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If you are new to Forex and need some guidance, copy trading can be a great solution – you can easily repeat it after you have successfully traded. However, such an approach must be taken with caution if you want to avoid some common mistakes. In this article, you will learn how copy trading works, how it differs from copy trading, and what methods will help you improve the effectiveness of this method.
What is copy trading?
Copy trading is a technology that allows novice Forex traders or investors to copy the trades of professional traders to their accounts. On platforms with this feature, traders around the world can show their trades to subscribers, giving them the opportunity to borrow some trading experience and communicate with people from different trading platforms.
Copy trading allows customers not only to copy the trades of other traders, but also to read news feeds, share their own views on market sentiment for a fee, and offer trades for copying. Overall, it is a complete set of tools for effective communication, knowledge exchange, and increased income from the Forex market without the need for specialized skills. However, copy trading has risks, which will be described in this guide.
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Copy trading investment
1: What is a stock?
With copy trading, making investment decisions is easier because you can copy other traders’ trades on a percentage basis. For diversification purposes, some platforms do not allow users to invest more than 20% of their portfolio in a single trader’s strategy. This is a smart rule because the same trader does not always perform well.
In addition to saving time on market research, copy trading allows users to increase their profits. Various studies have shown that people who use copy trading have 10% more positive results than those who trade manually and manage their trades based on their personal preferences.
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Know moreDifferences Between Social and Copy Trading
Copy trading is a type of social trading: it allows traders to imitate the trades of popular investors. In this case, you do exactly the same thing as the traders you follow: when they sell an asset, you sell too. When they buy, you buy too. This strategy can be suitable for people who do not want to spend time analyzing the market and are willing to take on higher risks. In theory, you can choose a trader and virtually leave your account in their hands.
With social trading, you have access to a number of features:
- Follow other traders;
- Track their statistics;
- Notifications about other users’ trades;
- Communicate with other traders.
Although each trading platform has its own characteristics, there is one common feature: they focus on collaboration and community work. On many sites, you can join chat rooms or forums to discuss your strategies. So with social trading, all decisions are yours. It is an ideal choice for those who need full control over their accounts. This may require a longer learning curve but you can choose your risk/reward ratio and still be fully responsible for your trades.
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The difference between social/copy trading and PAMM
Social trading and PAMM services allow investors to make profits without direct participation when trading on your account is managed by an experienced trader.
However, there are significant differences:
- In the PAMM service, the investor’s money is transferred to the managing trader’s account for trading. In social trading, the investor’s money remains in their account. The money is reserved for copying trades, but they can be withdrawn at any time.
- In social trading, the investor can set the copy trading parameters (volume, amount, stop loss) as well as stop copying at any time. In the PAMM system, the investor cannot intervene in the trading process until the end of the investment period.
- In the PAMM service, the managing trader can limit the information provided to the trader. By default, the investor will see the profit, income percentage and commission. In social trading, the statistics are as transparent as possible. The managing trader cannot hide anything and the investor can track the closed positions in history as well as the currently open positions.
- The managing trader’s commission in the PAMM system can be very high, from 20% to 80% and even higher. As a rule, experienced managers set a commission of 50%. On the contrary, in social trading, professional traders have the lowest commission. There are many potential investors in the system, traders reduce the commission to attract them. The average commission is about 20%.
How does copy trading work?
To get started, the user registers on the copy trading platform and deposits funds into the account. The copy trading feature does not require activation: the user can take advantage of the technology immediately. Its set of functions fully automates the process of copying the actions of other traders and ensures the security and reliability of order execution for each participant.
The investor copies the trade and shares part of the profit with the trader in the form of a fee. The commission amount is predetermined by the trader in the form of a copy trading fee, which is displayed in the trader’s ranking.
The unique feature of copy trading is that, unlike systems such as PAMM, funds are kept directly in the investor’s account and the trades of trading experts are copied directly to the investor’s account. While repeating the trader’s trades, investors can also communicate with their peers in private chats within the application or contact the trader directly and ask any questions before copying.
In addition, the system can be individually configured to limit risks. Trader tracking (rating) displays full trading history, profit charts and risk estimates.
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Know moreWhy is copy trading so popular?
With the growing popularity of cryptocurrencies and other financial instruments, the number of people who want to start trading continues to grow. However, lack of experience can be a serious obstacle – this is where copy trading comes in. Many new users choose this feature to familiarize themselves with different markets and assets, as well as learn trading strategies by observing what professionals do.
The Social Trading method is transparent and user-friendly, not to mention effective. In addition, it allows users to cooperate and help each other. Famous traders can make a living, while beginners can take their first steps with fewer mistakes and painful losses. The former happily multiply their profits, while the latter borrow effective trading strategies from them. It’s a win-win situation.
Example of copy trading
A classic example of spontaneous and unsystematic copy trading can be seen in early 2021, when many people started investing heavily in GameStop stock due to rumours that started on Reddit. Investors on the r/WallStreetBets subreddit sparked a wave of buying interest, leading to a short squeeze on GameStop stock.
Another example is a common situation. Suppose trader A wants to make money on Japanese stocks but is not aware of local events and news: he does not know Japanese (to read political news or central bank policies) and is not aware of market sentiment in real time. This is where copy trading comes in!
