Copy Trading: What Is Copy Trading?
Investing and trading are no longer something only characterized to be the activity of Wall Street professionals.
In the last decade, especially over the last few years, the term 'retail trader' or 'retail investor' has risen to great heights and changed the financial world as we know it.
And we are truly only in the beginning stages of this global revolution. Given such events, the option of copy trading financial markets has become an absolute sub-trend of the retail trader and investor space.
Are you establishing your placement in this revolutionary trading movement? What is copy trading? We explain below.
Table of Contents
What is Copy Trading?: An Introduction
What is copy trading? Is it a good option for investing, and who is it suited to? What types of copy trading can you utilize? There is much to explore in this sub-culture of retail trading.
Before you can grasp the benefits, the 'why' and the 'how' behind copy trading, we must cover the bare basics – What is copy trading?
Copy trading is simply the act of one trader copying, in the sense of manually or automatically copying the moves of, another trader who enables themselves to be copied.
It can be confused and interlinked with the term 'social trading', also known as 'influencer trading' - while copy trading and social trading are extremely similar, and are direct branches in relativity, they are still technically two interlinking parts to the same overall equation.
You may also have heard of mirror trading – another very similar concept, belonging within the same matrix, however different in practice and theory.
For a clean and straight example, let's say Trader A is well-known for her market trades in the healthcare sector. She gains popularity and decides to enable the option for others to 'copy trade' her portfolio.
Trader B finds Trader A's results attractive, so decides to automatically copy trade with Trader A using the minimum set amount of capital; every open and close position Trader A makes, Trader B does as well.
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The History of Copy Trading
Copy trading has come into the financial world as an offering for retail investors only relatively recently, in terms of it being a literal service with the coined term 'copy trading'. But actually, the concept of copy trading has existed for quite a long time.
Before the wonders of the internet (can we imagine those days?), traders used to communicate their potential open and close positions via traditional newsletters (read: snail mail) to their 'followers', or readers; we're talking old-school Wall Street days.
Eventually, in around the late 90s, an official trading room was started with the same concept in mind – a transaction was executed and announced in a 'virtual room' or chat room, and if the trader wished, they could reproduce the transaction.
This concept grew in popularity where others would comment, interact, ask questions and so on, and there was eventually a fee for this chat room service.
As most things worthwhile do, this idea progressed into something bigger and better as time went on. The concept of automatic replication within open and closed positions of a given trader made a lot of sense within the trading community; if only such a system could exist to enable this automatic activity?
It is not long after, in 2005, when automated trading or, also known as, algorithmic trading led the way for official concepts such as copy trading and mirror trading to be born. At this time, mirror trading was the focus and inaugural strategy – the ability to duplicate a trader's strategy (but not the exact opening and closing of positions).
Fast forward to 2010, and many financial brokers started to offer copy trading, especially in the foreign exchange market (Forex).
Why is Copy Trading a Good Trading Option?
The world has certainly been turned upside down over the last, now, two years, with the effects of the global pandemic – which are still far from over at this time of writing.
If we are wise as individuals, we will try to embrace adaptability and step forward (never turning back); it is under times of pressure and hardship that we have the potential to thrive more than we ever imagined possible. This is exactly what has happened within the financial world, amongst many other areas.
Traditional banks may not be desirable to the everyday customer – and the everyday banking customer, which represents the majority of us, is also becoming much wiser with our finances and such decisions.
People no longer accept being treated as a segment. The generations now are looking for financial service solutions which are both modern in a use case, and in philosophy. Traditional banks are no longer the only option for money management.
Copy trading, while it has a significant history timeline in the financial world, is still a relatively new and unrecognized concept to the everyday person, or budding retail investor. While it maintains to be 'new' in practice, it fits in very well into the above description of regular banking customers looking for flexible financial solutions.
What makes copy trading such valid and beneficial trading and investing option?
More Efficient Trading and Investing
Probably the most attractive benefit of copy trading is efficiency. When you register to follow a trader's positions, known as copy trading, your activity then becomes quite literally automated.
Given that you trust the track record of the given trader, you can 'sit back and relax' while the positions are executed without merely lifting a finger.
Of course, risk is not eliminated in copy trading, as it never is in trading overall. That said, given you are following the background of the said trader you choose to copy, you are making what can be considered an 'educated risk'. The mass amount of time you save in following the markets, the news and executing trades makes the option of copy trading an alternative trading option.
