As it was mentioned previously, copy trading is what its name says – you automatically copy trades of professional traders. You attempt to replicate the trader’s performance.
The money spent on copying a trader is under control of the investor, unlike an investment fund.
The investor is just copying another trader and he can stop it anytime and the money will remain in his brokerage account.
Copy Trading vs Social Trading
Despite being used interchangeably, there is a difference between these two notions. A social trading platform is a place where a trader shares his trades publically. The copying mechanism isn’t necessary for it.
However, lots of trading platforms contain the copy option, so copying the trades shared by other traders on their social platform can be chosen by the investor.
A Signal Provider
Copy Trading isn’t difficult to perform, finding the right person or system isn’t that easy though.
Your first step should be using the platform. As soon as you find it, you can use the tools to filter and find the most suitable and successful traders to copy.
A person or a system providing the trades you will copy is called a signal provider. Some of the platforms provide signals only, and you are required to open your brokerage account on the third party. Other platforms offer a full range of services.
The choice of the platform depends on the amount of your investment and level of your experience. The newbies are recommended to choose a platform providing full services (both the signals and the copy mechanism). All you should do is to open an account only; the rest will be in the same place.
In case you are a Forex trader, you are likely to have a Forex brokerage account already, so you can find signal providers integrating with your broker.
A Practice Account Would Be a Good Start
Of course, copy trading reduces the risk of stock tracking or Forex, but a certain risk still exists.
Education and practice would be the great way to reduce the risks. For the beginners, it is recommended to start with a practice account. The majority of the platforms offer such an option. As to signal providers, they usually don’t have any practice accounts.
That extension of copy trading means that instead of copying an individual trader, you are able to copy a group of top traders in a single fund. Not all the providers offer this function currently. But as copy trading is gaining more and more popularity, most providers will be offering Copy Funds soon.
Pro-rata vs Fixed Subscription
When copying a trader, you are entitled to choose the level of control under the trades the traders make. Most of the reputable platforms offer that option. When you decide to use a fixed subscription, it means you may stop copying your trader once he lost a certain amount.
In case you choose a Pro-rata copying, your trader might lose let’s say 10 bets for not a big amount, but after that 2 of his trades might be successful and return you even more profit.
In case of Pro-rata copying, you have a chance to get your funds back and earn a good profit. If you had a fixed subscription, you would lose a certain amount of money in that situation, without any chances to recoup it.