Millions of people across the world are engaged in trading of currencies, stocks, commodities, market indices, and cryptocurrencies. What makes all of this possible is the existence of brokers that render services online. Digital trading is still expanding, with 15+ million members of this vibrant finance community.
However, despite the profits gained on the vast market daily, risks are just as real. One of the ways to hedge them is by using copy trading. The method caters to risk-averse individuals and those who are simply pushed for time.
What Risks Are There
In any investment schemes, risks are inevitable. No broker will guarantee that your trades will not return a loss instead of a much-desired profit. However, the probability of erroneous decision largely depends on your experience and competence. Traders who are afraid of choosing failed strategies and making big mistakes prefer to delegate the job to professionals.
Who is a copy trader? Also known as Strategy Manager, this is an experienced player who renders services for a fee. Brokers compile lists of their available Strategy Managers with details about their performance. Choose a candidate from the list and let him/her make trading decisions for you. As their actions are copied into your account, the name seems self-explanatory.
This concept is applicable to Forex trading, and it is also used for stocks. These Internet-based forms of trading enable connection of a client’s account with that of their chosen expert. What happens next may be easily monitored, managed, and terminated by the client if necessary.
Who Uses It
It is not just newbies who request the service. For them, it is a way to reduce the inevitable risks. For seasoned traders, it is a way to still gain profits when they have no time for in-depth market analysis. Here is how this delegation scheme works.
General Principle and Procedures
The Strategy Manager you pick will be responsible for managing a portion of your funds. Their interest lies in the fee or commission which is paid in the event of profitable actions. For you, the arrangement is basically trading by proxy.
After you sign up for the service, the broker establishes a connection between your funds and those of the expert. Next, all their open trades and subsequent actions will be replicated — or copied — into your account.
In effect, it is as if you were pursuing identical strategies on the exchange at the same time. However, no actual participation from you is required. You are free to monitor the copied trades, cancel those you do not want, or sever the connection altogether.
Main Stages Explained
First, you pick the trader you would like to copy and inform the broker of your decision. Next, you deposit money into your account if the balance is inadequate for copy trading to commence. The subsequent copying of trades will be entirely automatic. Once profit is made, you may cash in, paying a portion of it as a fee. Here is what all this means in terms of real numbers.
Supposing you allowed the trader to open positions using $1,000 of your money. If the decisions they make bring $500 in profit, you will be getting 90% — $450. The rest of the profit (10% — $50) will constitute their reward. Importantly, this will only be paid if the copied trades return a profit.
Critical Aspects of Copied Trades
Some limitations may apply. Study your broker’s terms and conditions carefully. Commonly, the share you may invest is limited (e.g., to 20%). Even though you will be using the services of more experienced online traders, success is never guaranteed. Their trades can turn out profitable or not, as gains on any financial market are never certain.
This is why brokers provide ratings of their most favorite traders and keep these updated. This allows you to make an informed decision as to which candidate is most likely to succeed.
In general, the phenomenon of copy trading has created a social trading network where more weathered players offer to share their knowledge for a commission. Start small and gradually increase the delegated sum if the results meet your needs.