By
David Dombrowsky

What is Copy Trading, and How Does It Work?

Published on
September 12, 2023

It's becoming increasingly easier to get into the financial markets and squeeze some profits without doing much. Gone are the days when traders had to spend hours trying to study and understand the goings in the market. Thanks to technological advancement, spending hours glued to the screen analyzing charts is no longer mandatory to try and find trading opportunities. Copy trading is one sensation that makes it possible for novice traders to venture into the world of trading.


What is Copy Trading?

Copy trading is an innovative way of trading by taking advantage of experienced traders' actions in the market. It entails copying trades of experienced traders with a record of generating profitable opportunities and squeezing profits from them.

It is a valuable trading strategy for novice traders needing more time and knowledge to develop trading strategies or carry out in-depth market analysis. In this case, one merely follows and copies trades executed by experienced traders.


Introducing copy trading 

 Source: Iconomi.com


Copy trading is popular in the short term, especially in swing and day trading styles. It also focuses on assets in the currency market, stocks and other volatile financial instruments. While it can be a lucrative trading strategy, traders must be aware of its limitations.

There are two people involved in copy trading.

Provider: Also known as a signal provider, is an experienced trader relied upon to analyze the market and generate profitable trading opportunities. In return, they execute their trading ideas which other traders then copy.

Copier:  This is a subscriber who follows a provider or signal provider. In return, they copy the trades initiated by the provider in their trading accounts. The execution can be manual or automatic through automated trading software. The goal of a copier is to have similar trading positions as the provider.


How Copy Trading Works

In copy trading, experienced traders or signal providers connect a section of their trading accounts or portfolio for others to see what they are doing in real-time. Consequently, some platforms pool together the signal providers willing to share their trades. While sometimes the services are offered for free, in some cases, the providers allow traders to copy their trades upon paying a small fee.


Copy trading structure

 Source: Ig.com


Therefore whenever a copier or novice trader subscribes to a signal provider, they can access their trading accounts and follow all their actions in the market in real-time. However, copy trading requires a powerful trading platform. In this case, copiers must open an account with a broker to gain access to a platform such as MT4 or MT5 to copy other people's trades.

After opening an account, the next and most important step is searching and finding the most successful traders to follow and copy their trades. Most brokers offer a rating space that ranks the signal providers based on the outcome of their previous trades. Providers who executed many trades that resulted in positive outcomes rank higher on the rating page.

The rating page comprises previous trades, the outcome of the trade, the strategy deployed, and the instruments traded. It also includes other information that impacted the signal provider's trading decision.


Why Traders Should Follow Top Rated Traders

The level of success or profits that one accrues while copy trading depends on the signal traders follow. Therefore, following and copying trades from top-rated traders is important to be safe in the highly competitive market.


Learning Prospects

One of the main benefits of following top-rated traders is the opportunity to learn. Such traders are usually ready to share and impact the skills they have learned over the years with their followers. The stakes are even higher when the top-rated traders are running subscription services. Therefore, they will always be ready to share information that is not readily available, to try and help their followers gain a competitive edge in the market.


Generate High-Profit Margins

It does not mean that one will always make profits while copying the trades of top-rated traders. A risk is always involved, given that such traders are only sometimes right. However, given that experienced traders know what they are doing, the prospect of generating higher profit margins is always high.


Professional Insights

Experienced traders spend a good chunk of their time analyzing the market to try and uncover highly profitable trading opportunities. Therefore, they are some of the best to follow for anyone looking to master the art of fundamental and technical analysis. As they would always share their ideas on how to analyze price action, market volatility, and market rate while trying to predict the future.


Save Time

Following top-rated traders goes a long way in saving time analyzing the market and staying glued to the screen in search of trading opportunities. In this case, one only has to wait for the signal providers to execute a trade and replicate the same in their trading accounts without doing much.


Social Trading vs. Copy Trading

Copy trading is often compared to social trading. Nevertheless, they are different. In social trading, traders generate investment or trading ideas from various social trading platforms and social networks. The ideas do not necessarily include the kind of trades triggered by other traders but what the traders expect the market or given instrument to do. By sharing ideas, traders can create unique trading techniques.

In contrast, copy trading does not entail sharing trading ideas or strategies. Instead, it involves duplicating positions executed by more experienced and profitable traders. In most cases, it is best practice to start with social trading as a novice trader.

Social trading allows one to gain in-depth knowledge of market workings and developments. In return, one can gain the much-needed experience and knowledge of how signal providers in copy trading operate or execute trades in a given way. In return, one would not have to execute trades blindly just because a signal provider did so.


Mirror Trading vs. Copy Trading

Mirror and copy trading are two different things. In mirror trading, traders replicate the trading styles of other traders. For example, while focusing on trading styles such as swing or day trading, traders try to use the same tools and indicators to develop similar trading strategies.

In contrast, copy trading entails copying the trades experienced traders implement in the market rather than following their trading styles or strategies to generate trading ideas.


Copy Trading Benefits


Perfect for Novice traders

Novice traders looking to master the art of trading while still earning can take advantage of copy trading. Copy trading allows novice traders to follow what experienced traders do, from fundamental to technical analysis. In addition, it will enable them to replicate professional traders' actions in their accounts, increasing their prospects of making money.


Portfolio Diversification

Copy trading is an ideal way of diversifying an investment portfolio by implementing trades on various instruments carried out by professional traders. Additionally, it allows traders to gain access to inaccessible opportunities.


Enhance Risk Management

One of the biggest downfalls of many novice traders is their inability to deploy proper risk management strategies. By following experienced signal providers, novice traders can deploy appropriate risk management strategies that can help protect their accounts from being wiped out by one trade.


Make Money

Copy trading also benefits signal providers as they can generate some income from copiers replicating their trades in their accounts. In most cases, they run subscription programs requiring the copiers to pay fees to access their trades.


Copy Trading Cons


Copy trading benefits

Source: Investinggoal.com


Market Risks

Copy trading comes with its fair share of risks. There is always a risk of significant losses on picking and following inexperienced traders. The copier will suffer the same consequences and incur significant losses in their accounts if their strategies fall.


Minimal Trading

In copy trading, the copier or novice trader has minimal control of their trading actions. Given the need for knowledge of information or trading skills, the trader is forced to copy everything that the experienced trader does in the market. Therefore, if the experienced trader makes a bad call or trade, the results will manifest themselves in the copier's account.


Frequently Asked Questions about Copy Trading


Is copy trading a good idea?

Yes, copy trading is a good idea for traders who wish to learn to trade while making money. By following experienced traders, one can gain in-depth experience while replicating their trades to make some money.

Is copy trading illegal?

No, in most countries, copy trading is legal.

How much can you make from copy trading?

The amount of profits one makes from copy trading depends on the performance of the experienced or signal provider one follows. If professional traders make triple-digit percentage profits, the prospects of making similar profits are usually high.

Is copy trading profitable?

Yes, copy trading can be profitable. Everything boils down to the experienced traders one follows and the kind of ideas they generate. Top-rated traders with years of experience in the market would always make it easier for copiers or novice traders to generate significant profits in the market.

Is copy trading well for beginners?

Yes, copy trading is good for beginners who wish to learn the art of trading from experienced and professional traders.


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