5min read
Published on: Oct 3, 2024
#Trading 101
Copy trading is a relatively new concept in which a trader, usually a beginner, follows another trader's moves. This guide discusses all you need to know about the opportunities and risks of copy trading and provides a straightforward checklist to get started.
➔ Copy trading allows traders to replicate the moves of other traders in real time.
➔ It is very useful for those who wish to trade but lack the time or resources to do it on their own.
➔ Copy trading presents both opportunities and risks; and choosing the right trader to copy can be the key to future success.
➔ Copy trading allows you to spread risks and get better returns from different traders and types of assets.
➔ It also helps you learn from Master Traders you follow so that you can make your own decisions one day.
"Success leaves clues," they say. Well, so does an experienced trader. This is where copy trading comes in, allowing beginners to take advantage of the financial markets while a master trader does the heavy lifting.
Increasingly more new traders are using the copy trading approach to engage in the markets without having to learn the complex financial dynamics and technical analysis. This guide discusses all you need to begin your copy trading journey and a checklists that will help you increase your chances of success.
Copy trading is a model that enables beginners to replicate the moves of experienced traders and potentially make profit without prior knowledge or technical skills. New traders can mimic without having to learn all about the market trends or perform technical analysis.
After choosing a trader to follow, any action the trader takes, including buying, selling or changing positions, will be done in the follower's account in proportion. The amount you allocate towards copy trading will dictate the size of trades your account will execute. For example, if you allocate $500 to copy a trader and they decide to put 10% of their account funding on a certain stock, then $50 of your capital would be used to execute that trade and buy that certain stock.
Copy trading also opens opportunities to invest in diverse markets such as forex, equities, exchange traded funds (ETFs), and commodities, considering most beginners are uncomfortable trading in certain markets. Such a model does not necessarily need much effort and has turned out to be one of the most convenient ways to get started.
BitDelta’s Copy Trading feature makes it easy for you to follow a specific trader by providing all the necessary information about the trader, such as their previous performance, risk level, and trading strategies.
Although the process is easy, some risks are still involved, and you are also subjected to market risks. Plus, the trader you copy is not guaranteed to make good decisions all the time.
Copy trading came into the limelight in the mid-2000s due to the increased use of Automated and Algorithmic trading. It transformed the trading concept into a simpler and more convenient way for everyone.
Previously, traders would have to rely on newsletters or join trading groups to learn strategies from professionals. Now, with the help of the internet and technological developments, copy trading platforms allow users to easily replicate the trades of a professional trader. Some of the early entrants in the market included MetaTrader 4, which introduced automated trading systems, allowing users to watch a trader’s every move without having to engage in the market actively.
Copy trading has become increasingly popular in the last few years, especially among new traders who lack the knowledge, experience, or time to trade on their own. Copy trading platforms enable users to search for a suitable master trader to follow and view their profiles and performance to make an informed decision about whom to follow.
Some of the advantages of copy trading include:
► Easy for Beginners
A major advantage of copy trading is that it allows beginners to engage in the financial markets without prior experience.
► Saves Time
Copy trading is quite automated and straightforward, so you do not have to spend a lot of time analysing charts and market trends. Once you choose which master traders to copy, the platform does everything for you, leaving you with more time at hand.
► Diversifies Portfolio
Copy trading also helps in portfolio diversification. While you can decide on a favourite Master Trader to follow, you can also follow several traders who may have different focuses on markets or instruments. For example, you can follow a trader who is into forex, another in commodities, and a third who specialises in exchange traded funds (ETFs). This diversification helps minimise risk since you are spreading your capital in different markets.
► Earn and Learn from Experienced Traders
Copy trading is not a one-dimensional concept. The approach also helps you watch and learn from other traders' moves in the market. By observing how they make their decisions, you can build your confidence as a trader and become a better trader yourself.
► Potential for Passive Income
Copy trading offers a fair chance of earning passive income depending on the right master trader you copy, the amount of funds invested, and the market condition. This is especially beneficial for those who wish to make a passive income but do not have the time or energy to do so.
► Transparent Performance Data
Copy trading platforms offer transparent, extensive information on each trader's performance, such as profitability, risk taken, and trading style, to help users decide which traders to follow.
Tick the boxes off the checklist below to start copy trading and increase your chances of success.
✔️ Choose a Copy Trading Platform
The first step is choosing an appropriate copy trading platform with a good reputation. Most copy trading platforms, such as BitDelta, have a list of experienced traders, a variety of assets, and features that will assist in managing your investment portfolio. The platform must be regulated, the charges should be well elaborated and understandable, and the features of the platform should be easily understandable.
✔️ Open an Account
Once you choose the platform you want to use, you must create an account by filling in your details. You will also be asked to verify your identity by submitting an identification document, like a passport or driving license. This is a common procedure for the platform's and its users' safety.
✔️ Deposit Funds
Once you have confirmed your account, you will need to add funds to it. The minimum amount required to deposit depends on the platform of choice; usually it is between $100 and $500. We advise only investing the amount of money that you are comfortable losing because every trade comes with risk.
