Trading isn’t easy. Far from it. It requires a whole lot of studying, experience, and patience. While you can force yourself to learn technical analysis or the fundamentals of investment, it’s hard to master them and, even then, you’re still bound to make some mistakes. The truth is that for most people with a day job, a solid trading strategy it’s just not attainable.
Hollywood has made it look easy, and we’ve all, at some point, imagined living off trading, but let’s face it, most of us would have no idea of where to even start. Sure, we can read about it, listen to some Ted Talks, or get on some online trading courses, but in reality, we’re probably just daydreaming while working a 9 to 5 with little to no time for teaching ourselves a skill that offers rewards as high as its risks.
While there are some options that allow investors to trade without knowledge like active or passive mutual funds, these can be hard to invest in for a few reasons. High tax costs, lack of transparency, fluctuating returns, and difficult access to these funds if you only have a relatively small amount to invest.
What is Copy Trading and How Does It Work
Copy Trading or Mirror Trading is an activity that has been around for quite some time, which consists of imitating the transactions of someone else. Another similar concept is Social Trading, where traders analyze and mimic investments through social media. However, this requires some basic level of knowledge to interpret the graphs and tips provided by others, meaning that you already had to be a knowledgeable trader to copy their trades.
What is new about Copy Trading, however, is the ability to trade automatically and without any previous trading knowledge whatsoever. Copy trading is somewhat similar to social media for trading. You can browse for and follow investors through their profile and portfolio history. When you decide to start copying a trader, simply press a button, and when said trader makes a move, that trade is automatically replicated on your own CopyTrading Portfolio.
Being a Copy Trader is pretty simple: Browse through a list of successful traders, choose the ones you like the most, and copy their trades. Most platforms allow you to check their recent stats, biography, and investment strategies along with some additional information. When you’re happy with your search, hit “follow”.
Copy Trading eliminates the obstacle of technical knowledge while also making it adjustable to everybody’s needs. You can choose the volume of your copy trading portfolio, and the platform will allow you to copy it proportionally, so if you allocate $1000 to copying an investor with a trading account of $10000 and he opens a $1000 position, a $100 position will be opened in your account.
There are quite a few platforms providing the Copy Trading service, most noticeably eToro. However, there are many alternatives like Naga Trader, ZuluTrade, or Darwinex. All these platforms differ in the number of assets available, the value of the minimum deposit, or the leverage value, so it’s up to you to choose a platform that can accommodate your goals.
The Pros and Cons
Even if you plan on managing your own investments in the long run, Copy Trading can be a great way to start. Finding your strategy is hard, and seeing how others succeed (while succeeding with them) is a very nice and interactive way of learning.
It is a passive investment strategy, does not require time and effort in analyzing the assets and the market. You can choose to take some time watching what investors are doing before following them, or you can start right away if you feel confident about them. There are many traders to choose from, so if things aren’t going well with one of them, you can always move on to the next.
With this method, your investment never sleeps, as Copy Trading allows you to trade around the clock while still working your day job and getting 8 hours of sleep. Now, of course, investing is always a gamble, and you have very little control over what is happening. It’s a trade-off in which you give away all control of your investment for the expertise of a successful investor. Some claim that one of the risks associated with Copy Trading is its ability to affect the markets.
Also, some of the most successful traders in these platforms have over 100k followers/copiers, which means that in low-volume assets, its movements will affect the price. In this case, what will happen is that the position in which the investor buys/sells will not be the same as the 100thousandth person. Most platforms have a “first come, first served” policy.
Another noticeable risk in Copy Trading is the conflict of interest from the trading influencers. Getting more followers means more money, so sometimes their investing can be made in a way that attracts followers instead of being the best possible strategy. The money earned is also not connected to wins or losses, so the creators of the portfolio will always get their earnings as a trading influencer even if they lose funds on their portfolio.
Lastly, Copy Trading-enabled platforms are usually created for beginners, meaning a trade-off between ease of use and fees. Spreads are generally a bit wider in Copy Trading platforms, and the fees are high, so make sure to compare those before you start!
Copy Trading is a useful tool for those who can’t afford to invest time and money in learning how to analyze and predict the markets, but, like in all risk-related ventures, we should proceed with caution. In eToro, we find the lowest percentage of users losing money by Copy Trading, and it is still 62%.
In other words, Copy Trading is for everyone, but not everyone can make it work. Make sure you do your own research and never invest more than you can afford to lose!