What is Copy Trading? [You Should Know About This]

Every day, the number of newcomers who seek to profit from cryptocurrency trading increases. In addition, millions of users gather on various social networks to discuss the market with professionals and get valuable tips on deals.

Technological platforms allow copying the transactions of experienced specialists to take advantage of this trend. Anyone can register on such a platform and choose a suitable expert to follow.

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This feature allows you to earn passive income and the provides the ability to monitor the trades of a specialist to gain experience. At the same time, the user retains complete control over their accounts.

Copy trading is incredibly convenient for those who do not have time to analyze and monitor the market. It is enough to specify the main parameters in your settings and activate copying transactions of the specialist you have chosen.

This article will explain what is copy trading.

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What is copy trading?

Copy trading is the automatic copying of transactions made by experienced traders. At the same time, the user independently determines the amount for one operation, the size of the leverage, and the percentage of risk, and takes the profit.

If an expert buys 10 DOT tokens, you will do the same. If the price of the DOT has increased, and he sells them, the deal will be duplicated with your investment.

At the same time, you do not need to sit at the monitor for days, check the price, look for good entry points — a trusted trader will do all this. And if you wish, you can follow his trades to gain experience.

In turn, traders on the platform benefit from expanding the subscriber base. This also allows them to earn passive income in the form of a commission from each profitable transaction.

For example, on the popular eToro platform, a copy trader named Jay Smith makes investment decisions for more than 21,000 people with assets of $40 million (according to Bloomberg.) For this, eToro pays him up to 2.5% of the total amount of assets attracted by him for management on the platform.

The mechanics of copy trading on different platforms may differ. But the principle is the same: external money management.

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Basics of copy trading

While the exact components of the copy trading tool depend on the provider, almost all reputable ones have the same principles.

Platform

The platform is the point where you, the trader you want to copy, the broker offering the service, and the markets come together. There are several copy trading platforms, each with its own characteristics and advantages.

Market

You need access to the financial market for copy trading to work, such as paper currencies or cryptocurrencies. This trading tool appeared on the Forex market, but it is now available in various markets thanks to the introduction of contracts for difference (CFDs).

Broker

The role of a broker in copy trading is to offer you a trading account that you can use to send and receive funds. The broker usually acts as a link between you and the trader you are copying.

Trader

The term trader is usually associated with the person you decide to copy.

You can only find a specific trader on one platform in most cases, although it is possible to find the same trader offering copy trading opportunities on multiple platforms.

Respected copy trading platforms provide you with extensive information about traders, including risk appetite, success rate, historical profit/loss and specialized markets.

Without this information, it can be very difficult to choose a trader who fits your investment strategy.

Investor

The investor is usually a person whose capital is invested by a trader. Therefore, it is likely that you will be an investor. Naturally, without your decision, investing in copy trading cannot begin.

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How to determine the best trader to copy

Your passive income depends entirely on whose transactions you copy and how much money you invest. Therefore, it is essential to choose a reliable platform and good specialists. And it is not easy to do this, just as it is not easy to determine the best altcoin for investment.

You may have to work with several before finding the one that best fits your trading goals.

To begin with, you can select several traders and subscribe to them. Then allocate the same minimum amount for each. In a week, you will see the result of their trading and will be able to determine the best of them.

Here are some more criteria:

Experience. Each specialist on the trading platform has his own profile — a kind of resume with indicators of his effectiveness, such as the number of profitable/unprofitable transactions, total income, profitability, number of days on the platform, etc. These parameters will help you immediately weed out the low-performing ones.

Strategy. The most important thing for a trader is the history of his trades. This is the main criterion for the selection of a real professional. From the history of transactions, you can determine the style of trading and the degree of risk. However, to analyze the order history, the user needs some experience.

Number of subscribers. As a rule, the most popular traders are often profitable. They usually don’t have seats available for new subscribers. But you can catch the moment when some subscribers are eliminated.

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Advantages and risks of copy trading

Before deciding whether you should try copy trading, let’s first analyze some pros and cons of this strategy.

Advantages

1. This is convenient for beginners since you can simultaneously earn and gain experience by analyzing specialist transactions. If you are starting to master the crypto market, copy trading is one of the ways to understand how it works and avoid significant losses. However, the main factor on which success will depend is choosing a good trader.

2. This is the best way to generate passive income. Thanks to full automation, copy-trading saves users time to focus on other activities.

3. Copy trading allows you to control your losses and take the necessary measures in time. If the results do not meet your expectations, you can stop copying the trades of a losing trader and focus on more effective ones.

4. With dozens of cryptocurrencies available, copy trading allows you to use the technical knowledge of experts with effective risk management strategies.

Risks

1. Even professional players in the market sometimes lose. No one has 100% profitability in the transactions being made, so you will also lose some part of the money one day. If you repeat the trades of several people, this probability increases.

2. Choosing the best experts to copy is not an easy task. It is always challenging to determine whether their profitability results from experience or just a streak of luck. You will have to spend time testing each selected specialist.

Conclusion

Copy trading is a great way to get into the financial market, learn how to use it effectively, and get to know the benefits of the market and the huge treasures that it can offer.

A smart novice trader should pay attention to the transaction process and not trade with a large deposit — instead be attentive and careful. This is the only way to earn experience and do it with self-confidence. It is important to remember that experience will help you in the future.

Otherwise, the exercise will be completely useless, and your time will be wasted. Copying is a good way to make money, but, more importantly, to learn trading techniques.