What is Copy Trading and How to Copy Trade?

One of the easiest ways to take advantage of market opportunities is by copying successful traders. Copy trading lets you automatically follow the moves of more experienced traders, so you don’t have to do all the market analysis yourself.

Copy trading works for different kinds of traders, offering various strategies and goals. For beginners, it’s a chance to make profits while learning how the market works. For busy traders, it’s helpful because they don’t have time to trade actively. In both cases, copy trading is a useful tool.

What is copy trading?

Copy trading is a way to automatically copy the trades of other, often more experienced, traders. The idea is simple: you find a trader with a good track record and let your account replicate their trades in real time.

There are usually three key players in copy trading:

Provider: The experienced trader whose trades are being copied, also known as a "Master Trader" or "Signal Provider".
Copier: The person copying the provider’s trades through their own account.
Broker: The platform that connects the provider and copier.

To start copy trading, all you need to do is find a successful trader on a platform. Most platforms let you filter through the results of experienced traders, so you can easily pick one that matches your style and risk level.

When the trader you’re copying makes a trade, the platform will automatically make the same trade on your account. You can choose how much money you want to invest and set limits on the risks you're willing to take.

For example, if the trader you follow buys gold with 5% of their account, the same trade will happen in your account, but you can adjust how much risk you want to take.

There are different types of copy trading, such as mirror trading and social trading. Each has slight differences, but the goal is the same: to help you follow successful traders without having to make every decision yourself.

How does copy trading work?

Copy trading is available through brokers that provide special apps or software. In these apps, experienced traders you can follow are called "signals", and the people who copy them are called "copiers".

Here’s how it works:

Traders sign up with a brokerage and link their accounts to the copy trading app.
As signal traders make trades, their performance (like monthly returns and profitability) is tracked in the app.
Copiers choose which signals to follow. When a copier connects to a signal, every trade the signal makes is automatically copied in the copier’s account, but adjusted based on factors like available money and risk tolerance.
In exchange for their trades, signal traders take a percentage of the profits from their copiers.

How Does Copy Trading Work in Cryptocurrency?

Copy trading works across all financial markets, including Forex, cryptocurrencies, metals, commodities, and stocks. While most copiers focus on following the trader’s performance, not the market, you can choose to only copy cryptocurrency trades if that’s your goal.

Since crypto is still relatively new, many traders specializing in it have deep technical knowledge. If you don’t have much experience in crypto, it makes sense to copy these traders to benefit from their expertise.

How to copy trade?

To start copy trading, the first thing you need is a live trading account. This account will let you follow and copy other traders. You can also open extra sub-accounts if you want, which gives you more flexibility. For example, you could use one account for manual trading and another just for copying trades.

After you’ve opened your live account, link it to the copy trading platform you want to use. Once connected, you’ll see a list of traders whose trades you can follow. You can click on a trader to view their performance history, see what they usually trade, and check their risk levels.

Before copying a trader, you can adjust the risk settings to match your own preferences. For instance, some traders might have more money and be comfortable with higher risks, but you can set your own limits. This flexibility is one of the reasons copy trading is a great option for people who don’t have the time or knowledge to trade by themselves.

Once you’ve decided, just click ‘copy’, and your account will automatically start copying that trader’s moves. You won’t need to manually intervene – the system does everything for you. However, it’s always a good idea to check on your account regularly to track how things are going and make sure you have enough funds.

Copy trading isn’t just for forex. Some traders specialize in stocks, commodities, cryptocurrencies, and more, so you can choose the type of market that interests you.

Social trading vs copy trading

Social trading is another form of copy trading, but with a key difference: instead of automatically copying trades, you’re exchanging ideas and market research with other traders. This can help you improve your own trading by learning from others.

On social trading platforms, you can see how experienced traders analyze the market, why they make certain trades, and how they manage their positions. It’s a great way to learn and improve your skills.

However, social trading has one major downside: it’s not automated. You don’t automatically copy trades like you would in copy trading. Instead, you have to manually decide which trades to follow.

Key points to consider:

Time-consuming: Social trading takes more time compared to copy trading because you have to open trades manually.
Education: Social trading helps you learn from professionals by understanding their reasoning behind each trade.

Mirror trading vs copy trading

Mirror trading is a type of copy trading, but instead of copying individual trades from a specific trader, you’re copying an entire trading strategy, often run by automated algorithms.

These algorithms are sometimes developed by a team of professional traders. Instead of following one trader’s decisions, you’re following a strategy that has been carefully designed to respond to the market. The trades happen automatically, based on the algorithm.

Key differences:

Automation: Like copy trading, mirror trading is fully automated, so you don’t need to do anything manually.
Diversification: Algorithmic strategies often look at many different market factors and work across various markets. This can help spread out your risk and diversify your portfolio.

