investing or trading in which a trader automatically copies the trades of another trader that they believe to be successful.
The copied trader is often referred to as a “signal provider” and is generally a part of a social trading network or social trading platform hosted by an online trading brokerage.
One of the first trading brokerages to offer clients the ability to automatically copy trade was Tradency in 2005. However, the copy trading implemented by them was called mirror trading, and it was a system to automatically copy the trading strategies of certain traders rather than the trades themselves.
The first Fintech firms to implement automatic copy trading in which traders could automatically copy the actual trades of other traders were ZuluTrade in 2007, and then eToro in 2010. ZuluTrade and eToro revolutionized the copy trading industry and since then they increasingly became a popular presence among online financial trading panorama.
Today, traders have a wide variety of social/copy trading platforms to choose from around the world.
Generally, traders apart of these social/copy trading platforms and networks can view a wide array of statistics on other traders and decide for themselves whether or not they will be profitable to copy. For instance, most copy trading platforms allow traders to view a signal providers overall performance and profile. Often times this will include:
- Trader’s trading history
- average rating by followers
- total profit
- trades to date
- percentage of winning trades
- average profit per trade
- average trade time
- best and worst trade
- number of followers
- current ranking
- and more.
Of course, the statistics available vary from broker to broker, but the stats mentioned above are what traders must at least review before copying a specific trader (signal provider).
Is Copy Trading Legit?
At first glance, copy trading can seem too good to be true. It just seems to easy to simply follow and copy the trades of the most highly ranked traders (signal providers) and rake in all of the profits.
So, what’s the catch, or is copy trading legit?
First off, we’ll go ahead and say there are always risks involved with trading and investing, even the most experienced and successful traders experience losses. With that said, it’s safe to say that copy trading is in fact a legit trading method that works and can be very lucrative. However, it can also be disheartening as profits are not guaranteed and anything can happen in the financial markets.
As for the question of whether or not copy trading is legit, it most certainly is.
Copy trading is made possible via an automatic trading system. The automated system connects part of your portfolio with the portfolio of a trader of your choosing. Depending on the copy trading platform, you can set specific parameters such as which assets and trade types to copy, how much capital to allocate, and you can set your own stop losses and take profits. The platform will then automatically copy the trades of your chosen trader and take your set parameters into account as well.
Is Copy Trading Legal?
The short answer to this question is yes, copy trading is legal.
However, not just any online trading brokerage can legally offer clients the ability to copy trade. Trading brokerages offering copy trading services must be licensed and regulated by the regulatory entities governing the act of copy trading.
The main regulatory authorities that authorize and govern copy trading brokerages include:
- United Kingdoms Financial Conduct Authority (FCA)
- Cyprus Securities and Exchange Commission (CySEC)
- United States Securities and Exchange Commission (SEC)
- U.S. Commodity Futures Trading Commission (CFTC)
It’s important to remember that a brokerage offering copy trading services that is not licensed or regulated by any of the above regulatory authorities should not be trusted to provide transparent, fair, and reliable copy trading services.
As well, the regulatory authorities listed above are highly respected and reputable authorities that impose very strict and thorough guidelines and regulations on brokerages.
For this reason, there are very few viable social/copy trading platforms available as many brokerages cannot attain regulation by them.
Advantages & Disadvantages
Copy trading can be a very lucrative method of trading that presents various benefits and advantages over traditional methods of trading. After all, it has become very popular and is so easy that even inexperienced traders can profit by copying certain traders.
However, just like any other method of trading, copy trading is not perfect. If you’re not careful and completely unaware of the disadvantages, copy trading can prove to be quite discouraging. Therefore, to ensure you’re well informed and understand all sides of copy trading, we have compiled a complete list of the advantages and disadvantages of copy trading below.
Then, you can check our guide on social and copy trading.
- It’s possible to make money without too much effort. Instead of learning how to trade and constantly watching and analyzing the markets, traders can select a successful trader with a good track record and sit back as their trades are copied.
- Inexperienced traders can learn how to trade by following and copying the best and most experienced traders. Every time a trade is executed, or profit is taken, inexperienced traders can take note of this and learn why their copied trader made these moves. As well, generally traders can interact directly with the traders they follow via a social feed on the platform.
- A great way to make passive income. If a successful trader (signal provider) is selected, you will continuously grow your capital with little effort on your part.
- Traders who become very overwhelmed and stressed by the big decisions they must make while trading will appreciate and benefit from the automated decision making copy trading offers.
- Copy trading allows traders to better diversify their portfolio by investing and trading in markets that they don’t understand or have no experience in. Copy trading can be used as a hedge against your own methods of trading.
- It’s important to remember that trading the financial markets involves risk and it’s easy to forget about these risks and just follow and copy traders blindly. This can be a huge disadvantage as it’s easy to become naïve and unaware of your actions.
- Anyone can become a successful trader with a bit of luck and build up a large following and a good ranking even though they may not be as experienced as you might think. Therefore, thorough research must be done on the traders you copy.
- Finding the best traders to copy can be a daunting task. There are numerous metrics to take into consideration. Some of these metrics can be very misleading which leads to traders copying an inexperienced trader who is lucky.
- The past performance of traders is not indicative of future performance. Traders you copy may change their trading strategy and become riskier. As well, a trader may think they’re certain about a trade but end up being completely wrong.
Copy trading can potentially be a very lucrative form of investing/trading if it’s done properly. Traders must be fully aware of the potential disadvantages and risks involved as it is not as simple and easy as one might think.
However, copy trading is legit and has proven to work for many traders, but only if they approach it in a smart and reasonable manner.
Traders need not to worry if copy trading is legal or not, as it most certainly is, but bear in mind you should trade with a licensed and regulated trading brokerage.
All in all, if you’re a trader interested in copy trading, be sure to do your due diligence and consider all aspects to succeed in the world of copy trading.