Learn what is social trading and how does it work in examples. Find out a definition of copy trading that can help you to earn money on Forex and other financial markets.
What is copy trading? Learn how it works
Updated in April 2021
Mark Palmer
What is copy trading? Definition
Copy trading is a form of social trading that is gaining popularity. This method of trading is mostly designed for the novice traders, allowing them to automatically or manually copy the trades of more experienced traders on Forex and other financial markets.
eToro was the first major broker to launch a copy trading platform in 2010. The developers merged the features of a social network for traders and the platform for essentially copying trades.
The set of features of today’s copy trading platforms allows users to subscribe to traders and start copying their trades, using a part of or their entire capital. Each opening of a position, assigning Stop Loss and Take Profit orders, opened by the copied trader are also automatically executed on the account of the copier. There is also an option of creating a certain analog of a portfolio from different signal suppliers.
On the majority of the platforms, the copier can unsubscribe from a trader at any given moment and start trading independently or subscribe to a different manager.
Copy trading pros and cons
The key benefit of copy trading for the novice trader is an opportunity of an easier entry to the financial market. By copying the trades of expert traders, you can earn as much as they do and not get distracted from your other work.
In addition, copy trading platforms usually have a low entry threshold ranging within $100-$2,000. This enables even investors with a small amount of money to spare to try this service.
The biggest drawback of copy trading is that great financial results of the copied traders in the past do not always guarantee that they will repeat in the future. This means that the risks are mostly similar to classic trading. In addition, on some platforms, the most successful traders charge high management fees, which at times reaches 30-40%. Other platforms, like eToro, the investor’s fee is limited only to the broker’s commission.
👍 Pros
• Low entry threshold
• Possibility to invest without knowledge and experience
• User-friendly set of features for copying
• Possibility to unsubscribe from the copying service at any moment
• Learning investment strategies using real-life examples
👎 ECN Broker cons
• Results of the copied traders in the past do not always guarantee that they will repeat in the future
• The fee of successful traders sometimes reaches 30-40%
How does copy trading work? A real-life example
Let’s take a simple real-life situation. A software engineer, let’s call her Alice, has a $1,000 to spare, which she would like to invest. The issue is that Alice does not have the time to try and understand the intricacies of investment. She doesn’t like the bank deposit option due to its profit level often being lower than the inflation.
As an alternative, Alice has considered copy trading on Forex from one of the brokers. She decided to try with $1,000, which she divided among 5 managers with different strategies.
Using the search filters on the social trading platform, she selected 5 copied traders with different strategies and return rate over the past year. In this case, the model of work between Alice and the traders will look as follows:
| Alice | ||
|---|---|---|
|
$200 |
Copy trades |
Trader 1 |
|
$200 |
Copy trades |
Trader 2 |
|
$200 |
Copy trades |
Trader 3 |
|
$200 |
Copy trades |
Trader 4 |
|
$200 |
Copy trades |
Trader 5 |
Flexibility of settings allows Alice to do the following at any moment:
Monitor financial results of each trader in detail.
Add another copied trader to the portfolio.
Stop copying any trader and withdraw money.
Stop copying for a period of time.
Increase and reduce the amount for copying for each of the traders.
Monitor financial results of each trader in detail.
Add another copied trader to the portfolio.
Stop copying any trader and withdraw money.
Stop copying for a period of time.
Increase and reduce the amount for copying for each of the traders.
Can I earn money on copy trading?
Copy trading can bring you both higher than average return and losses. The effectiveness depends on many factors, the main ones being:
The return rate will largely depend on the broker and the social trading platform he offers.
The traders you choose to copy.
Commissions and fees charged by brokers and traders.
Market situation.
According to eToro, in 2019 the average return rate of 50 most successful copied traders was 29%. However, one should always keep in mind that profitability in the past never guarantees the same outcome in the present.
Experts also recommend to treat the brokers who promise sky-high return rates on their social trading platforms with low risks rather skeptically.
Read our article for more details on how to select a broker for copy trading, the mechanism of selecting traders and specifics of copying.
Is Copy Trading safe?
This largely depends on the broker that you choose. It is desirable to select only well-known brokers with regulation in one of the developed countries: UK (FCA), Cyprus (CySec), Australia (ASIC).
Traders Union experts recommend looking into the brokers from Top 20 Best Copy Trading Platforms, which we compiled using strict selection criteria.
Review the rating here.
Where to start?
To start working, you first have to take these five steps:
Search for the broker that offers the service
Search for the suitable traders for copying
Compose a portfolio of copied traders
Setting up the criteria of copying and risk management
Monitoring financial results and re-balancing the portfolio.
Comments
FAQs
How do you choose a trader for copying?
You need to approach this issue very carefully, as the potential of return directly depends on the trader you choose. We recommend reviewing the financial result of the signal supplier over a long period of time, the longer the better, and see whether his profit has been stable or there have been serious slippages.
Is Copy Trading legal?
Copy trading is legal in the majority of countries. However, some regulators point that the brokers don’t always disclose to the investors the full list of information about the important peculiarities of copy trading. We recommend that you choose brokers with reliable regulation for copy trading. In this way, you are most likely to choose a fully legal option.
Where to start?
To start working, you first have to take these five steps:
- Search for the broker that offers the service
- Search for the suitable traders for copying
- Compose a portfolio of copied traders
- Setting up the criteria of copying and risk management
- Monitoring financial results and re-balancing the portfolio.
Ahmad Hakim, 35, London, Investor
Copy trading is a cool thing that allowed me to start earning 40% annual. Previously, I tried to trade myself, wasted a lot of time and only lost money. Then I decided to try copy trading and things picked up. I am copying trades of 5 traders on eToro. I invested from $500 to $1,500 on each of them. I increase investment for those who are showing a good return rate and if the trader suffers losses, I wait for up to a month and then switch.
Stella Harris, 24, St. Louis, Teacher
My experience turned out to be mixed. I did earn a profit, but only 20% in a year. In reality, I still had to spend time. You have to control the risk management, shuffle the portfolio from time to time, otherwise the traders may start to slip. Still, you have to know a bit about all of this. I am learning as I go.
Roger Dean, 48, New York, Manager
My first experience turned out to be a failure. I chose a trader who charged a 30% management fee. Also, the broker charged the copiers a specific higher commission. As a result, the trader did have a profit, but I only slipped or, in the best case scenario, broke even. This continued for two months. The moment the trader slipped was the last drop. I stopped copying and withdrew all my money.