Forex trading, or at least forex trading done the right way, is highly research-intensive. Traders have to track and analyze multiple indicators, market information, and so many other things before they can safely make trades based on their forecasts for the markets. Understandably, this can be quite grueling. So, in 2005, traders began to experiment with automatic trades assisted by algorithms built for that purpose.
So, instead of poring over charts and micromanaging every step of their transactions, traders could simply set points of action for the algorithm to follow. This algorithm-assured trading has now evolved into what is known today as copy trading. In this article, we delve fully into this feature, explaining what it is, best copytrade practices, and then listing some of the benefits and risks associated with it.
What is copy trading?
Copy trading is a technique by which traders who wish to can carry out trades by simply copying other traders’ transaction activities. The central goal of forex trading is to earn the best returns on your trading capital. The higher the performance, the better.
But to get these results the old way, you’d have to conduct hours and hours of research. But the technology empowers traders to continue to generate great performance figures with less work. With copy trading, traders can simply automate their accounts to take positions that follow whatever their selected trader(s) does.
What are its benefits?
Also known as social trading, copy trading is a relatively new trading technique and is still actively evolving. However, in its few years of existence, it has shown a lot of potentials. Below, we outline some of the proven benefits of copy trading.
1. It helps to ease the entry of new traders into the market.
The forex market has the biggest trading volume of all the financial markets in the world. Every day, more than $6.5 Trillion in commodities are swapped on forex markets worldwide. And every day, millions of traders earn billions in profits. Understandably, all of this activity has led to increased interest in the forex market, with more people than ever making their first forays into the markets.
However, trading remains highly technical. Before any positions can be taken, the traders have to spend hours poring over charts and crafting trade strategies. And, understandably, greenhorns may not be up to the task. Copy-trading enables them to participate in the market, learning from the more chosen professional traders and making profits alongside them.
2. Even experienced traders sometimes need to make quick trades
Not many people take on trading as a full-time job, and even for those who do, it’s simply impossible to dedicate all of one’s entire time to it. Sometimes, experienced traders might just not have the time or energy to carry out rigorous research. In instances like this, copy trading enables them to continue participating in the market with as little effort as possible.
3. It fosters community
One very noticeable trend in business is the tendency for companies and people in similar niches to huddle together. Corporate finance in America is headquartered in New York, and startups are clustered around San Francisco. The reason for this is that businesses tend to thrive in the community. All entities involved get to share information and ideas as fast and efficiently as possible.
Copy-trading does something similar to forex trading. Unlike corporate finance and tech startups, forex traders don’t need to open physical offices. However, social trading enables them to create an online community where they can communicate ideas and information among themselves.
4. Risk management
The forex market is a very high-stakes endeavor. Most forex trading platforms usually display conspicuous notices warning traders to only commit funds that they can afford to lose. However, even at that, losses can quickly pile up into substantial sums.
With copy trading, traders can monitor and imitate a few professional traders, thus limiting their own risk exposure and maximizing returns.
What are the risks?
Copy-trading might be a great strategy for trading, but it is by no means without risks of its own. Just like any market activity, returns aren’t guaranteed. Below, we outline the few risks associated with copy trading.
Regular market risks
Just like regular trading, copy trading exposes investors to market risks. Professional traders also occasionally record losses. They can’t predict the future; they can only make forecasts based on calculations. Sometimes they get it wrong, and sometimes they might just commit errors. And when they do, any copy trader mirroring them would take a loss too.
Systematic risks
In the end, currencies are the properties of whichever countries issue them. So, major economic or political events far away in the UK would directly impact a forex trader in Malaysia who has invested capital in the GBP/USD currency pair. In such events, currency may be suddenly devalued or, worse, suspended. A very recent example is the Russian ruble. When Russia invaded Ukraine in February, it triggered severe economic sanctions that tanked any investment in the Ruble in the forex market.
Liquidity risks
Another risk involved is the ease of liquidity, which in simple terms is the ease of exiting one’s position. The exchange is primarily a market involving buying and selling between consenting traders. For hot assets and currency pairs, like the USD or GBP, traders might experience little hassle in selling them, as there is always a high demand. For emerging market currencies, on the other hand, there might be a little lag between supply and demand. And, as you well know, in this market, the difference between profit and loss might be just a few seconds.
In conclusion
The forex market is a high-risk and high returns environment. Traders willing to take on risks can make incredible profits. However, to earn these payoffs, they need to do intense research. And for newbies who don’t know how to go about it and even pro traders seeking to minimize effort, copy trading offers a way to participate in the markets and profitability. However, it is not without its risks, and copy traders should consider these risks and allocate their resources in the best way to reduce their exposure.
