Copy Trading is one of the easiest and profitable trading methodologies that novice or inexperienced investors can use. This methodology is also known as social trading. It is an automated way to optimize the investment strategy and portfolio management for investors looking to replicate the trading portfolio of highly renowned investors.
What is copy trading in crypto?
Copy trading is the trading methodology whereby investors across financial markets can automatically open positions and execute trades in accordance with the portfolio of another selected entity or individual in the market. It can either be automatic or manual depending on how the individual would like to approach copy trading.
The copy trading methodology depends on social networks and social trading systems, where one trader’s open position is broadcast to other traders on the network. Traders can decide whether they would like to open the same position, or the automated trading system can perform the action on their behalf without any additional input required.
Copy trading system (Source: IG.com)
Traders can replicate the primary trader’s trades with the belief that the primary trader has experience in the underlying market. The copy trader might be entirely new to investing or be completely unaware of the specific market. It is one of the easiest ways to generate a regular stream of income from investing without putting in a lot of time researching the market or charts. The primary trader receives a portion of the profit or establishes a cost of service for each transaction.
Click here to learn “What is social trading?".
Copy Trading vs. Mirror Trading: What is the difference?
Even though these trading methodologies might sound similar, copy trading and mirror trading are two different trading styles. Copy-trading is a refined version of mirror trading. The latter entails that investors follow every signal and trade in an automated manner. In contrast, with the former, traders opting for this strategy can choose which specific trades they can copy.
Mirror trading is preferable for traders with a large capital base since the automated system imitates every signal and trade of the primary trader, exposing the copy trader to witness large fluctuations in their account. Copy trading on the other hand is more suited to smaller volume traders or new traders as they can assign a percentage of their account balance to an individual trader’s strategy and follow several traders concurrently.
Can copy trading be profitable?
Copy trading is one of the most profitable investing methods as traders can copy the primary trader’s whole transaction history. Copy traders pay a fee to the primary trader for copying their strategy. Copy traders can also impose limits, including limiting the number of transactions per day or the percentage of their account involved in the trade position. They are also free to cancel an agreement if it does not suit them. In addition, platforms on which copy trading takes place such as Zerodha, Aliceblue, DupliTrade are also profitable as a portion of the cost goes towards platform subscription. Thus, all parties involved can earn profits by participating.
Why is copy trading popular with new investors?
Novice traders who do not specifically have a lot of experience in a specific market stand to benefit from the expertise of primary traders without having to spend a lot of time and research to develop a profitable trading strategy. Testing and trying a profitable strategy and consistently refining it can be a long and time-consuming process. Especially since in the cryptocurrency market a high number of new investors enter the market every day due to the media hype and the volatility the asset offers. Therefore, copy trading can be a safe alternative to experimenting with the markets.
Pros and Cons of Copy Trading
While copy trading appears to be a convenient and profitable methodology at the outset, the pros come hand in hand with cons. A few of the pros and cons are featured below:
Pros
- Copy trading methodology allows traders to follow and replicate successful and profitable traders with a proven track record.
- Fosters financial inclusion by enabling novice traders or traders with limited knowledge of the financial markets to participate actively and diversify their portfolios.
- Intermediate and seasoned traders can take advantage of a trade position without the need to constantly monitor the market, or they can become signal providers and earn a portion of the profits (on the copied trades).
Cons
- Copy trading does not require traders to research and learn about the markets, thus providing little incentive for traders to learn about the underlying asset as well as creating their own strategies.
- Even though knowledgeable individuals design these strategies, they do not entirely eliminate the risk with trading. Sometimes, they are used by traders to influence the market price for their gain.
- There is an undeniable cost involved with copy trading which goes directly to the primary trader from the profits earned by the trader.
Conclusion
Copy trading has broadened the scope for novice retail investors to come up to par with professional traders. Thus, it promotes financial inclusion and behaves as the leveling factor in the market. However, before indulging in such strategies it is highly critical for investors to assess the risks attached to this in addition to all the potential advantages.
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