Trading 101: What Is Copy Trading?

 

The areas of crypto and forex trading are filled with ambitious minds trying to have an edge in the market. This makes them employ as many tactics as they can to secure whatever advantages they can in this often messy space. One approach that is gaining popularity is copy trading, which is an automated way in which a trader tries to replicate positions used by the competition.

 

This is, of course, a simplified version of what they are as there is more to them. To determine whether or not this strategy is for you, keep reading so you can know what it is, how it works as well as its benefits and drawbacks.

 

Contents:

- Copy Trading

- How It Operates

- How Successful It Is

- How to Go About It

- Its Advantages

- Its Drawbacks

- Final Thoughts

 

Copy Trading

We have already gotten a definition of what copy trading is, but what else is there to it? Well, it had its roots in the idea of trading in a social environment. If you follow someone on a trading platform that supports this, their trade patterns can be immediately copied.

 

For a price on a platform of this nature, you can do this and profit off of the other trader's success. The only thing that has to happen is that the trader has to be successful, otherwise, their failure will lead to yours. Moreover:

- This type of trading is commonly used by beginners in this field.

- Many experts advise the uninitiated to go this route because it can be quite successful.

- Outside of that experienced traders just use it to avoid the hassle of trading because this tactic is automated.

 

How It Operates

The potential for the widespread use of this strategy is beyond vast, simply due to the power of social media. Unlike the use of bots, for example:

- copy trading does not require any complex mechanics or knowledge of code and programming;

- all it requires is that you follow an experienced trader on any social media site;

- for the most part, the experts use a paid discord to attract people to them.

 

There, they will bestow upon aspiring traders knowledge as well as their daily positions. Of course, this is just one of the ways this strategy takes place. 

 

A more recent channel is the presence of middleman-type platforms that offer trading copies in real-time. This is mainly prevalent in the crypto space of the market. These platforms in particular are gaining a lot of traction because they are the ones primarily incorporating automation into their works.

 

How Successful It Is

This particular trading strategy is quite effective and has yielded many good results. It is for this reason that its popularity has risen to such heights, which is set to continue going forward.

 

That said nothing in the trading sector is surefire and this means that having the wrong approach might cost you more than you would like. As stated earlier, it all depends on the trader you are copying. Their competence and success will determine yours and you can guess what will happen if they aren't.

 

How to Go About It

To properly use this strategy, you have to start by knowing the traders you are following and their tactics. Doing this will allow you to be consistent when the markets hit some turbulence.

 

It should come as no surprise that putting your eggs in one basket or this case, one trader, may not be ideal. In this case, you can follow as many traders as you can and use their strategies. The only conditions are that they should have varying tactics and you should be able to manage it all.

 

The most important thing to consider if you are using any version of this strategy is that you have to employ the principle of risk management. This means that the trades you make will not be as costly if the copied positions don't pan out.

 

Its Advantages 

The benefits of this tactic have everything to do with its remote nature. Because you aren't constantly keeping watch, you can actually focus on other things while the trades sort themselves out. This also removes any risk of emotional decision-making. All that needs to be done is follow the right trades and the proper management of assets.

 

Its Drawbacks

The downside of using this strategy comes in three forms which are risks of liquidity, the market, and the system. These risks often end badly for traders because they copy positions in a volatile market that has ever-changing interest rates and can't predict the future.

 

More than anything, the biggest drawback of this is the following of traders that don't know what they are doing. By following them and copying their moves, your chances of failure just increase by a larger margin.

 

Final Thoughts

Now that you have all the above information in your head, do you want to consider this strategy? Granted it is risky, but if we are talking about risks, so is every other tactic that can be used. The crypto and forex markets in particular are about as chaotic as it gets and nothing is certain.

 

That said, if you go about it the right way, you can at least reduce your losses if you come by them. In the case of copy trading, one starring factor that can protect you is the following of the right trader. Yes, this is going to cost you quite a bit, but it is much better than resting on your own experience, especially if you have none.

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