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Copy Trading Strategies

Copy trading is a way to automate your trading by copying the trades of other traders, often used by newbies. Is itself a trading strategy, and is a relatively passive investing strategy.

Copy Trading Strategies

Although copy trading seems to consist of passing trading decisions to other traders, it still leaves a lot of room for strategic decisions.

For example,

  • When it comes to choosing the traders you want to copy
  • Or deciding how much capital to allocate to each copy trader, placing stops
  • Knowing when to stop copying a trader, and so on and so forth.

Therefore, before entering the copy trading arena, it is wise to arm yourself with several copy trading strategies to use in case certain situations arise and they always do.

KEY TAKEAWAYS

  • Before entering the copy trading arena, it is wise to arm yourself with several copy trading strategies to use in case certain situations arise.
  • When copy trading, there is a danger that traders will not do their due diligence before invest ing large sums of money, so it is important not only to research suppliers thoroughly.
  • Copy Traders need to have confidence in a trader's work in order to make a profit.

Copy Trading Strategies

As we mentioned earlier, even though you are handing the steering wheel over to other more experien ced traders, it's important that your trading strategy is aligned to the one that you copy. Here are some strategy considerations to keep in mind.

  • Risk tolerance - how much market volatility are you willing to accept and what war nings and tools will you use to manage your risk?
  • Markets - what financial markets do you want to invest in, because it is impor tant to understand the market in which you want to invest your money.
  • Fixed or flexible - what level of control do you want to have over your capital? A fixed and fully automated copying approach will reflect transactions with minimal control or data entry. If you want more influence and control, you can opt for a more open and flexible option.
  • Research – when copy trading, there is a danger that traders will not do their due diligence before investing large sums of money, so it is important not only to research suppliers thoroughly, but it is also very important to regularly monitor the performance of trading when your capital is at stake.
  • Leverage - leveraged copy trading allows you to increase your profit potential and diversify your portfolio by reflecting trades from multiple providers.

Note. Leverage rates vary depending on your jurisdiction.

The Keys to a Successful Copy Trade Strategy

  • Knowing when to enter a copy relationship and when to exit it, as well as letting go - As in various financial markets, traders experience ups and downs, and it is desirable to start copying them at the beginning of the upswing, but how can you tell what phase a trader is in? Well, there are a few telltale signs you can look at.
    • View the list of trader's open trades. In many cases, the statistics on a trader's prof ile will only reflect their performance based on the trades they have made, not the po sitions they currently hold.
    • If a trader has a lot of these positions, especially if many of them are in the red and have been down for some time barring a sudden market reversal, that trader is heading down. Copying them now is useless. But you may want to keep an eye on them in the future, because after these losing trades are finally closed, the trader may be ready for a new up phase.
    • And vice versa - a trader who has recently suffered several downs but has good overall pe rformance and few open trades is ripe to do well now that his list is completely wiped out.

    Note: it's important to look not only at past performance, but also at the trader's current situation with an emphasis on the future.

    • Just as important as knowing when to start copying a trader is knowing when to stop. This can be more difficult than you think due to various psychological factors. In addition to the sunk cost misconception that haunts every financial trader (the more money you invest in an investment, the harder it is to abandon it), when copy trading, people tend to become emotionally attached to the traders they copy.
  • Choosing right trader to copy - You should consider the following Traders
    • Experience in trading and how long they have been in the business;
    • Open positions and investment ratio of invested money;
    • The types of investments they prefer;
    • Average investment holding time.

    There are also some tips for choosing a trader to follow.

    • It is better to spend some time and see how the trader performs over time. Experts advise against copying a well-known trader who has recently reached his peak earnings, as this may be a sign that this is his maximum. Instead, select a trader who opens new trades.
    • Some traders are too good to be true, for example, there may be traders with a perfect trading history and no losses. Therefore, it is better to choose a trader with a good business reputation and a history of big wins and occasional losses.
    • Consistency is critical in copy trading, which is why it's best to avoid players with big peaks and losses.
    • Also see how many open positions this trader has at the same time. Too many positions can be an ineffective strategy. If you're losing, you'll want to have fewer positions to control.

And it's always good to have some spare money in your account so that you can take advantage of oppor tunities when they arise.

  • Diversifying - There is a saying that perfectly describes what diversification is - don't put all your eggs in one basket. Diversifying your portfolio is the surest way to reduce risk and ensure long-term profitability. In copy trading, achieving diversity may require a little more research and careful strategy development than in traditional market trading, where diversity is pretty much self-evident. Diversification is based not only on the choice of different traders, but also on different financial markets, that is, on Forex (one currency pair), on a commodity (one commodity), you understand.

    For example,

    Let's say you started copying the five traders on the network that showed the highest percen tage of profits over the past year. But it turns out that all five of these traders trade ex clusively in the EUR/USD market. As a result, even if you invested in five different traders, in the end all the eggs ended up in one basket.

    To avoid this situation, the copy trading strategy should be to carefully check the portfoli os of the traders you intend to copy. The safest way is to choose traders whose investment s cover different classes of instruments such as stocks, indices, currencies, commoditie s, etc.

    Another thing worth mentioning is that traders can change their trading strategies while you copy them, so keep a close eye on your copy portfolio as a whole to make sure previously compatible traders stay balanced.

Is Copy Trading Safe

Many traders are often concerned about the safety of copy trading

  • First issue infront of copy traders is having confidence in a trader's work in order to make a profit.
  • The second issue is whether copy trading is a safe way to engage in trading activity in the fin ancial markets.

Copy Traders need to have confidence in a trader's work in order to make a profit.

Although subscriber traders can set up copy strategies and risk management settings that protect the subscriber to some extent, whether it will be profitable or not will still depend on the trading efficiency of the trader.

Let’s take a look

Does built-in Risk Protection features help?

First thing you will do when choosing a trader to copy is checking his or her rank. You can customiz e your own filtering criteria for traders and find the performance you like and see a performance scoring system. The rating is based on the results of trading on the trader's account.

Trader's scores are calculated according to five factors:

  • Account profitability,
  • Stability,
  • Ability to control risks
  • Windfall profit and loss
  • The amount of capital.

Having this information in hands you can make a balanced decision.

However, you have the freedom to follow or stop following and start trading indepe ndently on a trading account, despite the fact that this account has been linked to the trader's account. It is also possible to overwrite any trade orders from a linked trader's account by manually opening or closing them based on your own decision.

Bottom line on Copy Trading Strategies

Copy trading is becoming more and more popular among novice traders around the world. The con cept in volves automatic transactions impl emented by professional traders. Essentially, everyone chooses a financial market professional who will follow his or her methods and make a profit every time the chosen expert makes a profit.

Even though copy trading strategy is considered to be mostly used by novice traders, that doesn’t mean that you can sit back, relax and money will come flowing.

In other words, it's a constant learning curve, even though it's more passive than other trading s trategies.