Seeing people share their winning trades on social media could give you a push. The numbers are enticing; it appears mouth-watering. However, in reality, being a profitable trader is no easy feat; in fact, only about 5% of day traders are successful full-time traders. So, if the opportunity to replicate the trades of a successful trader on your trading account arises, surely you would become profitable, yes?
Copy trading was created for this purpose; it allows newbies and less experienced traders to match the trading performance of pros who have been able to stand the test of time in crypto trading. This article dissects copy trading, its features, pros, and cons.
What is Copy Trading?
Copy trading is as simple as it sounds. On a copy trading platform, you can view the statistics of several pro traders, choose one from the lot, subscribe to them, and easily copy their trades. Of course, you don’t necessarily have to match the pro trader’s capital; if the veteran opens a trading position worth $100,000 and you are only trading $1,000, the algorithm will set up your trades in a 1:100 ratio; hence, allowing you to allocate a similar share of your entire portfolio.
Copy trading platforms typically require traders to deposit funds to their protocol; the platform automates the copying process, and the trader isn’t required to do much. After closing all positions, the trader can withdraw their profits after the platform has deducted a commission.
Pros of Copy Trading
- Easy Way to Make Profits from the Market: This is perhaps the most obvious benefit of copy trading; it offers newbie traders a way to make profits in the market without having a huge knowledge of market cycles or technical and fundamental analyses. They totally rely on the prowess of pro traders and get similar returns (minus fees and commissions).
- Passive Income: Copy trading is not an active trading practice; the copier is not required to spend time carrying out analysis or other activities. All they need do is deposit money into their trading account, set notifications for their favorite traders, replicate their trades (which may be automated on some platforms), and set a few parameters. All these can be done within minutes, and they can be merged with another full-time job.
- Can Help Develop Trading Skills: Newbie traders can develop their trading skills and strategies by observing the actions of veteran traders, which is usually available on the copy trading platform.
- Diversification of Funds: With a copy trading platform, copy traders can mitigate risks by following a number of traders and dedicating a certain amount of their portfolio to each. It is highly improbable for multiple pro traders to have losing positions simultaneously; hence, diversification on copy trading platforms helps increase profitability with low risk.
Cons of Copy Trading
- Differences in Position size can lead to losses: Quite often, many pro traders open large positions in a single trade, up to seven dollar figures. However, beginners, on the other hand, do not have this much liquidity; hence, in cases of leveraged trading, pro traders with large position sizes may be able to accommodate huge drawbacks. In contrast, traders with smaller amounts may get liquidated. Eventually, the pro trader could survive the drawback and eventually end the trade with a profit, but the copier makes no profit.
- Initial losses could wear out a new trader: Dealing with emotions could be difficult while trading; hence, a few losses after the first few trades could lead an inexperienced trader to make rash decisions which could lead to more losses, or ultimately, they could quit entirely.
- Automation may not work effectively: It may be counterproductive to copy a trade with a different position size and leave everything to automation; if you aren’t carrying out the exact trade as the pro you are copying, you may need to take profits or stop losses at a time different from the automated copy trade. Hence, passive trading may not work in some cases.
If done right, Copy trading could be very profitable for you, even without being a pro. Hence, it is important to draw up a copy trading strategy, diversify your funds, and only copy trades/traders you believe in their strategy. Also, be wary of leverage while copy trading; if not approached wisely, you may end up with losing trades while your mentor keeps winning.
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