Copy trading is a process to execute trades by following expert trader’s decisions. You don’t need to have a deep knowledge of trading or professional analytical skills to earn money. Therefore, it might be a fruitful start for newbies who want to make money from trading.
There are thousands of traders offering or allowing people to copy their trades, although all of them aren’t good to follow. You need to follow some tips or guidelines before starting copy trading. Otherwise, there is a possibility of getting scammed at any time.
This article contains the top five tips to help you choose and continue with the best copy trading strategies.
What is copy trading?
It is just copy-pasting other people’s trade in your account. If the master makes a profit, you will make a profit as well. The goal of copy trading is to benefit from a brain that is already master in this industry. Copy-trading is very useful to traders who can’t anticipate the future movement with their knowledge and understanding of the market.
Copy traders usually implement short-term or day trading strategies so that followers can see the benefit within a day. Moreover, this service is available for the FX, crypto, and other marketplaces that include volatile assets. The copy trading platform shows the analytical overview of traders who offer services. Any follower can check on the profile or portfolio of service providers even before taking assistance from a person. This trading style is profitable, but you should remember one thing.
The past performance doesn’t guarantee future profits.
On the other hand, it would be a great source of earning diversified money from different financial assets. For example, you can distinguish your funds on multiple assets at a time. Most copy methods require a subscription fee, where individuals pay fees to get services from a master. Otherwise, another option is revenue sharing; both participants, the investor and fund manager, get a certain percentage of profits from winning trades.
How does it work?
Copy-trading works through a platform where investors meet traders. When the expert trader opens any trading position, broadcast that trade idea to individuals. Later on, the individual who has subscriptions can follow that trade idea and make positions or execute those trades through automatic trading without any interruptions.
This type of trading is popular as it often allows making profits from small movements and frequent trading ideas. Copy-trading does not require monitoring the trading positions after executing. All activities like opening, closing, or modifying trades will be automatically copied to followers’ accounts.
This trading style creates an opportunity to leverage someone else’s trading experience and knowledge. You don’t have to do any analysis; you can make profits just by following the trading activities of pro traders. For managing personal clients, many brokers offer PAMM or MAMM accounts where people allow their investment to manage traders. On the other hand, you can find a list of successful copy service providers on the MQL5 website and eToro.
How to find copy trading success?
Copy-trading would be an excellent source for you to earn money online, but as we said initially, there is a huge possibility of getting scammed?
What if someone assured you a guaranteed profit but failed to provide?
Copy-trading services are not regulated like forex brokers, so there is no way to take legal actions if someone makes you lose. OK, even if there is a way to get your money back, why should you not focus on prevention rather than cure?
Tip 1. Understand the concept behind the trading strategy
It is the very first factor you should check on before choosing any trading method. Many traders may invest in copy trading and face losses. It occurs as novice copy traders have tendencies in not checking on the logic behind trading strategies.
You might think that you are just following the trader in copy trading, and you don’t have to bother what strategy the person is following.
No, don’t do that! If you know the strategy, you can understand the profitability or effectiveness of the service. For example, if someone offers you trading with only moving average and RSI, you expect less accurate trades than price actions.
Trading in a highly volatile market involves risk, so you must be aware of several affecting factors while making trade decisions. Understanding the concept of strategies will enable you to avoid blind trading. When you know the logic, you can utilize the strategy positively in your trading. Moreover, it will help you to increase profitability and reduce risk on making trade decisions.
Tip 2. Diversify your masters
Diversifying masters will enable you to be familiar with the trading patterns of the pro traders. Before choosing trading strategies, you have to consider several facts, such as capital size, investment type, risk ratio, profitability, drawdown, etc.
However, the divergence means expanding your investment to multiple copy traders. Therefore, if someone blows your trading account, you have another option to come back. For example, you can expand 50% of your investment in FX and another 50% to crypto or stocks.
Tip 3. Know the person you are coping from
When you choose to purchase something, you should know the service provider’s profile correctly. Knowing the person means knowing about his trading patterns, decision-making capabilities, risk management, and trade management concepts. Always try to choose the provider that has a suitable profile that matches your trading pattern and profit expectations.
For example, If you like to make money from swing trades, you should choose a trader who catches swing trades to follow his service. In that case, you may ignore another trader who may have a good portfolio, but his strategy is scalping.
Tip 4. Start with Demo account first
Testing any strategy should always be an introductory chapter before choosing that method for trading. You should check the result of a system in demo trading before applying it to your account. You can assure yourself about the potentiality of that strategy by checking it properly, which will increase your confidence.
On the other hand, you’ll learn negative factors in the method by demo testing. It will help you avoid less profitable strategies and help you to choose more potential. Many traders offer free subscriptions for a particular period to prove the capabilities and potentialities of their trading strategies.
Tip 5. Gradually increase your investment
At this point, a quote from famous investor Warren Buffet is appropriate, which is “Don’t put all your eggs in the same basket.” That means don’t invest your whole capital in one or a few trades.
Firstly, check the above factors to choose your suitable trading strategy. Then make a portion of your entire capital and start trading by copy trading strategy. Check the performance of that strategy for a certain period, then increase your capital size with that strategy. Putting whole capital at once by relying on unknown methods involves risks. Don’t risk as much as you can’t afford.
These are the top five tips that you should follow before choosing any copy trading strategy. Avoiding any of these factors will lead you to select trading strategies with comparatively low potentiality. That may cause risk on your investment or decrease your chance of profitability.
On the other hand, choosing a trading method by following these tips will help you select the most potentially profitable copy trading strategies.