Trader A can rely on the experience of trader B, who is familiar with working with Japanese stocks and follows him on the copy trading platform. However, before entrusting his money to anyone, trader A must analyze the performance of trader B himself.
How does one trader copy the trades of another in the system?
With the growing popularity of cryptocurrencies and other financial instruments, the number of people who want to start trading continues to grow. However, lack of experience can be a serious obstacle – this is where copy trading comes in.
Many new users choose this feature to familiarize themselves with different markets and assets, as well as learn trading strategies by observing what professionals do. The Social Trading method is transparent and user-friendly, not to mention effective. In addition, it allows users to cooperate and help each other.
Famous traders can make a living, while beginners can take their first steps with fewer mistakes and painful losses. The former happily multiply their profits, while the latter borrow effective trading strategies from them. It’s a win-win situation.
Example of copy trading A classic example of spontaneous and unsystematic copy trading can be seen in early 2021, when many people started investing heavily in GameStop stock due to a rumor that started on Reddit. Investors on the r/WallStreetBets subreddit sparked a wave of buying interest, leading to a short squeeze on GameStop stock.
Another example is a common situation. Suppose trader A wants to make money on Japanese stocks but is not aware of local events and news: he does not know Japanese (to read political news or central bank policies) and is not aware of market sentiment in real time. This is where copy trading comes in! Trader A can rely on the experience of trader B, who is familiar with working with Japanese stocks and follows him on the copy trading platform. However, before entrusting his money to anyone, trader A must analyze the performance of trader B himself.
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Benefits of Copy Trading in Forex
Access to Expertise: For beginners, it allows them to access information and expertise from experienced Forex traders who have a track record of profitable investments. Traders may find such support very useful in the complex and fast-paced Forex market.
Saves Time: It provides a passive investment option for those who do not have the time or desire to actively manage their Forex trading activities. There is no need to constantly monitor the market as the trades are automated due to its inherent nature.
Diversification: Diversify your portfolio and reduce the risk that occurs when one invests in different strategies implemented by different traders simultaneously.
Learning Opportunity: Both new and experienced traders can use this method as a hands-on training method. Beginners learn the strategies used by successful traders in the forex market. They also learn the dynamics of this market.
Transparency: Most platforms that offer copy trading services usually have detailed profiles of traders. This is where you can find relevant information such as their performance history, risk level, and investment style. This transparency helps investors make informed decisions when choosing which traders to follow.
Potential Risks and Challenges
Relying on others: This form of investing largely depends on others to achieve results. If the trader being followed performs poorly, it will lead to potential losses to the assets held by the follower.
Lack of control: Another aspect that makes it risky is that it reduces the ability to control trading decisions. In other words, if the following traders do not react quickly enough to sudden and abrupt changes in the trading market, it can cause problems for the followers.
Overconfidence: If the investor succeeds in copying the trades at some point, they may end up overestimating their abilities. Additionally, they may inadvertently take on excessive risk in the future.
Hidden Fees: Finally, you should also be aware of the hidden fees found on most copy trading sites. These hidden fees can eat into their profits over time.
How to Start Copy Trading?
Find a reliable platform: Choose a popular copy trading platform that is regulated and offers a choice of qualified traders.
Research the traders: Research the traders’ background, risk tolerance, and trading style. Instead of going for short-term gains, look for consistency in performance over a period of time.
Start small: Start investing a small percentage of your total investment capital to try out copy trading and see how it works in practice.
Diversify the traders you copy: Don’t put all your eggs in one basket; instead, follow different traders using distinct strategies to minimize your risk.
Monitor and adjust: Regularly check the performance of your copied traders, then make changes if necessary.
Best Practices for Copy Trading
Set Clear Goals: You should clearly specify your investment goals and risk appetite before participating in copy trading.
Be Aware of Risks: Remember that past results do not guarantee future performance. Therefore, investors should be prepared for losses which may arise, and should invest only what they can afford to lose.
Stay Updated: Even though copy trading can be passive, it’s important to stay informed about the market trends and other factors that would affect your investments.
Utilize Stop-Loss Orders: Using stop-loss orders will help you manage your potential losses as well as protect your capital.
Review and Rebalance: Occasionally, assess the quality of your copy trading portfolio and if necessary, realign in order to maintain your desired exposure level to investment risks, while also taking the expected return on investment into account.
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You cannot fully understand the practical side of Forex trading from written material alone. So, while reading books, articles and blogs is a great source of knowledge, it does not surpass the effectiveness of teaching from an experienced professional. Therefore, the best way to learn Forex trading in your self-study journey is to take an online Forex trading course.
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Conclusion
Since the advent of copy trading in Forex, significant changes have occurred in the world of investing. Its inherent characteristics are a combination of factors such as accessibility, ROI, and education that make this type of trading very unique. With its unique set of features, it has attracted a number of investors to the Forex investment market. Whether you are a beginner or an experienced trader, it is important to weigh the pros and cons before getting started.
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In order to potentially improve your trading performance and results, you should follow best practices such as conducting detailed market analysis from time to time and even maintaining a rational approach to investing in them. Also, like any investment strategy, success in copy trading requires patience, diligence, and a commitment to constantly learning and adapting.
