Copy trading is a form of social trading that involves a trade copier mimicking the trades of a provider. Typically, what happens is that the trade copier allocates a proportion of funds for the copy trading relationship, separate from the rest of their account, wallet, or portfolio. Whether there is a minimum copy trading amount depends on the broker the trade copier is working with.
As this form of trading becomes more and more popular, there are naturally more questions concerning the nature of this type of investment. This article aims to answer some of these questions, including its regulations, methods, and the pros and cons of copy trading. It will also contain a checklist of what to consider when you are searching for a provider to copy. If you are a new copy trader and want to learn more about this topic, read on.
Is Copy Trading Legal?
Perhaps the first question most new copy traders want to know is if copy trading is legal. The good news is, yes, copy trading is legal in Australia. There are no laws that prevent you from doing this in the country, and you are free to make your own decisions.
Is Copy Trading Regulated?
Copy trading is only as regulated as your broker is. As an Aussie trader, you should ensure that your broker is ASIC-licensed. ASIC stands for the Australian Securities & Investments Commission, and it is the country’s national corporate regulator. It ensures that companies – especially those in the financial services sector – are compliant with national laws.
How does Copy Trading Work?
The first step a copy trader does is research a profitable provider on a copy trading platform. When you identify a provider that suits your trading preferences and style, you can choose to copy their trades manually or automatically.
You will also need to allocate some funds and set them aside from the rest of your portfolio. Some platforms require a minimum copy trading amount, some don’t.
You begin a relationship with a provider by following their trades. If the provider spends 10% of their trading capital on a trade, trade copiers do the same. Depending on the platform, copy trades may also be able to set extra parameters such as Stop Limits that lower their overall risk.
Is Copy Trading the Same as Mirror Trading?
As newcomers to the social trading scene, you may also have wondered if copy trading is the same as mirror trading. The answer is no, not exactly.
Mirror trading is like copy trading, but mirror traders simply implement strategies based on their personal preferences. It may involve elements of copy trading experienced traders, but not necessarily.
What are Some Pros of Copy Trading?
So, why copy trade? There are in fact many advantages for trade copiers in the world of copy trading. Below, we outline a few:
No Experience Needed
The main advantage of copy trading is that you do not need any prior experience in trading or in a particular market to participate. If you are a trader who is keen on starting out, you will find that it is possible to spot a good provider and benefit from their decision-making.
This is also a benefit for traders who want to diversify their portfolio. For example, a trader who is an expert in stock trading wants to break into forex trading, but he is unsure of how he can do that. He can follow a successful forex trader and diversify his portfolio through the provider.
Wide Range of Instruments
There is generally no set limit for what trades you can or cannot copy trade. As long as your broker provides an instrument or a product, you may be able to copy someone else’s trades on it. This ranges from forex and stocks to commodities, and more. This offers traders a chance to diversify their portfolio and gain exposure to different markets.
Chance to Hone Skills
Another advantage of copy trading is that you get to witness an experienced trader perform in real time. You can track when they enter and exit trades, the strategies they employ, and the risk management tools they use. This is a great way for traders to hone their own skills, so they can one day make their own trades.
Flexible Fund Allocation
Finally, one of the great things about copy trading is that there is a degree of flexibility involved. Trade copiers do not need to follow their providers directly and completely. Depending on the broker you work with, you can tweak certain parameters, such as the funds you allocate to copy trading and the parameters of your trades. You can also implement your own risk management strategies such as Stops and Stop Limits if you want to.
What are Some Cons of Copy Trading?
Despite the pros of copy trading, there are also several risks that you must consider:
Market Risk
Whether you are placing your own trades or following someone else’s lead, a risk you will always meet is market risk. This is the possibility that market performance will not be what you expect, and your predictions may not be correct.
Provider does Not Perform Well
Another risk you take on when copy trading is that your provider may not perform well. This could be for a number of reasons beyond your control. In this case, the most you can do is to terminate your relationship with the provider and find someone else.
Liquidity Risk
Finally, another risk that you will encounter regardless of whether you are placing your own trades or copy trading is liquid risk. This is the risk of an unequal balance of supply and demand in the market, making it difficult to close trades when you or providers want.
How Can I Mitigate Copy Trading Risks?
There will always be risk in trading, but there are ways to mitigate them and to minimise their impact. Some ways you can reduce the risk you take on when you trade include:
Choose the Right Provider for You
The most important thing you can do is to choose the right provider for you. Ensure they have a similar risk level as you do, that they trade the same markets you want to, and you can opt out anytime.
Use Risk Management Tools
Next, you should also ensure you use the risk management tools you have at disposal. Set Stops and Limit Stops in your copy trades, set your own parameters and tweak those of your provider, and never allocate more funds than you can afford to lose.
Try a Demo Account First
If you nervous about losing money when copy trading, then it may not be for you. It’s okay to take a step back and trade on a demo account with simulated funds first. You can hone your skills this way with no risk, and you can enter the market when you are ready to start placing live trades.
Do Extensive Research on the Markets
Even though you are following a provider’s trades and copying their moves, it is a bonus that you do extensive research on markets and understand how trading works. You can spot waves early on and assess how your provider deals with market volatility. You can also have a better eye for spotting which providers are legit.
Summary
Copy trading can be a lucrative endeavor when done correctly. If you are a new trade copier and you are looking to break into the scene, you should know two things: there will always be risks in all forms of trading, and you will only be as profitable as your provider. Therefore, you should ensure that you choose the one that best suits you, and always keep an eye on the markets so you can react quickly.