copy trading

What is copy trading, and how to use it for investment?

deltafx writer 6 July 2021

The copy trading system is considered a suitable investment solution in the Forex market, and you can count on it for your future financial goals. Today, due to the high inflation rate in some societies, people try to maintain the value of their capital by earning dollars. Copy trading is one of the useful strategies in this field. But many traders and users face the challenge of using this system. They often worry that they will not be able to use this system to profit due to a lack of training in the Forex market. In the following, you will find that this system is designed in a way that not only busy professional traders but also people with intermediate and even basic knowledge in the market will be able to use it.

Definition of a copy trading system

Copy-trading is a branch of group trading. This new method of investing enables the traders or investors to copy the trading positions (buy or sell) of another trader in their trading account automatically or manually. So, while their capital is in their own hand, they potentially entrust their account management to an experienced trader to make a reasonable profit.

The development of technology and precise definitions of legal terms provided many regulators in this field with a situation in which they can have their own copy-trading system. In such cases, although the copy trading performs automatically, the customers decide which trader to choose. Other different methods may have similarities in terms of performance with the copy trading system. In this article, we will introduce them and talk about their performance.

The working method of copy trading system

The copy trading system relies on social media platforms as well as group trading systems. The moment an experienced trader opens a position, he will share details and information with other traders. Then traders will decide whether or not to execute this order on their trading account. It is even possible for them to do so using automated systems without any additional input. In such cases, the experienced traders who publish the details of their positions usually know the market perfectly. Others who copy the trades may lack this experience or be completely new to the market.

Copy trading is a popular strategy in the Forex market because price changes are small and frequent. Therefore, a trader can copy other traders’ positions instead of looking for quick market movements.

The difference between copy trading and PAMM system

There are systems such as PAMM system, which is similar to copy trading. PAMM stands for Percent Allocation Management Module. With the help of professional and reliable managers, this special software puts investors’ money in a single account. Then it distributes the profits with certain pre-determined conditions among all investors.

Considering the similarities between the two, some people may ask, which is the best way to invest? The answer to this question depends entirely on the investor. Because each investor has a different view of them, and one of these methods can never be 100% superior.

Mirror trading vs Copy trading

Mirror trading means reflecting a trading strategy. Here traders imitate the style or technique of other traders, so it is slightly different from copy trading. At first, traders showed their interest in specific algorithms that were developed, and developers shared their trading history and experiences. In the next step, traders find high-efficiency algorithms and copy the results after obtaining access to them. Thus, it can be said that copy trading is originated from reflective trades. But in the copy trading system, the trader does not receive the order of the strategy and instead follows the leading trader unconditionally.

An example for further explanation

Imagine a trader opening a position and buying EUR/USD currency pair with 100000$ and then sharing his account details. If other investors want to copy this transaction in their account, they must have the same account balance. A trader with 1,000$ capital must select a volume of 0.01 lot to trade with the same amount of risk. Remember that if the investment volume in this example is below 1,000$, the same volume of 0.01 lot will be automatically selected for the investor, but the resulting risk will increase. As you have noticed so far, like any other trading system, this method has advantages and disadvantages, which we will explain in the following.

Advantages of using copy trading system

  • Copy-trading allows you to try different markets despite not being familiar with them.
  • You can make your decisions based on experienced people’s deals and make the most of your time.
  • The main advantage of this method is that traders do not have to deposit money to the experienced trader’s account, and all the transactions are done through their accounts. So, the traders can fully control their account funds and allow the operation of other additional programs and services such as cashback.
  • Unlike the PAMM system, this method does not require a trader with a specific license. You are able to select any trader among a wide range of traders.
  • The settings of this method are easy, flexible and transparent.

Disadvantages of using the copy trading system

  • Using this method will make traders spend less time researching and obtaining the necessary information about the market and miss the opportunity to invest in other sectors.
  • This method does not eliminate the risks of investing.
  • This method may be beneficial for novices, but it should be noted that this is not the only strategy on the market.
  • In addition, execution prices are not always the same for the traders. Because the amateur traders only copy the trades of the experienced traders, and the amount of risk will vary based on the individual’s capital.

Always remember that any system and method, regardless of its advantages and disadvantages, is undoubtedly exposed to potential risks. In the following, we will review the risks of the copy trading system in the Forex market.

Market risk

Market risk defines the risk of loss concerning price changes. The ultimate goal of using this method is to make more profit by increasing the value of the traded asset. But as we mentioned before, the risk of losing capital in the copy trading system is inevitable. To prevent this loss, traders should only allocate a certain amount of their capital to this strategy. Because in case of using all of the money and encountering an unexpected event in the market, the investor will face severe losses.

Liquidity risk

This means that a trader may not be able to close the trading position at the intended level. Therefore, in the risk management method, the leading traders’ trading strategy and historical background must be clear so that an amateur investor can see their maximum historical fall. In fact, the maximum price drop represents the peak of the decline over the life of a strategy. This figure is crucial because it allows investors to see the maximum amount they may lose before entering a trading strategy.

Systemic risk

This risk usually exists about the currencies that have been recently introduced to the market. It means that traders’ money may be locked in their accounts, and they cannot close or leave their position. This is an infrequent risk, but it should be included in the trading strategy.

Considering all these points makes traders have a more thought-out and appropriate choice based on their type of analysis of the Forex market or cryptocurrencies.

Conclusion

Finding the best method to generate income in international markets with a very low risk seems difficult and complex. However, to reduce the potential risk of trading, some investors give their money to trading companies or experienced people in this field to trade on their behalf. This may seem to be a good way, but then people will no longer be able to manage their accounts and funds. Introducing the copy trading system in the world of Forex as a solution to take control of your account and reduce trading risk, along with employing experienced people, has provided a good opportunity for investors and traders, even the amateur ones. However, selecting a good and professional broker in this field will be very helpful.

FAQ

What are the criteria for choosing the best copy trading system and the best trader?

The important criteria include:
1. The time a trader spends on trading;
2. The trader’s history of investment;
3. The trader’s number of open positions;
4. The proper time frames for investing;
5. The appropriate investment methods.

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