✔️ Research and Choose Your Master Trader
Some factors to consider when choosing a master trader include their performance, risk level, trading style, and the kind of assets they trade in. BitDelta offers detailed profiles and traders' performance statistics to help compare them. Select a trader who will assist you in achieving your goals and align with your risk tolerance.
✔️ Allocate Funds
Choose what percentage of your account balance you would like to set aside for copying each of the traders.
✔️ Monitor Your Portfolio
Copy trading is an automated process, and you need to keep an eye on your portfolio. If a master trader’s performance declines, you may decide to stop copying them and look for another trader to copy.
Below is a checklist to help guide you through your first steps into copy trading.
✔️ Analyse Performance History
Search for master traders who regularly make profits and check their monthly and yearly turnovers. Be cautious of master traders who make huge profits within a short period, as this may result from high risk-taking.
✔️ Evaluate Risk Levels
Many platforms use risk ratings to determine traders based on their risk personality and the asset they trade in. Select a trader who matches your risk personality and whose risk-taking capacity is similar to yours.
✔️ Consider Trade Frequency
It is important to choose a trader with a pace that suits your objectives. Some traders make trades several times a day while others may only trade several times a week. Frequent traders may be suitable for short-term investors, while the ones with longer trade durations may be suitable for long-term investors.
✔️ Review Assets Traded
Some traders are involved in the stock market, while others are involved in the forex market, among other markets. For instance, if you want to trade in forex, try to look for a currency expert. If you are interested in stocks or commodities, then you should look for traders who have a history of trading stocks or commodities.
✔️ Check the Number of Followers
Traders with many subscribers or followers on their social media accounts are usually good to follow, but this is not the only factor to look out for. Some of the smaller traders may be using great strategies, but do not receive much attention. Therefore, it is critical to do your own research and not follow the crowd blindly.
✔️ Look at Drawdown Statistics
A drawdown is the decline from the peak of a trader’s portfolio value. Low drawdown means that the trader has not incurred a large loss, which could be seen as a positive sign of the trader’s ability to minimise losses.
Below are some tips and best practices to follow when starting copy trading.
If you are new to copy trading, it is recommended that you start with small amounts of funds to gain the ropes of the process. Over time, as you gain more confidence, you can increase the amount of funds that you are willing to invest.
Trading with multiple traders, having different strategies, and having asset exposure will also minimise your risks. It also allows you to profit from different markets through stocks, forex, commodities, and ETFs.
Some copy trading platforms may have charges, including management fees, performance fees, or commissions. You should always be aware of the fees involved before you begin. Ignoring a platform’s fee structure can cut into your profits.
While copy trading is automatic, traders need to monitor the portfolio’s performance occasionally. If you do not want to continue investing in a certain master trader because their strategy is no longer in line with your objectives or their performance has declined, you have the choice to stop copying that trader.
Keep abreast of market trends and news, as this will assist you in deciding when to start or stop replicating a master trader’s decisions.
Copy trading is not a “get rich quick” scheme and can be a bit slow sometimes, so you may need to give it some time to see good results. Every market is unpredictable, and sometimes, even the most successful traders experience a series of declining performances. Do not deviate from your strategy, and do not let short-term market movements or emotional trading get the better of you.
Copy trading is a fairly new and straightforward model that allows new traders to get into trading easily. However, to be profitable, it is important to choose the right master trader, diversify your portfolio, and monitor your investments from time to time. Copy trading has advantages and risks, and you should be cautious and have a plan in place.
For those willing to start copy trading, BitDelta provides an intuitive trading interface with insights into top traders and various products, including crypto, forex, and commodities. A secure, transparent, and feature-rich trading experience makes BitDelta an ideal platform for new and experienced traders.
Join BitDelta and start your copy trading journey to earn more for your trades and take advantage of the expertise of master traders.
1. What is copy trading?
Copy trading is a way of investing in the financial market in which a trader’s operations are automatically mirrored by another trader. Thus, if an expert places a trade, the same trade is also made in the investor’s account.
2. How much money do I need to start copy trading?
The majority of the platforms demand a minimum deposit of $200 to $500, but the minimum deposit may be higher or lower depending on the platform.
3. Can I lose money from copy trading?
Unfortunately, like any other type of trading, copy trading involves risks, and you can lose money if the traders you follow make the wrong decisions.
4. Is copy trading suitable for new traders?
Indeed, copy trading is suitable for new traders because it enables them to profit from the strategies of experienced traders.
5. How do I choose the right trader to copy?
Therefore, one should look for traders who have been in the business for some time, have a risk tolerance level similar to one's own, and have a trading plan suitable for one's needs.
6. Is copy trading legal?
Yes, copy trading is legal in most countries worldwide, but the regulations depend on your country. To ensure that, use a regulated platform.
7. Can I stop copying a trader at any time?
Yes, you can stop copying a trader whenever you wish. As soon as you cancel a copy trading order, your account will not copy the trader’s subsequent movements.
8. What fees are associated with copy trading?
Fees vary depending on the service provided and may include management fees, commission, or performance charges. It is always advisable to check the fee charges before getting started.
9. Can I copy more than one trader?
Yes, anyone considering diversifying their investment and lower risk exposure is advised to copy more than one trader.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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