A number of social forex trading platforms of today offer copy trading opportunities. Copy trading allows a trader to directly copy the trading positions that are assumed by another trader and give you an option of attaching a part of the trader’s portfolio with the other’s. This link helps the trader to copy all of the positions that the successful forex trader assumes in the market and any further action that they make take. If the trader opens, you open and you close when the trader closes. The same holds for winning or losing the trade as well. You win if the other trader wins and vice versa.
However, this does mean that there is a total loss of control for the trader that has copied. In a majority of the platforms even if the trader has established a link with another successful one who trades he/she wants to copy, the trader is still left with the capacity to open new trades, close others and moderate the overall outcome. The major advantage with copy trading is that by copying a successful trader, one can make money based on the skills of the other.
Copy trading is popular because it allows the newbie traders to make some money in the market. Many forex traders create ‘people’s portfolios’, meaning they invest in other traders and do not do any trading themselves in the market.
Copy Trading Basics
The manner in which copy trading is executed depends on the trading platform that is chosen. However, the basic principle on which it works does not change. The trader that wants to copy invests a part of his portfolio in another specific trader and thereafter copies all their trades on a percentage basis. Many of the sites allow a trader to invest a maximum of 20% on another single trader. This allows the trader that has copied to sail through bad losing streaks if any. In such cases it is always better not to have invested too much in the trader as they seemed better-performing in the market.
Investing in Other Traders
To start with the trader that wants to copy has to study the performance graphs of other traders that he/she might want to copy trade. Points that are to be studied include their trading strategies, their success rates, their risk management strategies, etc.
How to Choose Your Copy Trading Platform
There are many sites that offer copy trading. However, choosing one from among these is a tough task. The first golden rule would be to go for the bigger and more established websites. The more users of a copy trading website indicate greater popularity. This also indicates that there is a wider user base from which the newbie trader can choose an expert to copy from.
Copy Trading – How It Works
Most trading platforms display trade histories of the traders that one can choose on their user interfaces. All statistics of the traders except the amounts invested are displayed on the screen interface. Some trading platforms also allow two options that a trader can choose from: Follow or Copy. If you choose Follow, you will receive updates of each and every trade that the trader executes and functions much like Twitter.
On the other hand, if the trader chooses the Copy option, very trade executed on the other account will be copied. When a trader chooses to copy another one, first of all they are asked for the amount which they would like to invest for copy trading. If they allocate $1000, his means that the other trader has $1000 at his/her disposal. If the trader executes a trade that is worth 10% of his/her equity that very trade is copied into the newbie trader’s account and instantaneously executed. The trade is opened or closed at the same time and the same win/loss is recorded. The amount allocated to the expert trader increases or decreases over time depending on the performance.
When the trader is given copy trading options, the trading interface would also asks if the trader wants to copy the expert’s existing open trades. A good amount of caution has to be applied here. It is best to review the trade histories thoroughly before opting to copy open trades. If the trader form whom you intend to copy has a number of unrealized open trades, it could be an indication that the trader is misjudging entry points. You may as well reconsider your option of choosing to copy from this trader. If you feel that the positions can be recovered, then it is a good idea to copy the trades and take control of them right away. You may be able to close the trades profitably whereas the trader from who you copied may not be able to do so if he is sitting on a big loss.
Reliability of copy trading
To the question as to how successful copy trading really is, it has been found out that according to statistics, those who choose traders based on statistics are about 10 percent more successful than others that choose traders based on personal preferences and instincts. In short subjectivity in choosing traders does not work as well as the numbers.
How To Choose a Copy Trader
Most sites feature millions of traders and it is tough task to choose a trader to copy from. Given below are a set of pointers that a newbie trader can keep in mind when choosing a trader to copy from.
• The trader should have at least 12 months of trading history.
• The trader must be active with having conducted at least 1 trade in every week over the entire 12-month period.
• The performance should be such that there have been no more than 2 drawdowns of more than 25% in the period.
• The trader must have a realized profit of at least 25 percent.
• The trader must be at least 95% manual.
• The win ratio must be at least 85 percent.
• There should be no more than 20% high risk trades.