A Guide to Understanding How Copy Trading Works

Suffice it to say trading is not an easy task. Not only do you need to learn about the market and all of the relevant concepts surrounding it. Therefore, people who usually want to get into trading are hesitant, since they first have to learn a lot about the market before they can make effective trades. However, one of the ways that people can get around this is with the help of copy trading.

But what is copy trading and how exactly does it work? Is it an instant win strategy or is it more nuanced than an easy winning strategy. In this guide you can learn more about what copy trading is and how exactly does it work.

What Is Copy Trading?

Copy trading is a fairly successful trading strategy that allows individuals to easily copy the trades that some of the other individuals are making throughout a specific trading platform. It originally started all the way back in 2005 when Tradency, one of the premier trading service providers at the time, started offering a unique auto trading solution.

It was the first of its kind and very quickly managed to skyrocket in its popularity with trading platform ZuluTrade bringing out their unique copy trading service in an open environment, where the broker and the trading platform is not an obstacle to connect expert traders with potential investors that want to copy them. So an expert trader that had an account with X broker trading with MT4, could be copied from an individual in Broker Y trading with Tradestation.

Following that major rise in its popularity, a range of trading platforms have started offering copy trading services with a variety of features on display. One of the major advantages that comes with copy trading as a trading strategy is that instead of looking into the best types of assets to invest in, they will instead look into the best traders and what they are trading in.

Some of the trading platforms also make it much easier to find the most experienced traders on their platform to easily copy their trading strategy. You can even find ones that better suit your goals or your specific risk tolerance. But now that you have a more in depth understanding of what copy trading is, we can move on to how it actually works.

Zulutrade Copy Trading Service
Zulutrade Copy Trading Service

How Does a Copy Trading Service Work?

If you go for a copy trading strategy, you will be following a specific trader and the trades that they make will be measured in percentages of their total capital. So even if you can’t invest the same amount that they have, you can allocate a similar percentage for similar results. So regardless of what trade the individual that you are following makes, the platform you will use will also be adapting the trade size on your behalf, making a similar -in terms of buy or sell- trade unless you say not to.

You will get a notification with some trading platforms that will inform you that a trader that you follow has made a specific trade that is a specific percentage of their overall capital. It will also be asking you if you would like to make the same investment at the same percentage of your capital. You can outright decline, or you can accept and adjust the percentage of your capital that will go into it. Some even allow for an auto setting, which allows the bot to automatically make the trades without notifying you first.

A good example to consider is if an individual you follow makes a trade in gold that is equivalent to about 7% of their overall capital. The trading platform will ask you if you want to make the same trade at the same percentage. If you choose yes, you can even adjust how much of your capital you are willing to invest in it, since you might have a different risk tolerance than the trader that you are following.

Of course, there are different types of copy trading that have developed over the years, each one that can cater to a different type of trader. The best thing about finding these different types of copy trading services is that they can help individuals trade how they see fit.

Types of Copy Trading

Social trading

Social trading is a very different type of trading strategy since it focuses on individuals taking a more active interest in learning about the market and trading in general. Instead of directly taking on the different investments that an individual is making, they will prefer to exchange market research and ideas with the traders that they follow. So instead of learning from the trades that a more experienced trader is making, they would rather learn why they are making those trades so that they can grow as a trader.

Along with finding out why these more experienced traders are making certain investments, you can also find out how they will manage trades, and how they go about analyzing the market. Granted, social trading is not an automated process unlike regular copy trading, and it can often happen on different social platform as well. You will have to manually open any trades that you make.

Mirror trading

While social trading is a major step away from regular copy trading, Mirror trading is very similar. In fact, you could say that mirror trading is a subcategory of copy trading, but it differs in the sense that it doesn’t take away the entire trading strategy that the individual has. Instead, it will take away smaller parts of the strategy, which could just be an automated trading strategy.

In copy trading, you will be copying the individual trades that an individual makes. On the other hand, with regards to mirror trading, you could just take the trading strategy behind your preferred trader and end it at that. You do not have to invest in the same assets, and you can generally enjoy making your own trading strategy by using the one that you took as a blueprint.

Conclusion

Copy trading is one of the best ways that you can go about trading without having to worry about the serious issue that can usually come with trading without having proper experience. And with the help of a dedicated copy trading strategy, people who are new to trading can still make educated trades and learn as they do so. 

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