With the social trading sector expected to grow and reach a market size of $3.77 billion by 2028, copy trading, a form of social trading, is fast becoming a popular way for traders to achieve their financial and trading goals . Copy trading allows traders to mirror or replicate the trading positions of another selected trader on the platform. As a copier, the amount of time needed to research and analyse the market is significantly reduced as your positions are automatically mirrored to the trader of your choice.
Essentially, copy trading works by selecting another trader whose trades you wish to follow on the platform. After selecting the trader, the positions opened or closed by the trader will subsequently be replicated in the copier’s account. As a result, you will also reproduce similar trading returns as your chosen trader.
The practice of copy trading is popular for many reasons. Continue reading to learn more about the benefits of copy trading!
Reason to use Copy Trading
Reason 1: Better Risk Management
As with all forms of trading, copy trading also comes with risks. However, copy trading can help with managing risk more effectively. By following traders who have a history of managing risks well, you can benefit from their expertise and potentially minimise losses.
For example, in the Vantage app, you can choose traders to copy based on their risk band. The higher the risk band, the more volatile the trader tends to be.
As a beginner looking to copy a trader with good risk management, you can choose to filter for traders based on the popular filter combinations on the app such as “Low Risk and Stable Return”.
You can also choose traders with lower daily maximum drawdowns. A low daily maximum drawdown indicates that a trader is able to limit their losses on any given trading day.
Reason 2: Diversification of Portfolio
Diversification of your portfolio is important as it may help to reduce the impact of market fluctuations on your portfolio. However, diversifying your portfolio can take time, especially if you lack market knowledge and expertise.
Through copy trading, you can follow multiple traders and their respective strategies. This can reduce the impact of market fluctuations on your portfolio, as well as help you to mitigate risks. Just think of the saying, don’t put all your eggs in one basket!
Reason 3: Saves Time
As copy trading fully automates your trading decisions, you can follow the trades of traders with proven track records and let them do the work for you instead of spending hours analysing the market and keeping up with the latest market news.
Reason 4: Learn from the Best
Every trader has different approaches when it comes to trading and analysing the market. Through copy trading, there is the potential for learning about trading and understanding the market through real-life case studies of the traders you follow.
When following experienced traders with proven track records, you can pick up on their strategies and methods of trading. The same goes for traders with significant losses. It is equally important to know why some trades do not bring expected returns and why some trades do.
If you are a beginner trader, you can gain valuable insights into how the market works, and what works best in different market conditions. Through copy trading, you can earn and learn as you go along.
Reason 5: May Assist Both Beginners and Experts
Copy trading isn’t just for beginners, it can be use by both beginners and experienced traders alike.
Through copy trading, beginner traders can not only gain confidence but also have the opportunity to learn from successful traders with years of expertise and knowledge. For experienced traders, it provides them opportunities to gain insights from other traders with different trading approaches which they might have missed out on – opening the doors to alternative trading opportunities.
Downsides of Copy Trading
While there are many advantages to copy trading, it is also important to note the risks associated with it.
1. Liquidity Risk
One of the biggest risks of copy trading is liquidity risk. This means that the positions you open or close, if not executed in a timely manner, could result in a different outcome from the trader you are copying. If the trader you are copying is trading in an illiquid market, the positions you close may not be at a price that is favourable for you. This is also true for sudden, major market movements which could affect liquidity of various asset classes.
2. Less Control
When copy trading, you are essentially giving up control of all trading decisions and handing them over to your selected trader. Doing so will mean being unable to react as quickly to any market changes or adjust your positions to reflect your own risk tolerance or investment goals. Furthermore, you may not be able to take advantage of other potential opportunities when you do not have control over your funds which have been invested in copy trading.
3. Over-Reliance on Successful Traders
While copy trading is a good starting point for beginners to begin exploring the trading landscape, it may also lead to being too dependent on successful traders. This over-reliance can manifest in a few ways. One of them is the inability to trade independently without relying on other traders. This could stem from complacency and the comfort of not having to conduct your own market analysis and research. Without having knowledge of the trades, there is no understanding of the strategies and reasoning for certain trades. With the increased reliance on the success of the other traders, this might lead to a decrease in confidence in your own trading capabilities.
It is important for you to strike a balance between relying on copy trading and also conducting your own research and market analysis to strengthen your expertise and develop your own trading skills and strategies.
Tips for Maximising the Opportunities of Copy Trading
As mentioned above, there are unavoidable risks that come with copy trading. But fret not, here are some tips for you to maximise the benefits of copy trading.
Tip #1 Check All metrics Before Choosing a Trader to Copy
Don’t simply look at one success metric. There are multiple factors for you to filter for when selecting a trader to copy.
Do pay attention to metrics such as:
- Return rate
- Win rate
- Risk band
- Asset classes traded
- Number of profitable weeks
Other factors to take note of, even if they don’t directly indicate the expertise of the trader, include:
- Number of copiers
- Copy Asset Under Management
- Average holding time
- Number of trades per week
- Number of total trades
- When they started trading on the app
While it is possible to follow the crowd and follow a trader who has more copiers, it is important for you to do your due diligence and conduct sufficient research on traders before choosing a trader to copy.
Tip #2 Consider Choosing Multiple Traders to Copy
While it may be tempting to choose one trader with high returns to copy, investing in multiple traders can help to diversify your portfolio further and spread risk.
The markets can be very volatile where even the most experienced traders could fall victim to unexpected market movements. Choosing multiple traders can ensure that your investments are put into different asset classes with varying degrees of risk. Remember: do not put all your eggs in one basket!
Tip #3 Put Stop Losses in Place
Consider assigning stop losses to your trades as this will help you close out a trade when it reaches a certain price level, limiting your potential losses during unfavourable market conditions.
Stop losses will also offer you peace of mind as you can focus on other aspects of your life knowing that your investments will not fall below the price point you are comfortable with. This protects your trades from market volatility and incurring losses that you are unable to stomach.
Start Copy Trading with Vantage
Whether you are a trader who is just starting out or a seasoned trader looking to potentially increase your returns, copy trading is a great way for you to achieve your financial goals. Download the Vantage Trading app here and begin your copy trading journey with a user-friendly experience and an easy-to-use system.
- “Social Trading Platform Market Size Worth $3.77Bn, Globally, by 2028 at 7.8% CAGR – Globenewswire” https://www.globenewswire.com/news-release/2022/04/11/2420037/0/en/Social-Trading-Platform-Market-Size-Worth-3-77Bn-Globally-by-2028-at-7-8-CAGR-Exclusive-Report-by-The-Insight-Partners.html Accessed 18 April 2023