What is Copy Trading? What are the Pros and Cons of Copy Trading?

Is it really possible to copy someone’s trading skills? Like literally using someone’s brainpower to earn benefits?

Yes, in the crypto trading world, it is possible. Amateur traders are required to go through a steep learning curve before earning some profits in trading.

Copy trading is an amazing feature that allows novice traders to start their trading journey without any experience.

In this article, we will learn all about copy trading and how it benefits us.

What Is Copy Trading: Its Emergence And Development

Copy trading emerged from the idea of mirror trading and social trading. Back in 2005, traders used mirror trading to copy the exact algorithms that resulted in high returns.

It was possible because of the shared trading history of developers who allowed other traders to copy their trading history. 

Later, this strategy evolved into social trading. In social trading, the investor acquired ideas and theories from other social trading networks.

In this manner, traders exchange ideas and develop new strategies. Now, traders copy trades in their accounts instead of the strategies, and this approach is known as copy trading.

In the financial market, copy trading authorizes traders to copy the trades that are executed by experienced investors.

The purpose of this trading is to boost the position of the traders to the level of investors they copied.

In copy trading, the traders don’t have access to the investor strategy layout but one can compare the results and decide for themselves.

Copy trading is a worthwhile long-term trading strategy. And, anyone can use this approach despite being inexperienced.

It is a beneficial move to earn well if you learn to select the right investor.

How Does Copy Trading Work: Signal Replication Process

1. One of the important processes in copy trading is the signal replication process. It is activated by the signal providers, also known as the traders who have the best records to be followed.

2. On the broker trading platform, the signal provider unlocks its position. Meanwhile, the broker runs the order on the trader’s account and reports this order to the copy trading services.

3. Copy trading allows the signal to be copied on the investor’s account who selected this signal provider.

4. The copy trading platforms can adapt the operations of the signal providers to the investors who are following them.

5. The followers can decide to set options like stop loss, take profit, or copy the trade of lower volume than the trader. Accordingly, the orders are processed as per your preference.

6. Then the copy trading service receives the order from the broker of the signal provider. Now, you have the choice to filter it and change the data according to your potential. The result is then transmitted back to the broker.

This whole process occurs in a very short time due to advanced technology, thus saving a lot of time.

The Advantages of Copy Trading

1. Minimal risk– copy trading is the best opportunity for amateurs to get exposure to the market. Successful traders of copy traders will provide you with the essential knowledge and principles of the market. It ensures you grow with minimal risk.

2. Automated mode- the various processes and transactions in copy trading performed in an advanced technology mode, which eventually saves you time. In this market where each moment is precious, this mode helps the smooth flow of the transaction.

3. Access to statistics-This data allows the client to access the statistics of the trader’s work and analyze its feature before their cooperation. This data helps in risk management.

4. Control losses- if a trader does not match the investment expectation, the client can select other potential traders to work with.

The Risks of Copy Trading?

1. Allocating capital- one should carefully maintain the diversity of your investment with various signal providers. It is important to assign each capital of equal value. The key is to learn the art of balancing your capital.

2. Market risks- the chances of loss when the security price is changed. One aims to generate profit from the increased value of the traded asset but, there is always a risk that the value of the asset might lose at any moment.

3. Systematic risk -the new digital market currencies have a higher chance of systematic risk. Although it is a rare situation, there are some cases in the foreign exchange market. It has a risk of the money getting locked up and the trader might not exit the position.