If you are already a trader, you have probably heard about the latest trend: Copying other successful traders' activity. This form of investing has several names: CopyTrading, Mirror Trading, Social Trading, and Covesting. So why does it arise, and how it became so popular?
CopyTrading consists of a community of users interested in investments, trading and finances, which works in the same way as a social network but in which the topics of discussion and the objective of the network itself are, obviously, financial assets, investment, trading and price swings. These networks of investors and traders are viral among millennials and centennials, who seek to maximise the return on what can be considered a low investment amount through technological tools that allow users to benefit from other users' trading activity.
How CopyTrading Platforms Work
In general terms -each platform is slightly different-, traders who develop successful strategies with a proven track record can benefit from letting other traders and investors Copy them with a CopyTrading platform.
''Copying'' allows you to copy the positions taken by another trader directly. You determine the amount you wish to invest and copy everything they do automatically in real-time –. Then, your account will also make that trade when the Trader completes a transaction. You do not need to have any intake on the investment strategy, and you get identical returns as your chosen Trader.
So, copytrading means that your investment activity is open to the world. Times of fake ''I made a 500% return'' are off. The CopyTrading platform will allow other users to view the following:
Your investment strategy: In what type of financial instruments do you invest, that is, the composition of your investment portfolio, in addition to the financial instruments you invested in the past, in which of your trades you earned money, and also the ones that you lost.
Risk Profile: Almost all CopyTrading platforms will calculate your risk and allow other users to view it. In other words, higher leverage, higher risk.
Investment Ideas: Successful traders who want other investors to copy them, update their feeds with news, updates on their strategy, etc.
Portfolio Performance: As is usually said in Finance, "Past performance does not imply a promise of future results." However, a trader who consistently makes money with his trading strategy is undoubtedly a better alternative than someone who always loses money.
CopyTrading is a convenient way to gain exposure to financial markets, and it's fitted for investors with lower capital.
How to CopyTrade a Pro Trader
Open an account with a CopyTrading Platform. Most apps will ask you to upload an ID and proof of address. Remember, these are financial institutions. They are unregulated if they don'tdon't ask you for identification. Stay away from those.
Select a trader who best matches your investment goals. In other words, select the asset class (Forex, Crypto, Stocks) and find the available traders at the CopyTrading platform. What is important to you? It could be their number of followers, profitability, risk level, the total amount of funds they manage or their return on investment. It is, most likely, a combination of these. We include a list of things to consider in the following paragraphs.
Deposit Cash at the CopyTrading platform. Since these platforms are meant for retail investors, you may deposit funds with credit cards, bank transfers, eWallets, or Cryptos. The alternatives will depend on each CopyTrading platform.
Decide your investment amount. Be balanced and don't put all your eggs in one basket, so choose how much to assign to each chosen Trader if you have picked more than one person to copy.
The copy trading platform will automatically replicate all the selected Trader'sTrader's positions in your trading account.
After a while, review the performance. Add more funds if you like how the Trader performs. Or, reduce your exposure to one Trader and maintain your portfolio diversified by not investing too much in a single trader. You can replace your existing ones at any time.
As a parallel, CopyTrading works in a similar way to investing in mutual funds. In other words, when an investor buys shares of a fund, he effectively invests in the investment strategy determined by an organisation.
Benefits of CopyTrading (for investors)
Unfortunately, leveraged trading makes unseasoned investors lose money, and CopyTrading is an investment product that tries to alleviate that. But, then, Social trading arises from the need for beginner traders to interact with professionals to learn techniques and strategies, share analyses and charts, and discuss common interests.
Suppose you believe that a particular sector of the economy or financial asset has future growth (or decline) potential. However, you don'tdon't have enough time to follow the markets daily. In that case, CopyTrading allows you to copy a trader who agrees with this thesis. In other words, the second benefit of social trading is that it will enable you to gain exposure to a particular strategy or asset class without following the markets.
Suppose you have little capital and copy a trader with a diversified strategy (one with a good number of different financial assets in its portfolio). In that case, it allows you to diversify your portfolio in a simple and much cheaper way than it would cost you to have that same portfolio if you build it on your own.
Interact with Pro Traders, learn how they decide on an investment, and learn how to be patient.
Eventually, you can develop your investment strategy by selecting the positive features of other traders.
Disadvantages of CopyTrading
Social trading has a few disadvantages that must be weighed, as follows:
A trader just starting to invest through a pro Trader can lead to a lower perception of risk, which can be very dangerous when deciding the amount of capital to invest. So, start low, and increase the amount over time if you see results.
Investing through CopyTrading implies higher costs in the form of commissions paid to the platform. In the spread that we pay the broker for each trade, an additional fee is added for copying the other Trader.
