10 benefits of copy trading + advantages and disadvantages
If you are new to trading, copying the trades of more experienced traders can be a good way to learn the markets and improve your results.
There are several benefits of copy trading, including getting access to the strategies and knowledge of experienced traders, increasing your confidence and saving time.
In this article, we will briefly explain what copy trading is and the potential benefits that it can bring. Copy trading can benefit beginners who do not have the time to develop their own trading strategy and follow markets.
At the same time, copy trading can be appealing to experienced traders who wish to diversify their trading.
What is copy trading?
Copy trading allows you to copy trades placed by other traders.
The basic goal is to find another investor with a proven track record and copy their trades. You will profit from their winning trades and lose when their trades go wrong.
To find out more, download the copy trading app on your mobile today. The Axi Copy Trading App is provided in partnership with London & Eastern LLP.
Learn more here: What is copy trading?
Benefits of copy trading
Find out the main benefits of copy trading below and decide for yourself if copy trading is a worthwhile part of your trading strategy.
- Time saving
- Great for new traders
- Provides the ability for someone to trade with limited market knowledge
- You can learn how to trade from expert traders with years of experience
- Variety of signal providers and you can view their track record
- You can manage risk more effectively
- Removes emotion from the trading decision process
- Diversification across different markets
- A potential source of income for signal providers
- Can help experienced traders, not just beginners
1. Time saving
Let's face it – becoming a successful trader is not an easy task and requires a considerable amount of time and effort. Whether it is their day job or other commitments, some traders will simply not be able to find the time needed to develop a trading career.
This does not mean that they must give up their dreams of becoming a profitable trader. Copy trading allows you to copy successful traders and does not require manual intervention of constant monitoring. That being said, you need to ensure you have set appropriate risk parameters that you feel comfortable with to avoid losses that exceed your risk tolerance.
2. Great for new traders
Most copy trading apps and platforms have a user-friendly and simple interface, which makes it suitable for beginners. Classic trading platforms contain a variety of features, which vary from easy to complex, and the number of options and different order types can sometimes be overwhelming for new traders.
3. Provides the ability for someone to trade with limited market knowledge
Analysing the markets requires an understanding of the market structure, as well as fundamental and technical analysis. While fundamental traders might not find technical analysis particularly useful, and vice-versa, it is always good to have an understanding of the concepts.
4. You can learn how to trade from expert traders with years of experience
While some master traders will remain anonymous, others prefer to build a community around their service. This will allow you to learn from an experienced trader and exchange ideas with other fellow traders.
5. Variety of signal providers and you can view their track record
Most copy trading apps will display a leaderboard with the best performing signal providers. Furthermore, signal providers will generally have a profile visible on the copy trading app, allowing you to gain insights about their past performance. While past performance is not indicative of future results, it can help traders gain a better understanding of the trading style of the particular signal provider. For example, a drawdown of 50% on their account would indicate that the signal provider is taking big risks, which would not suit everyone.
Find out more about how to become a signal trader in the Axi copy trading app.
6. You can manage risk more effectively
Copy trading does not make trading any less risky. However, traders can adjust various risk parameters within the copy trading app that will allow them to keep the risk at reasonable levels. For example, traders can set a maximum drawdown level or define whether they want to mirror the trade size of the master trader or adjust the size of the trade relative to their account size.
7. Removes emotion from the trading decision process
Keeping your emotions under control is one of the biggest challenges traders are facing. This is the reason why traders often find it easy to become profitable on a demo account (at least in the short-term) but struggle as soon as real money is involved.
With copy trading, there can still be emotions involved. For example, if a trade you copied is running into a larger loss than you anticipated. However, you can rely on a large degree on the decisions of the master trader. If you noticed that you are too emotional in manual trading and close your winners early while letting your losing positions run freely, copy trading might suit you more.
8. Diversification across different markets
Many traders have their preferred trading instruments, either because they feel most comfortable trading those or because their strategy works best with those instruments. Copy trading allows you to gain exposure to different markets which you potentially would not have looked at before. This can prove particularly beneficial during times when your preferred trading instruments are going through a period of very low volatility, which may limit your trading opportunities.
9. A potential source of income for signal providers
If a trader is already profitable and happy with their performance, why not scale the business and create additional streams of income for yourself?
As a signal provider, you can charge users a subscription fee (creating a fixed income stream for yourself) as well as a performance fee (creating an income stream that will depend on how well you perform as a master trader). If you are interested about this opportunity, learn more in our guide on the benefits of becoming a signal provider.
10. Can help experienced traders, not just beginners
Copy trading is not only helpful for traders who lack the time to do any trading on their own. Experienced traders may choose to copy someone as a diversification tool.
For example, a trader may feel most comfortable using a swing trading strategy but could copy someone who has shown they are successful at scalping. If their own strategy isn’t performing well or they are finding a lack of trading opportunities, copy trading might make up for some of it.
Disadvantages of copy trading
Above we have covered the advantages of copy trading, now review some of the disadvantages.
Signal providers will not always make winning trades
You do have control over how much you wish to risk - for example, by allocating a certain amount of money to the trading account where you will be copying traders from and setting individual risk settings. However, you do not have control over the trades that are being placed by the master trader.
Market conditions change frequently, and the master trader might struggle to cope with certain changes. Such events are outside of your control, which is why ensuring adequate risk management measures are implemented is crucial.
If you rely on copy trading only you will not develop proper trading skills and knowledge
It is possible to learn something from copying a successful trader, particularly if you invest time in analysing the individual trades and the underlying strategy. However, this does not even come close to learning about markets and trading on your own and gaining experience through developing your own strategy and learning from your mistakes by trading yourself.
You must therefore evaluate what your end goal is – are you happy with copying other traders as long as you make a profit? Or do you wish to become a successful, independent trader one day?
If the latter is the case, you may not wish to become too dependent on copy trading.
Some signal providers require a commission to copy their trades
Some providers charge a subscription and/or performance fee for offering you the ability to copy their trades. Always check what charges apply before you start copying a trader.
FAQ
Should I use copy trading?
All trading involves a degree of risk, and so does copy trading. However, it is your account, you have full control of it, and you can adjust risk parameters to suit your own requirements. Even though you’re copying another trader, it’s always your responsibility to conduct due diligence and not just blindly follow someone because they have proven success in the past.
For example, the trader with the highest return might experience massive drawdowns or could have a very short trading history. Other traders might have lower returns but demonstrate greater consistency. Unfortunately, there is no way to remove risk from trading, but you can use risk management strategies to reduce it.
Is copy trading profitable?
If you find a successful trader to copy, copying the trades of that person can be profitable. However, trading in general is inherently risky and copy trading is no exception.
No trader wins all the time, and even though you might have picked them because they have a solid track record, the provider you choose to copy might go through a period of drawdown – meaning that you would be facing losses. One way to try and mitigate this risk is to use multiple providers, preferably with different trading strategies and styles to achieve diversification.