Utilize Other Investor's Knowledge and Experience
Aside from saving time, which we could also use more of (and yet never receive), let's talk about the untapped market knowledge you are accessing via copy trading.
Copy trading gives you the ability to utilize another trader's hard-earned knowledge in certain markets where you may have no experience. Given your style and amount of trust, you can leave the decisions all in the hands of the trader you're copying, or you can learn as you go by following their moves.
This gives you exposure in sectors and seasonal trends you are unfamiliar with.
Diversity in Unknown Markets
Trailing on from the above point, your exposure as an investor only widens with the opportunity to use copy trading in your investing and trading strategy.
Much like you can use another more experienced trader's expertise, you can also find yourself in markets you are yet to be familiar with. Again, depending on you as an investor and trader, you may use this benefit to sit back and let autopilot take over, or you may use it to learn the unknown; both are completely valid.
As with anything investment or trading-related, an element of risk is always present. It is always possible that you may experience loss from copy trading, which is why you should only ever invest with an amount you are comfortable losing. This factor should always be considered in your risk management strategy. Always trade responsibly and follow your strategy.
The allure of ongoing profits with a minimum time commitment is certainly an attractive reason in itself to try copy trading. You simply need to define and choose your ideal well-performing trader who allows being copied, many of which we list here at Admirals, as long as you are using a live account.
Copy Trading vs. Social Trading vs. Mirror Trading
While these three trading strategies all live within the same family in the trading vortex, and in some ways work together, they are all different. It is important to clarify such differences as any level of trader needs to be constantly improving their level of education; education is the absolute number one golden rule of both investing and trading.
Overviewing 'what is copy trading', we have so far made it clear that copy trading is the act of systematically, either automatically or manually, having your trades follow the exact movements of the person you choose to copy trade. When the copy trader opens a position on any given instrument, your account follows, and once they close said position, yours does as well.
But how about social trading? Doesn't this seem to describe one in the same thing? The best way to describe the relation here, is that social trading acts as the umbrella for which copy trading rests.
Social trading is the overall concept of what you observe within your social feed relative to trading, whether that be on a private trading forum, social networking site or otherwise.
It's the act of traders sharing information with each other in real-time, with such information resulting in additional trades made, where there is confidence involved (naturally) - but no automatic commitment, most importantly.
Social trading certainly helps new traders to learn by following the actions of the more experienced. The new trader is learning quickly in a real-time environment and depending on the information shared, can replicate the trades easily via their own account – if they so choose to.
Copy trading, on the other hand, is a commitment to follow the exact trades of another trader, point blank. Perhaps you can see how these two terms can be easily confused.
As we briefly overviewed in the history, above, this concept of social trading is hardly anything new; with the possibilities of the internet, it has developed and gained popularity.
Where this development takes it to the next level, is when financial brokers such as Admirals have the technology in place so a trader can systematically follow another trader's every move. And hence, we have copy trading. Copy trading is a truly fantastic revelation that brings the concept of automated trading to the next level.
And how about mirror trading? Mirror trading is actually the original trading strategy of all three – the primordial act which gave birth to the evolution we can now financially thrive from. The methodology of mirror trading is to, literally "mirror" the trading strategy which suits their preference.
Based on aspects such as risk tolerance and past profits, the given mirror strategy is an algorithm determined by trading patterns from various traders who were successful. In simplest terms, mirror trading allows you to mimic and execute a trading strategy, rather than follow the moves of a specific trader.
What are the Most Popular Instruments to Copy Trade?
The person or people you choose to copy trade will determine the financial instruments, market exposure and strategies your dedicated portfolio(s) will follow.
Generally speaking, various copy traders have a speciality they choose, known as their market strategy. Depending on what you as a trader and investor are looking for in terms of exposure is how you should determine which copy trader is right for you. Important factors to consider are:
- Your risk exposure: How much risk are you willing to take?
- Your investment goals: Are you looking for passive income as a result of copy trading, or are you seeking long-term growth?
- Short-term or Long-term: Similar to the above but a question on its own, are you looking to trade positions that take place over days and weeks, or are you looking to expand monthly, quarterly or yearly? Or longer?
