What is copy trading and how does it work?

Have you ever wanted or imagined profiting from someone else's trading skills (could be a trader you admire or look up to) without having to do the hard work of analysis and decision-making? That's the freedom copy trading gives you.

Copy trading, sometimes known as social trading, is when an investor’s trade is copied by another. Within a copy trading network, traders can broadcast their strategies for others to complete the same trades.

Just like with regular trading, copy trading looks to invest in various financial markets, and includes contract for difference (CFD), trading on forex (FX), stocks, commodities, indices and cryptocurrencies - opening and closing a position on these assets once the value has increased or decreased.

So how does it work and how do you get started with it?

Choose a trader who aligns with your goals: Investors select a trader whose trading style and performance align with their goals. This can be done using the tools provided by the copy trading platform, such as filtering options based on profitability, risk level, number of followers, or total funds managed.

1. Allocate funds: Investors decide how much to invest and distribute their funds among different traders if they choose to follow multiple traders. Diversification is encouraged to reduce risk.
2. Automatic replication: Once the traders are selected and funds are allocated, the copy trading platform automatically replicates the selected trader's positions in the investor's trading account. As the Strategy Provider places trades, these are automatically copied using an equity-to-equity model. This allows investors to mirror the trader's trades in real-time without manually executing each trade.
3. Monitoring and adjustments: Investors can monitor the performance of the copied trades and make adjustments accordingly. They have the flexibility to add more funds if satisfied with the trader's performance or reduce exposure to a particular trader to keep their portfolio diversified.
4. Fees: While there are typically no special fees for using the copy trading function, investors may need to pay a portion of the profits to the strategy manager. Additionally, any brokerage fees applicable to regular trades will also apply to copy trades.

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Benefits of copy trading for investors

• Copy the strategies of experienced traders: Copy trading allows investors to replicate the trading strategies of experienced and successful traders. This gives them the opportunity to benefit from the expertise and knowledge of these traders without having to trade themselves. By following proven strategies, investors could potentially enhance their chances of success in their trades.
• Start and stop your investment as you please: Copy trading platforms offer investors the flexibility to start and stop their investments as they please. Investors have control over their investment duration and can enter or exit a copied strategy at any time based on their preferences or market conditions. This allows for greater freedom and adaptability in managing their investment portfolio.
• Employ risk management tools to mitigate risk: Copy trading platforms often provide investors with risk management tools to mitigate potential risks associated with copying trades. These tools may include features like stop-loss orders, which help limit potential losses, and take-profit orders, which allow investors to secure profits at specified levels. These risk management tools enhance investor control and allow for better risk management strategies.
• Full transparency: Copy trading platforms provide investors with full transparency regarding the performance of strategy providers. Investors can hence access detailed performance statistics and historical data of each strategy, including return on investment, risk levels, and other relevant metrics. This information helps investors make informed decisions and choose the most suitable strategies to copy based on their individual investment goals and risk tolerance.

Benefits of copy trading for strategy providers

• Put your strategy centre stage in front of an audience that’s ready to invest in it: By participating in copy trading, strategy providers can showcase their trading strategies to a wide audience of potential investors who are actively seeking opportunities to invest in. This exposure could increase the visibility of their strategies and attract more followers.
• Setup and broadcast your strategy immediately: Copy trading platforms offer strategy providers the ability to set up and broadcast their strategies quickly and efficiently. Once the strategy is set up, it becomes available for investors to start copying immediately, allowing for seamless execution of trades.
• Choose the commissions charged: Strategy providers have the freedom to choose the commissions they charge to investors who copy their trades. This flexibility enables them to set commissions that align with their strategy's performance and the value they provide to their followers.
• Receive your earned commissions daily: One of the advantages of being a strategy provider in copy trading is the potential to earn commissions on a daily basis. As investors copy their trades and generate profits, strategy providers receive their earned commissions regularly, providing a consistent stream of income.

