The concept of copy trading refers to the scenario in which an investor copies the positions of another instead of making their movements themselves. Many of the platforms with large user bases have created online forums and platforms that facilitate this method, which is typically regarded as particularly beneficial when it comes to fast-paced marketplaces, where prices change frequently and quite drastically. These features make it the perfect choice for the cryptocurrency environment, for instance.
Copy trading allows beginner traders to learn some insider tips and tricks that they might only become familiar with by losing money and making mistakes, hence why the vast majority feel very comfortable with this approach. However, as with every other method, you must still do your research, be proactive, and only make choices that align with your strategy and that you have thoroughly considered and analyzed. Remember that the only one who is in charge of your portfolio is yourself, and that also means that you have a responsibility to educate yourself on the best choices you can make.
How does copy trading work?
Copy trading is a subgroup of social trading, a form of investing that lets you observe the behavior of other market participants in order to make your own decisions. Typically, the ones you will choose to emulate are experts, but if you trust the decisions and experience of one of your peers, you can also rely on them for the decision-making. Social trading requires minimal knowledge about financial markets, but you shouldn’t keep on trading over the long term without having a plan or strategy to rely on. In fact, becoming more knowledgeable will provide you with an additional edge in this situation, as you will be able to spot if the investor you’re copying is making a decision that is antithetical to your financial goals so that you choose a different path.
Copy trading differs from mirror trading, but many traders often mistake one for the other. When you engage in copy trading, you copy individual ventures, but mirror trading means that you automatically execute every single trade the other person completes. The positions are copied when they are opened or closed, and while you can complete automatic copy trading there is also the option to try the manual approach, with the best solution depending on the particulars of your portfolio and your own personal requirements.
You should definitely take the time to do your research before, though, and never trust another investor blindly. Nobody can predict the exact movements of a marketplace that is as volatile and changeable as that of crypto, so you should never believe that any trade made by a specific user will also be beneficial for you. Analyze the market independently before you commit real money to it, and keep in mind that there is always a certain degree of risk involved in trading, even when you follow the movements of someone who is very experienced.
The advantages
There are many advantages that are unique to copy trading, and as a beginner trader, you must be aware of them and their scope in order to make the right decisions for your investment portfolio. The most obvious benefit of this method is the accessibility, as copy trading requires no prior knowledge about markets or trading in general. If you’re a novice who doesn’t feel confident about your skills yet, copy trading is a great way to get started and take your first steps into your ecosystem of choice. It gives you time to learn and study the markets more without missing out on investing.
Having direct access to another person’s expertise and knowledge can also be part of the learning experience. In fact, it can be more beneficial than theoretical knowledge as you get to see how things work in practice as well. Your portfolio will become more diversified as well, a crucial thing if you want to retain profitability and ensure that your gains continue to surpass your losses. This feature makes copy trading valuable even when you become a seasoned investor, as it opens the door to marketplaces you may not have even heard about before.
If the momentum is good in one of these ecosystems, you’ll typically want to make the most of it right away, which will typically mean that you won’t have the time to familiarize yourself with all the undersides of the marketplace. Since the procedure can be made entirely automatic, it will also free up plenty of time for you so that you don’t end up disregarding your job, hobbies, or social life in order to build a robust list of holdings. If you know that it would be challenging for you to remove emotions from investing, copy trading minimizes the likelihood of making irrational choices.
Keep these aspects in mind
Before you start copy trading, it’s essential to have a realistic outlook. Approaching this method with rose-tinted glasses can cause you to commit to poor choices that do you more harm than good. You must be aware of the potential risks in order to find ways to protect yourself against them. For example, you have less control when copy trading, especially if you go for the automated method. You’re just following the movements of the other investors, meaning that your funds can be at the mercy of someone else’s bad decision.
For this reason, you must be sure that the people you choose to copy are truly knowledgeable about the market and rely on objective, technical analysis in order to carry out their trades. Market risks can also be particularly difficult to predict, so an investor who has just completed a stellar winning streak can start recording considerable losses the following day. Sometimes, your trades cannot be executed at the same price points. Systematic risks, including geopolitical situations or scenarios involving major financial institutions, can result in losses for even the most profitable and luckiest traders as well.
On top of all that, you must know that copy trading can become quite expensive, as upfront fees can be quite elevated. In some cases, there will be a commission for every single transaction you copy.
As with any other method, copy trading has its pros and cons. If you’re considering it for yourself and want to make the most of it make sure to do your research and take charge of your portfolio in order to make your financial dreams come true.
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