Have you ever wanted to trade in Futures but felt overwhelmed by the choices and strategies? If so, you are not alone. The complexity of the market can make even seasoned traders hesitant to jump back in after a long absence. You don’t have to go with copy trading alone. Using the best trade copier can enhance your experience, allowing you to replicate the trades of top investors seamlessly. This innovative strategy allows you to mimic the trades of more experienced investors and can help you gain ease in trading in Futures. This article will discuss the ins and outs of copy trading and how it works. You will learn to use this tool effectively to generate profits with minimal effort and risk.
In addition to the information in this article, tools like a trading VPS from QuantVPS can help you achieve your goals with copy trading. A trading VPS hosts your copy trading platform in the cloud, allowing you to execute trades efficiently and without interruption.
What is Copy Trading and How Does It Work?
Copy trading is a type in which you copy the trades performed by another, more experienced trader. It can be manual, semi-automatic, or fully automatic.
Copy trading allows individuals to copy another trader’s positions when opened or closed automatically. Experienced traders communicate their positions using signals via social networks or forums, where followers can copy the methods.
Markets, Assets, and the Difference from Mirror Trading
The definition of copy trading is closely linked to mirror trading, although the difference with copy trading is that traders blindly copy rather than replicate top strategies.
Traders can copy positions in many markets, including:
- Futures
- Stocks
- CFDs
You can also copy trades on popular crypto coins, including Bitcoin (BTC) or significant precious metals such as Gold or Platinum.
Why Patience and Research Are Key to Success
Copy trading can be a good way to start trading, but it is essential to understand that you will not become rich overnight. In any attempt to rush, you must copy very high-risk trades, and you will likely lose your money.
All types of trading involve risk, so traders should always conduct their research and understand how the system works before committing capital.
Social Trading, Mirror Trading, and Copy Trading: What’s the Difference?
Copy trading is often considered to be a branch of social trading. Copy, mirror, and social trading can sometimes be used interchangeably. The following list provides the most commonly used meaning of the terms:
Social Trading
Social trading involves traders sharing their ideas and plans over social media, forums, and other means. It does not include any trading automation. Each trader should decide what strategy to use or devise their plan based on the ideas shared by other traders. It is the most time-consuming and effort-intensive type of trading on this list. It also often requires some level of knowledge. Therefore, it is more suited for more experienced traders.
New traders can also benefit from learning from their more accomplished peers. While it takes more time and effort than other types of trading, social trading allows one to learn how to trade and helps one understand markets. It also gives traders complete freedom to mix and match different strategies and trading styles, not requiring them to follow other traders and their strategies blindly.
Mirror Trading
Mirror trading means mirroring the strategies of other traders. Instead of following any specific trader, traders using mirror trading mimic an approach that could be created and used by any number of traders. Mirror trading can be performed by executing trades manually according to the chosen plan. Or it can be automated by robots and expert advisors. Mirror trading typically consumes less time and requires less effort than social trading, especially if it is automated.
The additional benefit of this method is that strategies based on technical analysis can be used for any number of assets. This type of trading provides less flexibility than social trading, as you are expected to follow the strategy blindly. Your only choice is what strategy to use and when to stop using it if you do not like it.
Copy Trading
Copy trading is a process of copying the trades of another trader. Instead of mirroring a strategy, you copy every action of the trader you have chosen to follow. The copying can be done manually by making the same trades as the selected trader. Modern providers of copy trading services allow complete process automation. In this case, you need only to choose which trader (or traders) to follow and what percentage of the capital on your account to allocate to that trader.
Afterward, copy trading is entirely passive. The obvious benefit is that copy trading frees up your time for other activities and allows you to benefit from the expertise of more knowledgeable traders. The learning potential is limited. You also give up the freedom to make trading decisions, although some platforms allow you to set your risk parameters or choose which trades to perform.
How Does Copy Trading Work?
The exact steps to start copy trading vary depending on your chosen platform. But most commonly, copy trading involves the following steps:
1. Choosing the Right Copy Trading Platform
You must find a suitable platform offering copy trading services. Try to choose among popular copy trading providers with a good reputation and a long history, and preferably register with at least one of the major regulators.
2. Testing Copy Trading Platforms
Before starting copy trading for real, it is a good idea to test the platform using a demo account. If you are satisfied with the results on the demo account, you can start copy trading in earnest.
3. Select and Diversify Traders for Successful Copy Trading
Find a trader to copy, though it is better to follow several traders. Thoroughly analyze the trader’s track record before following them.
- A good trader should be active, have consistent results, have many followers, and have traded with the platform for at least several months. However, a popular trader is not always a good one.
- Double-check their results, especially if they look too good to be true. It is an excellent idea to diversify your portfolio. Suppose you follow one trader who specializes in the Futures market. In that case, another trader you follow may be involved in commodities or stocks.
- Or choose traders that operate in different time frames. If one signal provider of your choice is a day trader, another can be a swing trader.
4. Allocating Capital and Managing Risk in Copy Trading
The next step is to decide how much capital you want to allocate to each trader you follow. Start small. You can always add more funds if you are satisfied with the trader’s performance. If the platform allows it, set risk parameters.
5. Maximizing Copy Trading Results
Connect your account to the trader of your choice and sit back, waiting for results. The platform will then automatically copy all the selected traders’ moves into your trading account. Adjust the funds you allocated to the trader based on their performance, adding more funds if you like their trading results.
Related Reading
Advantages and Disadvantages of Copy Trading
The Bright Side of Copy Trading
Copy trading has significant benefits for traders, especially inexperienced ones. But at the same time, it also has disadvantages and risks. You must consider both pros and cons before deciding whether to participate in copy trading.
Copy Trading is Accessible for Beginners
Copy trading is accessible to anyone. You don’t need any prior knowledge about trading to start copy trading. Instead, you can jump into the strategy and learn as you go.
You Can Profit from Experienced Traders
Copy trading allows you to benefit from the expertise and knowledge of someone with more market experience than you. If you want to get into trading but aren’t sure where to start, copy trading can help you ease into the strategy.
You Will Learn from More Experienced Traders
You can learn about markets and expand your knowledge by watching more expert traders. Over time, you can develop your trading strategy and become an independent trader.
You Can Diversify Your Portfolio
A wide range of traders provides signals for copy trading so you can gain access to many markets and trading styles. It makes copy helpful trading even if you are a seasoned trader, as it allows you to access markets you have less or no knowledge of.
Copy Trading Helps You to Free Up Time
Copy trading can be completely automated, so you can participate even if you have a day job. You can also use your free time to learn more about markets. You can also dedicate it to your hobbies or social life.
It Removes Emotions from Trading
It can be hard to avoid emotions when you are risking your own money, and emotions can lead to irrational and suboptimal trades. Copy trading removes this issue, as automated trading makes it impossible for your feelings to affect results.
Signal Providers Can Earn Additional Money from Trades
Expert traders can benefit from copy trading in another way—being a signal provider. You can multiply your profits by allowing other traders to copy your trades.
The Dark Side of Copy Trading: What Are the Disadvantages?
However suitable copy trading can be, it also carries some disadvantages and risks you should be aware of. To limit risk, you need to diversify your portfolio (do not put all eggs in one basket), limit the amount of funds you allocate to any specific trader, and set up risk parameters on the platform according to your preferences if the copy trading platform allows it.
Consider the following points before deciding whether you want to copy other traders:
You Have Less Control Over Your Funds
Copy trading (especially automated) removes control over your funds from your hands as you just blindly follow other traders.
The Learning Potential Is Limited
While you can learn some lessons by watching more experienced traders, the learning potential is limited. Unless you know the markets, it can be hard to tell why the trader you are copying does what they do and why their trades are winning or losing. Nothing beats your experience when learning to trade; copy trading simply does not allow this.
You’re Still Exposed to Market Risk
Markets are hard to predict, and the trader who won yesterday may have a losing streak tomorrow. Past performance does not indicate future performance.
You Could Face Liquidity Risk
Sometimes, your trade cannot be executed at the same price point as the trade you are copying. That can happen because of the delay between the original and copying transactions, and market conditions can change before your trade can be executed.
You cannot sell an asset if nobody is willing to buy it or buy an asset if nobody is selling it. That risk is primarily present if you trade illiquid assets such as exotic currency pairs or low-cap stocks. To avoid this risk, you should copy traders who are participating in popular markets.
There’s Systematic Risk
It includes geopolitical events and other rare or unique events that are hard or impossible to predict but can still affect markets. For example, when the Swiss National Bank dropped the euro-franc peg in 2015, the EUR/CHF currency pair dropped sharply. Be aware that such events can result in losses even for an otherwise profitable trader.
Copy Trading Can Be Expensive
Copy trading is often more expensive than regular trading. Sometimes, signal providers require a hefty upfront fee. Or they can charge a commission for every transaction you copy.
You should also know your broker’s spreads, which can eat up your profits. While it is usually recommended to follow active traders, you should be aware that following a trader who makes frequent trades can pile up commissions.
Related Reading
- Trade Copier for TradingView
- DX Trade Copier
- Trade Multiple Accounts Simultaneously
- Copy Trading Platforms
Is Copy Trading Legal?
Copy trading is legal in the United States. It is subject to stricter regulations than in many other countries. In general, there are no regulations specific to copy trading. Instead, copy trading falls under the existing rules set for other trading activities.
As a result, traders should be aware that the laws and regulations governing copy trading can differ from state to state. Before starting copy trading, check your local regulations, especially if you allow other traders to copy your transactions. Such activity can sometimes be considered investment advice or a similar financial service and may require appropriate authorization.
The EU’s Approach to Copy Trading Regulations
The European Securities and Market Authority considers copy trading and mirror trading to fall under the MiFID Directive (according to answer 9 in the Q&A regarding MiFID). It has a different approach to copy trading, depending on whether it is automated.
Automated copy trading is considered a portfolio management service and requires the appropriate authorization from the service provider. In contrast, manual copy trading is not considered to be portfolio management. Still, it can fall within other financial services categories, such as investment advice or reception and transmission of orders.
The UK’s Approach to Copy Trading Regulations
The UK’s Financial Conduct Authority has the same approach as the ESMA regarding copy trading.
The Bottom Line on Copy Trading Regulations Around the World
Copy trading is legal in the US and most other jurisdictions, though specific regulations can vary. As a general rule, there are no regulations specific to copy trading, but you should always check your local laws before starting.
If you allow others to copy your trades, rules may apply to your activity, primarily if you reside in a different country than the trader you are copying.
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