How Does Copy Trading Work?

Does copy trading sound new to you? Would you love to leverage on its enormous benefits? This article is well suited to offer you insightful information and get you acquainted with what it actually entails, and to help guide you through on how it works.

Prior to this time, traders had to spend so much time and effort trying to just understand the goings and other trends in the forex market. Those used to be long and strenuous hours, requiring so much of attention and monitoring of the market flow before one could make certain decisions or take action.

While determination and commitment still remain as the core and bedrock of succeeding in the forex market, technological advancements in recent times has made it even possible for traders to succeed without necessarily being subjected to hassles and stress associated with the traditional trading patterns. One of such technological advancements that has made it increasingly easier for individuals to get into the forex market and make good profits for themselves with relatively more ease is copy trading.   

Understanding Copy Trading

This is a trading strategy that allows traders to automatically copy and replicate the trades of experienced and successful traders in the forex market. It is an innovative way of trading, because it allows traders (copy traders) take advantage of the actions and styles of other experienced and successful traders in the market, and makes it possible for the copy trader to generate and get access to profitable opportunities from the market.

It is an effective strategy, especially for beginners and amateur traders who need relatively more time and knowledge to develop their own trading strategies for carrying out in-depth market analysis. Unlike the traditional trading pattern, where traders have to independently analyze markets and make decisions, copy trading enables traders ride leverage the expertise of others.

A little analogy should make this clearer. Consider in a classroom where you have a teacher who is well experienced in a given subject. And you also have the students who may not be so vast in knowledge and therefore rely on the guidance of the teacher. The teacher could solve a problem on the board, and ask the students to copy his pattern while trying to solve a similar problem. This way the students learn from the teacher and gain more experience.

There are basically two people or categories of people involved in this. They are the signal provider and the copier. Here’s a brief description of these individuals:

Signal provider

The signal provider is an experienced trader who analyzes the market, generates profitable opportunities and executes trading ideas in the market which others could rely on or copy for a fee.                       

Copier

A copier is otherwise regarded as a subscriber who follows or copies a signal provider. They copy execute the trades initiated by the signal provider. The execution can either be manual or automatic via trading softwares that are automated.

Differences Between Copy Trading and the Traditional Trading

Below are some of the areas where this strategy differs from the traditional trading:

1. Whereas the traditional trading involves making buys and sells in the market based on individual market analysis and research, copy trading involves automatically replicating the trades of other experienced traders.
2. A high level of understanding of the market is required for the traditional trading, whereas for copy trading can be suitable for individuals who may not have extensive trading experience.

   3. The traditional trading requires that individual traders make their own decisions with regards to         what, when and how to trade. For copy trading on the other hand, such decisions are handed             over to the signal provider.

4. Traditional trading requires more involvement and personal management of the individual.                  On the other hand, copy trading requires less daily management once a signal provider has                been chosen and copied.

5. Traditional traders need to personally develop strategies for spreading risks and managing                  portfolios. But copy traders may diversify by copying different traders so as to spread risks            across different strategies.

How Does Copy Trading Works

Here’s a quick rundown of how this works:

• The first step is to select a trading platform or broker that offers copy trading services and open an account. Note that copy trading requires an efficient trading platform.
• Haven selected a platform or broker and created an account, the copy trader needs to register, verify and fund the account.
• Next to the account set up would be finding successful traders (signal provider) to follow and copy their trades. This is important because to a large extent, the profit level of the signal provider determines the profit level of the copy trader.  it is therefore important to follow and copy top rated traders so as to ensure some level of safety.
• Haven selected and followed a signal provider, the copy trader can allocate a portion of his capital and start copying the signal provider. He can also start monitoring his trade performance and all.

Benefits of Copy Trading

Some of its benefits include the following:

1. It is ideal for beginners who lack the experience and expertise in forex trading.
2. Reduces the time the copy trader would have otherwise spent in carrying out market researches and making personal trading decisions.
3. Copying skilled signal providers has potentials for yielding higher returns.
4. Copy trading provides the copy trader with insights into the strategies and decision making processes of the signal provider.

Limitations of Copy Trading

 While there are positive sides to copy trading, there are also certain limitations associated with it. Some of these limitations include the following:

1. Some platforms may charge additional costs for this.
2. Copy traders have limited control over execution of trades.
3. Relying on copy trading alone may prevent one from developing his unique strategies.
4. The performance and strategies of signal providers may not always yield successful outcomes.

Frequently Asked Questions

Is copy trading illegal?

• It is legal and very much permitted across most countries of the world.

Is copy trading a good idea?

• It is is a good idea, especially for beginners who may be inexperienced in effectively navigating the forex market.

How do signal providers get paid?

• Signal providers earn a fixed payment per copier. They also get some bonus for advancing rank. Of course, these are in addition to the profits they make from their own trading.