In short, mirror trading uses advanced algorithms to automate trades and offers the potential for more diversification, while copy trading follows the trades of individual traders.

Advantages of Copy Trading

Copy trading offers several benefits for traders:

Flexibility: Even though you’re copying another trader’s moves, you still control how much money to risk. If the trader is making big trades, but you don’t have enough funds, you can adjust the trade size to match your account balance.
Efficiency: Trading successfully takes time and effort, but with copy trading, you can follow top traders while focusing on other things. You just need to set and monitor your risk settings.
Transparency: Copy trading platforms often have leaderboards where you can see the performance of different traders, including their wins and losses.
Diversification: Copy trading can help diversify your portfolio. For example, if you use a long-term strategy, you could follow a trader who is good at short-term trades. If your strategy isn’t working or you’re not finding enough opportunities, copy trading can fill the gap.

Disadvantages of Copy Trading

There are also downsides to copy trading:

Picking the right trader: Choosing who to copy can be tricky. It’s not always about picking the trader with the highest returns. You also need to consider things like their trading history and risk levels.
Risk of loss: Just like profits, losses are copied too. You can control how much you invest and set risk limits, but you don’t have control over the actual trades the trader makes. If market conditions change or the trader struggles, it could affect your results.
Additional costs: Some traders charge fees to copy their trades, so check for any costs before you start.
Market risks: Copy trading doesn’t shield you from market risks like slippage or platform issues.

Copy trading strategy

While copy trading doesn’t require you to have your own strategy, having a plan can help you choose the right traders to follow. Here are some key points for a strong copy trading strategy:

Tradeable Markets: All the trades made by the trader you follow will be copied to your account. It’s important to know what markets the trader focuses on and whether they align with your interests. For example, traders who focus on tech stocks may face risks tied to that sector, while those trading cryptocurrencies might experience higher volatility. Make sure to pick a trader who fits the markets you’re comfortable with.
Risk Management: How much risk are you willing to take? Many copy trading platforms let you set a maximum loss or limit the percentage of your account allocated to one trader. Semi-automated and social trading platforms also offer more control over managing your risk.
Market Analysis: One benefit of copy trading is not needing to analyze the markets yourself. However, if the trader you follow lacks experience, this could become a disadvantage. It’s always a good idea to monitor the trades and adjust if market conditions change.
Leverage: Do you want to use leverage when copying trades? Leverage can increase your profits, but it can also increase your losses. Be sure not to risk more than you’re willing to lose.

Is copy trading considered to be profitable?

In copy trading, your success depends entirely on the traders you follow. If you’re copying a trader with a solid track record, you might do well. However, there are risks involved, and here are a few you should know:

Market Risk: This is the biggest risk in copy trading. Every trade is influenced by market forces, such as changes in currency values, stock prices, or interest rates, which can lead to losses. Even professional traders can’t fully avoid market risks. They may reduce risks by avoiding trades during big news events or illiquid market times, but the risk is always present.
Liquidity Risk: Liquidity risk happens when it’s hard to close a trade at a good price or in a reasonable amount of time. For example, if there are no buyers when you want to sell, you can’t exit the trade. This risk is more common with less popular assets, like exotic currencies or small-cap stocks. It can also happen during the first or last moments of market hours when there are fewer traders.
Systematic Risk: This type of risk affects the entire market and can’t be avoided through diversification. Examples include unexpected news events or market shocks. One such event was in 2015 when the Swiss National Bank removed a key currency peg, causing chaos in the market. These events are rare but can cause significant losses.

Copy trading terminology

Fixed Size: This allows you to set the total size of the trade you want to copy. You don’t have to copy the exact trade size of the trader you’re following, but instead, you decide how much you want to trade.
Mirror Master Size: This directly copies the exact trade size of the trader you're following. For example, if they buy $50 worth of gold, you’ll also buy $50 worth of gold, regardless of the differences in account size between you and the trader.
Mirror Master Risk: This adjusts your trade size based on the percentage of risk the trader is taking. It ensures that the risk is balanced according to your account size. For example, a $5,000 trade is much riskier for a small account than a large one, so this feature adjusts accordingly.
Max Drawdown (MDD): This is a limit on how much you’re willing to lose before copy trading is paused. If your account drops by a certain percentage (e.g., 30%), all copy trades stop and existing trades close. No new trades will open until you increase the drawdown limit.
Warning Level: When your account hits a certain percentage loss (set by you), the platform will send you a notification to let you know.
Soft Stop Level: If your account reaches this level of loss, copying is paused, but trades are not closed.
Hard Stop Level: When this level is reached, all trades are closed, and copy trading is fully stopped.