The world of trading is becoming increasingly complex as a result of its growing popularity. While not long ago, investing was seen as the domain of a rather small group of people, things have changed significantly since then. Now, an ever-growing number of members of the general public are looking to create portfolios in order to meet their long-term financial goals. With inflation rates and living costs making it difficult for many households to make ends meet, people feel that putting their money to work and, hopefully, building some wealth in the process is the wisest thing to do right now.
However, you must always remember that trading can be quite risky, with some asset classes being trickier than others. In order to remain successful, you must come up with a comprehensive strategy that can help you achieve your goals. There are many different ones to choose from, but the one you settle for should be tailored to your needs to yield results. Increasingly, investors are considering copy trading as the preferred alternative.
What is copy trading?
Copy trading allows investors to copy the positions that were opened and managed by previously selected individuals. The process is automatic and copying also sends a portion of the funds into the copied investor’s account. Any action made by the investor whose ventures are being copied, whether it is opening a position, assigning Stop Loss, or Take Profit orders are executed in the other trader’s account as well.
The trader who copied someone else’s trades has the ability to disconnect and manage the endeavors on their own, and they can also close the copy relationship altogether, meaning that all the copied positions located at the current marketplace will be closed as well. The copied investors are also referred to as leaders and receive compensation for their work in the form of a flat monthly subscription fee. In some cases, popular investors can potentially earn as much as 100% of the spread rebate on their own personal transactions.
The reward schemes are also designated in such a way as to stimulate the traders to allow the copying of their traders in the first place instead of carrying out these activities independently. This form of trading has led to the development of a new category of investment portfolios, named People-Based Portfolios or Signal Portfolios by insiders. The main difference with these holdings is that the funds are invested in by other traders rather than the standard market-based instruments.
The beginnings
The beginnings of copy trading go back to the intention of some traders to open or close specific operations at a particular level to their followers via newsletter. The first trading room based on this concept was created not long after. An investor would announce they have executed a transaction by writing it in the virtual room, and their followers had the potential to reproduce it for themselves. When these rooms grew, other investors were able to ask questions or comment, something that required continuous presence in front of the screen and paying a fee in order to use the platform.
It was during this stage that the traders realized and understood the potential of automatic replication. Since 2010, it has become increasingly commonplace for investors who are not as experienced to make use of the decisions made by those whom they consider to be successful. Many online financial trading brokers have been employing this feature, so the majority are now familiar with it. Some traders choose to leave it behind when they start getting more familiar with the intricacies of the marketplace they inhabit, while others continue to implement copy trading as part of their ventures.
Most of the trades take place in liquid ecosystems such as foreign exchange markets, and regulators have tried to create a framework for the sector in order to avoid the issues created by scammers.
Does it help?
There’s no one-size-fits-all when it comes to trading, so the strategies that can help you and be beneficial for your portfolio could bring trouble to another investor or cause a decrease in their gains. It is essential to come up with a game plan that takes all these things into consideration, and the methods you choose should be personalized to your requirements and expectations. With that being said, there are definitely ways in which copy trading can be considered better than some of the alternatives.
For instance, a 2012 MIT-funded study revealed that some traders benefit from copying suggested investors (a practice known as “guided copying”). On average, they were faring 6 to 10 per cent better than those who chose to trade manually, and 4% better than those who were copying random investors that they had chosen themselves. In conventional investment decision making, imitation has also been found to play a positive role.
Yet, copy trading can also have potentially negative effects on those investors who don’t know how to use it adequately. Learning about the success recorded by others can lead to a considerable increase in risk-taking and poorer decision-making overall. When investors have the opportunity to copy others directly, the risks could be even more substantial. While all ventures are associated with a certain degree of risk, taking on more than you can handle can be detrimental to your financial well-being and might even signal the end of your trading career overall if you end up in a position in which you cannot keep up with the costs anymore.
Comparison to mirror trading
Copy trading and mirror trading are often erroneously believed to be the same thing, but that’s not how things work. Mirror trading refers to a methodology that lets investors in financial markets choose a particular strategy and mirror the trades executed by those strategies in a trader’s brokerage account. It had its inception in the early 2000s and has since become widespread in markets all over the world. Copy trading and social trading were both influenced by mirror trading, but all were preceded by automatic and algorithmic trading as well. With the development of more financial tools, companies gradually adopted mirror trading.
If you’re an investor, make sure to do your research before you adopt a new trading method, and always remain patient and disciplined in order to obtain the best results.
