Online trading can often feel like a daunting task – especially if you are new to the scene.
Not only do you need to choose the right platform that meets your needs, but you also need to have a firm grasp of how financial products work – as well as possess a general understanding of the underlying factors that might result in the value of an asset moving up or down.
Nevertheless, with the introduction of a revolutionary new feature called copy trading, you can now experience trading even if you are a beginner.
In this article we explore just what copy trading is, how it works and whether it’s right for you. We’ll also attempt to answer a key question – Is copy trading safe?
By the end of reading it from start to finish, you’ll have all the information you need. Let’s start by exploring just what copy trading is.
What is Copy Trading?
In a nut shell, copy trading involves the process of mirroring the same trades as another user on the same platform you are registered with. On the click of a button, you have the ability to profit off of the success of the individual you are following, based on an amount you are comfortable risking.
For example, let’s say that you identify a trader that you would like to copy, who focuses his trades on the Forex markets. Although the individual usually trades with high volumes, you decide that you want to risk $500. If during the course of the month the trader makes a net profit of 10%, then your $500 would now be worth $550. No matter how many trades your chosen trader makes, for the duration that you copy them, every single trade is mirrored like-for-like, proportionate to the amount that you decide to invest.
As of late-2018, there are three main players that can facilitate the copy trading feature – notably eToro, Zulu Trade and Ayondo. Across the three platforms there are a variety of financial products that you can trade on, which gives you the opportunity to select a trader that specializes in a particular financial niche.
This includes traditional Forex trading, as well as shares, commodities indices, ETFs, interest rates and even cryptocurrencies.
So now that you have a firm understanding of what copy trading is, in the next part of our ‘Is Copy Trading Safe?’ guide we are going to look at how you select a trader.
Selecting a Trader
If you decide to give copy trading a go, it is important that you spend some time understanding the process of selecting a trader.
Would you want to copy a trader with no prior experience, or a trader that often makes losses? Of course not – which is why you have the opportunity to perform your own due diligence.
Essentially, most platforms that facilitate copy trading will allow you to view a range of information on the trader in question. As you can see from the screenshot below, each trader will have their own biography, along with a rating. On top of that, you will also be able to view their historical performance – in terms of total trades and the amount they have made or lost in terms of a percentage, ROI or Pips.
Furthermore, you can break this information down in a number of ways, such as viewing each and every individual trade they have made. Ultimately, the aim here is to select a trader with an excellent track record – over a considerable amount of time. Just because a trader made huge profits in their first month, doesn’t mean that they will be able to replicate that on a consistent basis.
Moreover, there is no requirement to only copy one trader. In fact, it might make sense to spread your investment over a number of different traders, with each one specializing in a particular market. The trader from the screenshot above focuses their efforts on EUR/USD trading, however it might be wise to also back traders that operate in other markets.
Now that you have a good idea of what it entails to select a trader, in the next part of our guide we are going to explore ‘Is Copy Trading Safe?’
Is Copy Trading Safe?
When attempting to understand is copy trading safe or not, it is imperative that you recognise the underlying risks.
First and foremost, there is never any guarantees that your trader is going to make a profit. As we mentioned earlier, historical performance is not indicative of future results. Whilst a trader might be on an excellent run of form, their fortunes could just as easily reverse in subsequent months.
As you will see from the screenshot below, the trader had a remarkable first month, whereby they made an overall profit of just over 2,000 Pips. As a result, the individual attracted a significant amount of users via the copy trading feature. However, the following month wasn’t as successful, with the trader actually making a loss of 1,200 Pips. Ultimately, if you were following this trader – you could have made a significant loss.
Moving forward, a second factor that you need to consider when attempting to ascertain ‘Is Copy Trading Safe?’ is the value of your investment. In most cases, after you have chosen a trader you will then need to specify how much of your capital you want to risk. This is normally specified in terms of a percentage, which we will explain in greater detail below.
Let’s say for example you want to risk $1,000 with a particular trader. If the trader has a bankroll of $100,000, then in effect your trades will amount to 1% of the amount that the individual risks on each trade.
If the trader places a trade on Gold to the value of $5,000, then essentially you are mirroring his trade to the value of $50. Never make the mistake of risking your entire bankroll with a particular trader, as there is no guarantee that they won’t go on a prolonged run of losses.
A further factor that you should consider is the amount of money that the actual trader is willing to risk themselves. If the trader is experiencing good results, but they are only risking small amounts of money – then it indicates that they might not overly confident in their ability.
Moreover, it is also important to consider leverage. This is where you have the ability to risk more money than you actually have in your account – and can equally result in big profits or big losses. If the trader you back is operating on a leverage of 10:1 but you’re opting for 30:1 , then it means your margin requirement is three times greater than the individual you are copying.
Finally, it is also important to break down the amount of volume the trader is making on a month-by-month basis. The reason for this is that some traders might attempt to play it safe after having a phenomenal month, with the aim of preserving their overall ROI. For example, if the trader made a monthly profit of 250% when he was risking an average of $100,000 per trade, but then reduced his average trade size in the following months to $5,000 – then there is a chance he might be attempting to protect their historical trading statistics to keep their overall percentages high.