What is copy trading?

Trades made by other investors in the financial markets can be copied by traders. There are various methods for copying another investor's trades. A trader may, for instance, clone every transaction, including trade entries, take-profit orders, and stop-loss orders. As an alternative, users might manually duplicate the transactions after receiving trade notifications.

In order to mimic an investor, a trader must hold identical positions to that investor. When imitating another trader, one simply follows their trades without knowing how the trader operates. In contrast, mirror trading enables you to duplicate a trader's genuine techniques.

Mirror trading gave birth to copy trading in 2005. At first, traders imitated particular algorithms created by automated trading. Developers made their trade history publicly available so that others may emulate their tactics. As a result, a social trading network was created. Eventually, traders started to mimic other traders' moves in their individual trading accounts rather than following a method.

What advantages does copy trading offer?

One type of portfolio management is copy trading. Finding other investors whose record you'd like to imitate is the objective. Trades can be monitored by traders by copying the tactics of other profitable traders. Before deciding to risk real money, traders are better served by following the investor, just as with any trading technique they choose to use.

For traders who lack the time to study the markets personally, copy trading can be helpful. Although copy trading often concentrates on short-term trading, there are other more ways to make money. Contracts for difference and the foreign currency market are the main assets employed. While copy trading has the potential to be profitable, it may also be risky. Traders should keep in mind that past performance does not guarantee future results.

DEVELOPING A DIFFERENT PORTFOLIO

Trading in copies enables investors to diversify their holdings. This indicates that a trader is utilizing a variety of strategies to profit from the markets. Traders might employ a variety of techniques rather than placing all of their eggs in one basket. When copy trading, you ought to think about copying a few distinct traders.

Finding duplicate traders who trade on various financial products is one method to diversify. One may, for instance, duplicate both a forex trader and a commodity trader. They might also think about copying traders who work with various time frames. One may trade intraday, while the other may trade for a longer period of time. Traders with high return volatility in contrast to those with low return volatility may also be taken into account. Finally, one may compare extremely active traders to less active traders. But keep in mind that if it seems too good to be true, it generally is.

Copy trading's business concept has the potential to be successful. The majority of copy trading companies use subscription business models, where a customer pays a charge to copy traders each month. Revenue sharing is an alternate model that may be implemented. One gets a set share of the profitable trades here.

What dangers lurk in copy trading?

Market risk is the biggest danger a trader may encounter when using copy trading. A trader runs the risk of losing money if the strategy they are replicating fails. Additionally, when markets are volatile, traders suffer liquidity risk if the instruments they are dealing encounter illiquidity. Finally, systematic hazards might arise for traders if the product they are dealing sees sudden decreases or increases.

Market hazard

Market risk is the danger of suffering a loss as a result of fluctuations in a security's price. Gains from an increase in the value of the traded item are what are hoped to be generated. Of course there is a chance that the asset's value will decrease.

Traders might use an asset allocation strategy to shield themselves from market risk beyond what they anticipate losing. This implies that a specific plan only receives a set quantity of funding. By committing all of their resources to a single trading method, a trader runs the risk of suffering significant losses and losing all of their capital if an unforeseen occurrence occurs.

Trading professionals can diversify their portfolios by investing their funds across various tactics. Using a diversification approach, traders can profit in a variety of market conditions. Trending markets are used in numerous strategies. One could lose money in sideways trading market conditions if they exclusively invest in traders that do well during these times.

Availability risk

Liquidity risk refers to the possibility that one will be unable to sell positions at expected prices. So that the trader can view the copy trader's highest historical drawdown, a strategy's risk management technique should have historical precedent. The greatest drawdown depicts the strategy's peak-to-trough decrease during its entire life. This is a crucial number because it allows traders to see historically the most they might be willing to lose at any given time if they decide to use the technique. A copy trader, for instance, might be allowed a maximum drawdown of 20%. This indicates that once a trader begins to replicate the trader, they can anticipate losing at least 20% at any time.

For traders, learning more about the goods and asset classes they are dealing is also helpful. This is due to the fact that the liquidity level of each instrument varies. For instance, selling positions in EUR/USD will be considerably simpler for a trader than selling emerging currencies. When emulating traders who concentrate on currencies from emerging markets, one should look at the slippage factored into their results. Slippage can be quite important when volatility is at its highest.

Systematic danger

Currency from emerging markets is more susceptible to systemic problems. This implies that a trader's funds can become locked up and they might not be able to get out of their positions. When governments have been deposed in the past, capital has been imprisoned and is not allowed to depart. Even though this scenario is extremely unlikely, it must be considered in any plan where it might occur, particularly in the foreign exchange market.

Comparing copy trading and mirror trading

Mirror trading and copy trading have a few minor distinctions. Mirror trading is defined as replicating a trading strategy. Traders imitate other traders' trading techniques or styles. At first, traders were curious about particular algorithms being created, and developers were willing to reveal their trading records. Traders would seek out algorithms with high returns and duplicate them, requesting permission from the developers to use their techniques. Mirror trading gave rise to copy trading.

One does not get the copy trader's strategy's layout when copy trading. Instead, they blindly replicate the trader's actions.

Summary

As part of a copy trading technique, one copies the trades of another trader while monitoring their performance. Additionally, copy trading can be done automatically, transacting your transactions for you. A trader could carry out their own transactions using the manual version. The manual version allows for discretion, and if one uses their own discretion, they should anticipate that their returns will differ from the copy trader's historical returns.

A specific amount of capital should only be given to a single copy trader. If a trader has a set amount of capital set aside for copying other traders, they should diversify to make sure they are not betting all of their money on one trader.

When copy trading, there are a number of hazards that traders may encounter. The most frequent risk is market risk. Make sure you are at ease with the copy trader's maximum drawdown before putting money at danger. This is the capital decline from the peak to the trough, which can occur at any time. This means that even if a copy trader's previous profits may be substantial, if someone starts copying the trader while he or she is at their best, they may go through a rough spell.

After 5 p.m. New York time (10 p.m. UK time), if you hold onto your position, your account will be debited or credited at the current holding rate. You might get interest if you purchased a currency with a higher yield; you might pay interest if you purchased a currency with a lower yield.

Traders should be cautious of systematic risk as well. You should imitate traders who speculate on currencies from emerging markets because they run the danger of having their capital sequestered.

A trader can think about opening a demo account before beginning copy trading and manually copying the transactions to determine if the returns are as successful as had been anticipated.

Use MA Profit for copy trading

MA Profit offers a simplified form of copy trading to its customers. When they invest into the MA Profit AMC, all AI-based trades from MA Profit will also be executed on their behalf.

The MA Profit algorithms, which are powered by machine learning, are able to quickly adapt to changing market conditions and respond to potential risks, helping our clients to achieve their investment goals even in unstable financial markets.

In addition to our expertise in economics, behavioral finance, and data, MA Profit also specializes in using technology, including AI trading, to understand the driving forces behind markets and make informed investment decisions.