The risk profile, and the capital we have, can be very different from those of the traders we copy, so we must be careful when copying high-risk strategies (such as scalping ones). What does this mean? For example, a professional trader can afford a negative daily performance of -10%. However, in your case, if you just decided to copy this Trader on that specific day, you will lose money.
Benefits of CopyTrading (for Pro Traders)
If you have a successful trading strategy, you might want to share it with other traders. And the question is: Why would someone want to be ''copied'' by another investor? The answer is not out of simple vanity but because CopyTrading platforms reward successful traders through commissions.
If you have a high number of followers and a reasonably high AUM -Assets Under Management- you manage, you will make money as a Pro Trader. The amounts to be collected by the copied investor can reach 20% of the commissions generated by the trading activity.
Some Pro Traders use several CopyTrading platforms and apply the same trading strategy. However, they are all slightly different, so you might have to adjust how the operation works according to the limits of each CopyTrading provider. For example, the two CopyTrading champions, ZuluTrade (zulutrade.com) and eToro (etoro.com)* have very different applications. ZuluTrade provides an automated trading feature, a method of participating in financial markets using an automation programme that executes pre-set rules for entering and exiting the markets. It enables you to carry out many trades in a small amount of time. As the Trader, you can combine technical analysis with setting parameters for your trades, such as orders to open, trailing stops and pledged stops.
* Risk Warning: Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk.
How do I choose the best CopyTrading strategy?
There are a few things to consider before selecting the Traders that you will copy, as follows:
Number of Copiers: This is intuitive; if a trader has very few copiers and followers, it is a bad sign, and you should avoid him. However, the following might be a better fact.
Assets Under Management (AUM): The AUM rank reflects the signal provider's popularity more reasonably. It shows how much copiers trust that particular Trader with their real money. Although having one copier with a significant investment might also be a bad sign since it could be a friend or family of that Trader.
Traded Asset Class/es: Some Traders deal in the Forex markets, others in Stocks, others in Crypto, and others in a combination of all. Pick the one that best fits your investment goals. In other words, understand the Trader's strategy and overall behaviour.
Performance: Negative returns are wrong; we all know that. However, beware of high returns that may seem appealing but are not usual and are most likely down to luck or ultra-high risk. Also, check out the monthly returns to understand if the performance is due to a specific month. Your aim should be to copy someone who has consistently risen in profit for a long time.
Risk Score: Tied to the previous point, you want to look for traders with consistent risk scores that do not change much over time. In addition to having a consistent risk score, the score should ideally be as low as possible while ensuring you get the desired results.
Maximum Drawdown: A maximum drawdown is the maximum observed loss from a peak to a trough of a portfolio before it reaches a new peak. Remember, maximum drawdown indicates downside risk over a specified period. In other words, it is the maximum observed so far. A Trader with a 10% return but a maximum drawdown of 30% might mean that if you start copying at the peak, you still might get to lose 30%.
Trading Tenure: Although a successful Trader doesn't have to be a proven track record of ten years, it is still a good indicator if a Trader has spent a few seasons on the financial markets.
Activity and Consistency: Besides the number of closed trades -it's better to follow somebody with a vast number of profitable trades than somebody with just 1-, you also want to zoom in on the consistency. Someone with several successive profitable months (say 12 months) with minimal losses in between makes for an ideal candidate. Another factor you want to consider is how active your Copied Trader is. Ideally, you want to copy somebody who Trades consistently, say weekly or daily, instead of somebody who goes in and out without a uniform timeframe.
Take care of your money. Remember that situations change, and people also change. Don't stay put with somebody whom you don't like. It's your money, and you should care for it.
What do regulators think about CopyTrading?
Let's jump on where regulators fit CopyTrading within the legislative framework.
The UK's FCA (Financial Conduct Authority) and European ESMA (European Securities and Markets Authority) agree that CopyTrading is an automatic execution of trade signals. They describe the service as follows:
"Once the client chooses a signal provider and authorises the service provider to issue orders on their behalf, the service provider transforms each signal into a buy or sell order to be executed by the service provider itself or transmitted for execution to another firm, without further intervention from the client."
And then they add:
"This service falls within (...) ''portfolio management'' as ''managing portfolios under mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments''. In copy trading and mirror trading, investment decisions are implemented with no intervention by the client other than an agreement between the service provider and the client on the discretionary service provided."
CopyTrading is an investment activity that falls under regulation, so make sure to find a platform that complies with a trustworthy regulator.
Bottomline
CopyTrading is an excellent way to diversify a portfolio for people who wish to avoid following the markets daily. Also, if your disposable income isn't high, you can gain exposure to many assets in an accessible and simplified way.