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The history of copy trading

• Copy trading began in 2005, where it evolved from the mirror trading taking place between investors in the financial markets. Traders were copying the strategies that were created by algorithms through automated trading. The developers of these algorithms shared the insights to their investments, allowing others to mirror their trading history.
• As this developed, it began to form a social trading network. Eventually, investors began to copy the trading methods of other investors, as well as copying the exact trade itself rather than just the strategy.
• Copy trading became so popular that specific sites were created just for this network, offering the opportunity to trade in the stock or forex market for the first time, for example; to invest in a different, unknown market; or even to trial the copying of other traders with a demo account.

What are the benefits of copy trading?

As a novice trader, copy trading allows you to explore and understand the financial markets, and learn when and where to buy and sell. It provides access to the expertise of more knowledgeable traders, and the possibility to consider potential opportunities otherwise overlooked – although it is advised to still research the market that the copied trade is taking place in.

With copy trading, you are able to trade on various instruments including FX, stocks or indices. There is also a community aspect created, with all levels of traders given the opportunity to share and exchange ideas, strategies and trading education.

For more experienced traders, it can become an additional revenue stream in the form of fees.

What are the disadvantages of copy trading?

Like with any form of trading, there are still some risks involved when it comes to copy trading. The investment in the strategy of another trader means that the losses they encounter will also incur a loss for those who copied them.

The idea of being able to automatically trade based on the trades of others, can encourage a lack of incentive to research and learn about the different financial markets themselves. Without this research, and consideration of the trader being copied, mistakes and losses may occur.

Although copy trading is beneficial to those new to the financial markets, it is not the only trading strategy available, and as a trader gains more experience it’s recommended to diversify their portfolio by including strategies pertaining to different styles of trading.

What are the next steps when copy trading?

Research into the different financial markets and account types is the next step before approaching copy trading for the first time. To help you do this, take a look at our educational hub.

FAQs

How does copy trading work?

It works by connecting investors' accounts to the accounts of strategy providers through a copy trading platform. When a strategy provider executes a trade, it is automatically replicated in the investor's account in real-time. The copy trading platform ensures that the investor's positions mirror those of the strategy provider based on a predetermined allocation method.

Can I choose which strategy provider to copy?

Yes, copy trading platforms usually provide tools and filters to help you choose the strategy provider that best matches your investment goals. You can consider factors such as profitability, risk level, number of followers, and total funds managed when making your selection.

Do I need to have trading experience to participate in copy trading?

No, one of the advantages of copy trading is that it allows investors without trading experience to still benefit from the financial markets. By copying the trades of experienced traders, you could potentially achieve similar returns without needing to make trading decisions yourself.

Is copy trading fully automated?

Yes, copy trading is typically automated once you set up the connection between your account and the strategy provider's account. Once configured, trades executed by the strategy provider will be automatically copied into your account without requiring any manual intervention.

Can I adjust or modify the trades that are copied?

Generally, once you start copying a strategy provider, the trades are executed automatically and cannot be modified. However, you have the flexibility to stop copying a strategy provider or adjust your investment amount at any time.

Are there any fees associated with copy trading?

While there are usually no special fees for using the copy trading function itself, you may need to pay a portion of your profits to the strategy provider as commissions. Additionally, any brokerage fees applicable to regular trades will also be applied to copy trades. Click here to check other fees that may apply.

Is copy trading suitable for long-term investing or short-term trading?

It can be used for both long-term investing and short-term trading, depending on the chosen strategy provider and your investment goals. Some strategy providers focus on long-term investment strategies, while others may specialise in short-term trading approaches. It's important to select a strategy provider that aligns with your preferred investment timeframe.

What are the risks associated with copy trading?

It carries certain risks, such as the potential for losses if the strategy provider's trades do not perform well. Additionally, past performance is not indicative of future results, so there are no guarantees of success. It's important to conduct thorough research, diversify your investments, and carefully choose strategy providers with a track record of consistent performance.

Can I stop copy trading at any time?

Yes, you have the freedom to stop copying a strategy provider whenever you want. You can easily disconnect your account from the strategy provider's account through the copy trading platform.