What is copy trading?
Copy trading is a segment of social trading where the primary trader’s positions are copied by another traders account when opened or closed.
To limit risk and prepare for any losses it is really important to do your own technical analysis on a position, financial instrument or particular market before you commit your real capital to the trade. Remember that when you are copy trading it is your capital that is at risk even though you are following an experienced trader. There are various copy trading platforms and social trading platforms available.
So how does copy trading work?
Copy trading works based on social networks and social trading platforms. This was formerly known as mirror trading but has evolved into social trading. Mirror trading is exactly as it sounds; you are mirroring another persons trades. Copytrading and social trading are much the same.
You can set up an account and then search the copy trading network of your platform for a trader that you like. When those traders open a position they broadcast that information to other traders on the network who then can decide if they want to open the same position – or if you choose the automated, more hands off approach – the automated trading systems do it on your behalf without any further input from the trader.
Due to price movements being so small and frequent forex copy trading is very popular and constant monitoring is required. Copy trading in forex means that an inexperienced trader can copy another professional forex traders positions as opposed to having to scan the fast moving forex market themselves.
There are many trading platforms available that offer software for trading such as MT4 and MT5 for social trading.
One great benefit of copy trading
If you are a trade copier and want to get into forex social trading one great benefit is that the markets are open 24 hours a day. So, you can make money (or lose money) at any time of the day.
Here is a quick explanation from Investopedia: Although markets in many foreign countries are closed when North American markets are open, trading on foreign currencies still takes place. While the majority of trading on a particular currency occurs when its main market is open, many other banks around the world hold foreign currencies enabling them to be traded at times when the main market is closed. For example, the North American markets are open when the Japanese markets are closed, but North American traders are still able to buy and sell Japanese yen through their brokerages and banks. However, the market for Japanese yen is more liquid at times when the Japanese market is open.
Example of copy trading
Let’s say you are based in the United States but there is a domestic market crash in Spain and you wanted to take advantage of this unfortunate situation and make some money. If you have no experience with the Spanish market you could simply find a professional trader on your forex social network platform that is located in Spain and then rely on the expertise of that professional trader and copy their trades.
By finding the best forex traders to copy this allows you to make some money in the market but not have to know too much about the market. It is really a nice way to break into markets that are unfamiliar to you.
Pros of copy trading
You can enter into markets with little to no experience in those markets.
You can choose to follow forex traders and assess their expertise then rely on their knowledge of the seasonal trends, political climate, etc. This way you don’t have to know or understand exactly what is going on but can enter the market somewhat comfortably.
With copy trading you are really researching the best forex traders to follow by viewing their traders profile and making a decision based on their social trading profile and their proven track records.
Cons of copy trading
While copy trading allows you to cut a significant amount of the learning curve it provides no incentive for the copy trader to do their own research and technical analysis. You can always copy a professional trader but in the end are you really taking a shortcut or are you truly learning a skill?
As with trading any financial security you still have risk. Sometimes there are boards that are trying to influence a markets price for their own good.
Copy trading is alluring and can provide someone a quick entry into the market.
What should you do before copy trading?
- Do your own market research. Especially if you are unfamiliar with the market.
- Choose a copy trading platform here.
- Find a social trading board on the platform.
- Copy the trades and open a position.
- Be sure to monitor your position and set stop limits to manage your risk.
If you want to learn more about copy trading forex you can sign up to our free forex trading course here.