How beneficial is copy trading?
One of the highly-rated ways of earning from cryptocurrencies is through trading. However, trading has many risks resulting in people losing their funds. Also, in order for someone to become a successful trader, he/she should master the right set of skills, knowledge, and attitudes.
Because of these challenges some people choose to do copy trading as it reduces the hassles involved. Copy trading is a portfolio management strategy involving copying trades of successful and more experienced traders.
Currently, many individuals choose automated copy trading rather than the manual version. With the automated version of copy trading, an individual simply follows a trader leading to automatic execution of his/her trades. In such a scenario, a trader copies all the various aspects like trade-entry, take-profit and stop-loss orders.
What an individual needs to do is to allocate a certain fraction of his/her capital to a specific copy trader. Thereafter, one has to collect the profit that accrues. However, it is important to note that a successful trader may also lose some trades. Therefore, it is a 50-50 win-lose situation.
The fact, however, is that a person who chooses copy trading will not be involved in both technical and fundamental analyses. Hence, one goes about doing his/her business while earning from trading.
Regarding manual copy trading, an individual receives notifications of trades then executes them. In short, the goal of copy trading is to enable novice traders to copy trades of seasoned traders.
What are the benefits of copy trading?
There are several benefits you get from copy trading. The main ones include trading with little or no trading knowledge and the chance to diversify your portfolio.
Instant successes: An individual who selects a competent copy trader can have instant winning strategies. This is because he/she capitalizes on the knowledge and experience of the veteran trader. And also, one does not experience the hassles of learning about technical and fundamental analyses.
Diversification of portfolio: First, an individual can copy several copy traders, having a greater possibility of earning more profit. Second, the individual can copy trades relating to different portfolios or instruments such as forex, cryptocurrencies and commodity.
In addition, they may also copy traders who use different time zones. These may include day traders, position traders and scalpers, among others. As a result, one does not put all eggs in one basket.
Risks of copy trading
The above discussion points to copy trading that is very smooth and always profitable. That is not always the case. There are several risks involved as well.
Copy trader risks: The copy trader may change his/her strategy overnight, increasing risks. For example, a copy trader may trade more aggressively than before. At times, he/she may get a margin call from the broker.
Sudden market changes: Like in any trading case, unexpected market crashes may take place because of factors like disasters in form of terrorism, war or earthquakes. Certain news such as announcements of high unemployment levels and global economic crises can as well lead to sudden dips in prices of assets.
Liquidity risks: At times a trader cannot exit a trade because of liquidity problems, which may cause losses. Also, when there is high price volatility of the assets such as cryptocurrencies, slippage may contribute to unexpected losses.
Systematic risks: In some cases, trading platforms could lock up some money. Hence, traders may not exit their positions as expected.
The point regarding these risks is that anyone, including copy traders, face them. Thus, there are cases where using copy trading may not give you the anticipated profit.
How to choose the best trader to follow?
In order to reduce avoidable losses, an individual should select a competent copy trader. We have a few guidelines that can help you in this regard.
The interesting thing is that the platforms that use copy trading also take due caution to protect users. They ensure they allow only reputable and professional traders on their platforms. In most situations, they have criteria that copy traders should meet.
For example, trading platforms require copy traders to have verified accounts. They may also need to explain their trading strategies before being allowed to offer copy trading services to the public.
Sometimes, copy traders should have traded on the platform for a minimum length of time, such as six months. It may require copy traders to have a minimum amount of funds in their accounts.
However, the individual who wants to do copy trading should also do certain checks before engaging the traders. For instance, it is ideal to copy trades of someone who has been trading on the platform for over one year. It is also important that the trader that an individual is following does not also copy someone else.
Second, it is important to check the trading history of the trader you intend to follow. One has to analyze the trader’s performance for at least one year.
Third, the trader should have a consistent record of excellent results. If someone shows sporadic winning trades, he/she is not the best person to follow.
In addition, the trader you intend to copy should have a reasonable number of followers. And it is also essential to check if the followers are trading using real money rather than using demo mode.
Although there are several benefits for copy trading, such as diversification of portfolio, there are also risks. Therefore, every person should take due caution when choosing a trading platform as well as the copy trader to follow. Since trading is a risky venture, it is important for everyone to carry out one’s own research.