Copy Trading Brokers – Learn the Basics and Choose the Best Option

What Is Copy-Trading – Definition and Examples

There is no straight answer to the question what is copy trading?. Simply put, it is the easiest way to participate in the market by copying the trades of successful traders. After all, the aim is the same – to make a profit.

Sure enough, due diligence is needed to find traders that performed well in the past. Here is where copy trading brokers intervene, highlighting traders with a positive track record and rewarding them for success. More precisely, brokers pay a fee to successful traders, also called lead traders, as compensation for their services of providing trades to other accounts.

But why would a broker allow copy trading? Simply put, it is a win-win situation. It means more commissions for the broker, who charges a fee for intermediation services.

Through copy trading, investors benefit from other traders' knowledge and expertise at no additional cost. When the trader opens or closes positions in their account, these are automatically copied to the investor's account. Moreover, the risk management system adjusts automatically.

For example, let's assume that your broker allows copy trading. Usually, the brokerage house will highlight the most successful traders on their platform so that there is a list of names to pick up from.

Any new trades will be automatically replicated to your account after selecting the option to copy the trader's positions. Technology allows the trades to be replicated almost instantly, with little or no delay.

However, this doesn't mean that copy trading requires nothing else. The due diligence process of copying the proper account is very complex.

First, one needs to make sure that the risk profile is suitable. For this, an analysis of past drawdowns is required.

Second, even if a trader succeeds, it does not mean all trades are profitable. There will be periods when no profit or even losses are incurred. Therefore, the person using a broker's copy trading function must still have some trading experience.

The bottom line is that copy trading is the simplest form of participating in financial markets. Pick an account to follow, and watch new trades open and close in your account.

Types of Copy Trading

Copy trading can be done with any financial product, but the most popular ones are the forex and cryptocurrency markets. The explanation is that these two are the most volatile markets.

Crypto copy trading profits from the higher volatility and offers the opportunity to make quick profits, attracting new traders to financial markets. The cryptocurrency market capitalization reached levels unimaginable only a few years ago. It is a place where both long-term investors and speculators meet, known for extreme volatility.

In 2024, the Securities and Exchange Commission in the United States approved several Bitcoin ETFs, which made the crypto market even more popular. Therefore, it is unsurprising that cryptocurrencies are part of many copy trading portfolios.

Forex copy trading means the broker offers access to the forex market so that one can copy the signals of another account trading the currency market. The forex market is less volatile than the crypto market, but sometimes, one can witness vast moves of two, three, or even four standard deviations.

The type of market should not influence copy trading. The only requirement is that the broker offers a particular market. For instance, if one wants to trade cryptocurrencies, but the broker offering copy trading does not offer access to this market, then it is impossible to do so.

One may say that it is popular both among forex and copy trading crypto traders. As long as the market is volatile, traders can make money by following successful trading strategies.

Recommended Copy Trading Brokers

Explore these featured brokers to get started.

🚀 XM	Ultra-low spreads and a multi-regulated environment.	Visit site
🎯 XTB	Excellent customer service and innovative trading platform.	Visit site
🎁 Pepperstone	Top broker with razor sharp spreads.	Visit site

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5 Simple Steps to Copy Trade – Pro Tips and Strategies

A five-step guide for successful copy-trading should look like the following:

Safety Tips in Copy Trading – Evaluate the Risk

Is copy trading risky? Investing in financial markets is risky as no success is guaranteed. Even past performance is not indicative of future success.

Markets are irrational, and no strategy works 100% of the time. This is why successful investors use stop losses, either physical or mental. Some risks can be handled, but some cannot. For instance, systematic risk affects all portfolios invested in the stock market, not just a particular stock. Such risk is inherent to the entire market and cannot be diversified away.

There is also a liquidity risk, which means that one cannot exit a position quickly enough without taking some losses. Thus, make sure you are trading markets that are liquid enough to allow you to exit a position at any time without additional costs.

The idea of copy trading is to reduce all the risks. However, risks cannot be eliminated entirely. Instead, it can be diversified away by choosing a combination of successful strategies to copy.

Risk management is paramount when trading financial markets. Some copy trading platforms allow the copy trader to set the desired level of risk. If not, another way to control risk is to focus on lead traders with a history of small drawdowns.

It should be noted that copy trading does not mean that the copy trader loses total control of the trading account. New trades may be taken, independently from those taken by the lead trader, to reduce risk. For example, one may hedge a position the lead trader opened while keeping the copy trading service active.

Conclusion

Copy trading was only introduced several years ago. Technological developments allowed trades in one account to be replicated in many others. Nowadays, successful lead traders have hoards of followers and traders who copy their positions. This way, they supplement their trading income.

Despite the easiness of copying successful traders, some due diligence must be done. Copy traders should research the lead traders, their strategies, and the markets they trade in, and they should find out all about the cost of copy trading.

Summing up, copy trading is a great way to earn money in financial markets by following successful traders. It allows diversification and improves the chances of success in trading financial markets.