- Dividends: When the company profits of your shares are in surplus, are you looking to receive extra income from dividends? This is generally best suited for stocks and ETFs.
These are what are to be considered the most important factors to consider before copy trading – and questions you must also answer in general, before defining your trading and investing strategy.
Below we will highlight some of the most attractive and popular financial instruments which can be utilized when copy trading:
Copy Trading with Forex
Foreign exchange, also known as Forex, is an incredibly popular sector for both traders and those who would like to copy trade successful forex trader's portfolios.
Trading Forex is typically always a short-term trading plan. Another reason why this is a popular sector to copy trade is because forex trading requires a lot of technical analysis. Many inexperienced traders do not have the knowledge to do this successfully, hence why copy trading forex is a common option for this kind of market exposure.
Copy Trading with Stock Shares
As you can imagine, there are so many incredible companies with shares on the live markets, ready to be traded. Whether trading with actual shares or trading with stock CFDs, both are equally valid from an investing and trading perspective.
As this area is very vast in potential, so are the trading strategies; short-term or long-term are both equally common, depending on the sector, market conditions and various other factors. Typically, in copy trading stocks you will have a bundle of companies, often belonging within the same sector. Naturally, the strategy will vary.
Copy Trading Various Market Sectors
It is notable to mention again that this area of copy trading is often utilized to gain exposure to sectors you may not be familiar with, but want to gain access to in your trading and investing.
Healthcare, energy, industrial, financial, utilities... These are some of the most popular market sectors. Areas such as blockchain, tech, artificial intelligence... These are merging sub-sectors which are gaining in attention and popularity.
Copy Trading with Crypto
The world of digital currencies, or crypto for short, has been a fascinating sector over the past few years.
With a lot of scepticism, as is only natural with such disruptive technology, digital currencies have truly become a trader's "best friend" due to the mass amounts of volatility.
Of course, volatility brings a whole new level of associated risk. That said, given the options to both Buy and Sell crypto CFDs, there is a huge influx of copy trading portfolios which focus only on crypto.
Similar to trading forex, trading crypto CFDs is also done against a base currency such as USD or EUR. The volatility has made sizeable gains possible and you will find this most certainly within copy trading profiles.
Both fundamental and technical analysis are important factors here, and if you are not familiar with either, it may be a good solution to copy trade a portfolio which is familiar with the digital currency sector.
Fractional Shares Trading
Let's say the current price per share is around $2,000; if you wish to purchase GOOG as part of your portfolio, but do not wish you buy an entire share at $2,000, you can instead purchase a fraction, or a portion, of the stock. This is the concept behind fractional shares.
The concept of fractional shares allows traders or investors to purchase positions in expensive companies which they may not be able to otherwise.
What is Copy Trading? Conclusion
Trading and investing are not easy paths to take, but it is well worth the benefits you create for yourself by making financial freedom a choice in your life.
Utilizing each tool we make available for our users gives you full control of your financial activity, in one place, via the Admirals Dashboard. We consider your successes ours, too.
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How does copy trading work?
By copy trading, you are basically implementing a portfolio management strategy based on the open and close positional movement of another trader (who allows themselves to be 'copied' via an online broker). This can be done both automatically and manually, and for the most part, you can choose the amount you invest (however there is usually a standard minimum requirement).
What is the benefit of copy trading?
Some of the main benefits of copy trading include:
- Mimick or copy the positions of highly successful traders, giving yourself the same results as those you're copying with minimal effort
- Exposure to new or unknown markets which may be profitable but you lack knowledge in
- Time-efficient portfolio management
Is copy trading good for beginners?
Copy trading can be suitable for all levels, as long as you always keep in mind the risks that come with any form of trading. Copy trading can be good for beginners as the beginner trader will have the ability to learn as they mirror the trader's copy portfolio.
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The given data provides additional information regarding all analysis, estimates, prognosis, forecasts, market reviews, weekly outlooks or other similar assessments or information (hereinafter “Analysis”) published on the websites of Admiral Markets investment firms operating under the Admiral Markets and Admirals trademarks (hereinafter “Admirals”). Before making any investment decisions please pay close attention to the following:
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4. The Analysis is prepared by an independent analyst (hereinafter “Author”) based on Brandie E Blackler, Financial Writer and Analyst, personal estimations.
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