Copy Trading What is it?
What is Copy trading and how long has it been around? Well it’s been around for many years, and in that time it continues to develop and and also it’s growth is also noticable among many brokers who have now started to offer more advanced copy trading platforms. But, what again we come to the question: What is copy trading
the most basic explanation using the key points of copy trading includes
- How to get started
- the process,
- risks involved,
- key stakeholders,
Copy Trading is often confused with other types of trading such as; social trading and mirror trading. The difference though, is copy trading consists of copying the performance of other traders using automation.
at present, the most popular copy trading brokers can provide Social Trading services as well as this provides the opportunity to study both the actions and behavior of a trader.
How Does Copy Trading Work?
With copy trading, the investor has the option to automatically copy every operation executed by another trader to their own personal account, however this does not require a person to give any funds direct to a fund manager as Trading accounts can simply be connected to copy trading platforms to replicate the trades of signal providers.
The signals replication process in copy trading
The signal copying process starts with the traders who are the signal providers, these are the traders who can be followed.
for example if a signal provider decides to go long on GBR/USD for one standard lot.
The Trader who is the signal provider can, via the brokers trading platform, open this position.
At the same time, the broker then executes the copy trade on the trader’s personal account and notifies the copy trading service of the order.
This only happens when the broker acts as an intermediary, and not when it has an in-built system like platform such as eToro.
The copy trading service will authorize a signal to be replicated on investors accounts who copy the signal provider. Followers can also apply stop loss, take profit or copy the trade at lower volumes as this is the preference of the copier.
The copy trading company will receive an order from the signal provider’s broker, who filter and, if required, changes it according to the personal parameters of each individual follower that they have set. The result is then retruned back to the broker.
It all sounds very complicated and time consuming but in fact, these actions are processed within tenths of a second. However, in this small timeframe, slippage can still occur.
In an example, we assume the buy order was performed on GBR/USD at 1.3000, as this trader’s brokers best price at that moment. Even though the order was made at that price at that moment, once the order execution occurs there maybe a slight difference. This is called slippage.
Slippage can be in favor of the trader if the executed price is better, but against the trader if the executed price is worse.
The Main Components of Copy Trading
Important basic components of any Copy Trading service are:
The main market on which copy trading was established and grew quickly was the Forex Market, following on from that, was CFDs, almost all the other markets and their instruments could be copy traded including stocks, indices, commodities, interest rates, ETFs, and crypto if that is your preference.
Another key element is the trading platform, which is usually offered by copy trading brokers as you need a trading account with a broker who facilitates copy trading.
The Trader (Signal Provider)
as explained ealier, the signal provider is the trader that other investors decide to copy. Each platform will allow their investors to observe and evaluate various metrics on the trader’s performance.
On some platforms, they will require an evaluation of a signal provider’s strategy prior to alowing them to be copied. While others simply record the performance of these signal providers from the moment they subscribe. Due Diligence is advised.
The investor (follower)
The investor, or follower in copy trading is the person who is copying the trades of a chosen signal provider. Though it may seem like a simple process of directly copying trades, it is vital a follower studies and understands a signal providers strategies.
there are still risks involved in copy trading,a careful investor should understand their goals and objectives before conducting research and selecting to copy an experienced trader whose strategy fits their risk profile. This process requires both time and patience.
What Are The Risks of Copy Trading?
As with any all trading, there are risk elements to be aware of when copy trading. These include:
- Lack of platform knowledge
- Risk management
- Assigning capital
- Trader selection: