Introduction to copy trading
Copy trading is a system that has been developed in Forex trading as well as binary options trading, to enable traders without much experience or trading skill to automatically copy all trade actions taken by more experienced traders on a platform.
Copy trading can enable you to make a success of trading even when you have no trading skills or experience and lack a profitable strategy.
How Copy Trading Works
Copy trading is a process which works in an automated fashion, really allowing the trader to reap the benefits of trading without lifting a finger. The basic concept works this way:
- Select the trader(s) whose trades you want to copy.
- Choose the sum of money that you want to use to copy the trader(s) with
- Your account will be setup automatically to copy the trades of the trader(s) you have chosen.
These steps look so simple, but the truth is that copy trading within the context of forex trading or binary options trading is a lot more complicated than this. For instance, the process of selecting the trader(s) to copy is not a simple process. A wrong choice will send your account into a ridiculous tailspin.
Let us refer to the trader whose trades are copied as the Copied Trader, and the trader that does the copying as the Copier, for the purposes of this discussion.
|REVIEW||MIN SPREAD||MIN DEPOSIT||VISIT BROKER|
|From 1.3 pips||$100||VISIT|
Rules Regarding Copy Trading
Every broker that offers copy trading will set out rules and regulations that regulate the copy trading activity in order to protect the Copier and the Copied Trader. These rules border on the following:
- Minimum and maximum amounts that can be invested to copy trades from a Copied Trader.
- The maximum number of traders that can be copied.
- The market price at which trades are copied.
- Options to copy some or all of the trades of the Copied Trader.
- How the SL and TP of the Copied Trader’s trades will be applied to the Copier’s accounts.
- Whether the Copier can close the Copied Trader’s trades manually or not.
Copying New Trades for the First Time
One of the features of copy trading is the ability to copy new trades for the first time. After selecting a trader to copy, the Copier can copy trades from the Copied Trader from them on out. Only trades executed after the copy action is initiated will be opened in the Copier’s account.
These are the rules regarding copying of new trades for the first time.
- New trades will open at the same rate as the Copied Trader opens them.
- The Copier can allocate a portion of the account capital to be used to copy trades from the Copied Trader. Using the risk management setting, the capital used in new trades will be calculated from this allocated capital.
- The same Stop Loss (SL) and Take Profit (TP) settings from the Copied Trader’s account are used on the Copier’s account.
In essence, every action taken by the Copied Trader will be applied to the Copier’s accounts automatically. However, it is possible to manually close a trade without ending the copy relationship.
How to Copy the Best Traders
There are no hard and fast rules for selecting traders to copy, but the principles listed below are what were used by the writer of this article to pick a trader to copy. This Forex trading copy strategy has delivered profits for two months straight.
Step 1: Assessing Potential Copied Traders
The first step is to assess traders that can potentially become your Copied Traders. This is probably the most important step in the process, and is the only process which will NEVER be done for you automatically. You have to do it yourself.
These are the parameters to look out for:
- Look at the profitability of the trader. There is no point picking traders with chequered profit histories: a loss this month, profits the next month, followed by losses…this is not what you want. Look for those who have made profits for at least 6 consecutive months. The longer the period under assessment, the better. What you are looking for here is consistency.
- Look at the level of risk that these traders use. A Copied Trader that is ideal for beginners is one that uses the lowest level of risk possible. Risk management is key for account protection in case a losing streak hits.
- Look at the profitability graph. You want to use a trader whose graph shows a steadier growth pattern rather than one that shows a sharp spike.
Step 2: Funds Allocation
After selecting a trader to copy, the next step is funds allocation. For risk management purposes, you should try to allocate not more than 3% of your total capital for use in copying a trader.
Step 3: Spread Your Risk
Do not put all your eggs in one basket. Try to select at least three traders to copy and spread only a portion of your capital across each of these traders. This enables you to distribute your risk across several Copied Traders. If one of the Copied Traders starts to underperform, you will still have others to continue with while you shop for a replacement for the underperformer(s).
Step 4: Review the Trade Results and Copied Traders Periodically
After some time, you should review the performance of your portfolio as well as the performance of the traders you are copying. It is possible that some of the Copied Traders may have started to falter in performance, or that some better traders that you are not yet copying have emerged. Your aim should be to get the best performance with as minimal risk as possible. So if a trader not yet copied shows better performance than a Copied Trader, do not display emotions in taking the hard decision: replace the Copied Traders that need replacing.
It takes some level of practice to be able to get the best out of a Copy Trading system. The only way to hone your trader selection skills is to use the parameters set out above to select traders to copy. After this, the next step is to re-evaluate performance and keep tweaking until you master what it takes to properly select traders to copy.