Copy Trading for Beginners
Hello Everyone! In Today’s blog post, I’m going to talk about Copy Trading and how it works, the structure, and some of the well-known copy trading platforms.
So Without further ado, let’s get on with the post.
What is Copy Trading?
It is an automated investment methodology where you have the option to “copy” every action done by a selected trader. But in reality, it just allows the user to mimic everything a trader does, from strategies to picking open positions and such, in hopes that they can earn a profit.
Trading is a bit tricky and unpredictable, you may end up with some good trades and make a profit or lose some money because of a bad trade. With Copy trading, it lets you benefit from the experience and decisions from more experienced traders in the market. And judging from the various blogs and reviews about copy trading and copy trading platforms, it’s an effective investment tool that has a higher percent chance of success.
Basically, You just copy a trader and whatever actions they do on their end, your account will do it as well.
How Copy Trading Works
As I said before, it allows you to copy another trader’s actions. But how? First of all, you connect your account to another trader’s account via platforms like eToro and ZuluTrade. Once you’re connected, you can copy that account’s actions. And once you’ve done that, all of their actions, like open trades, gets copied to your account. This also includes all their future actions, as well. You are also prompted to choose a certain amount to invest in to the trader. In most cases, the amount can’t be more than 20%. The amount used in the trades are a calculated percentage of the trader’s account, which is based on how much you invested in the first place.
For example, you have $1000. You decided that you should copy trade because you don’t have any open trades. You check on some traders and found someone that has had some success or is experienced. But since you don’t know if the trader will keep this level of success, you decided to invest a small amount. Let’s say $150, which is 15% of your current funds. The money you’ve invested is a percentage of the trader’s account. So if the trader’s account contains $2000, then your investment in his account is 0.75%. If he makes a trade for $150, then your account will also do the same, but you will only gain 0.75% of the money invested, which is $11.25. Everything done on your account is automated, which means the system does the bulk of the work and all you have to do is sit back and relax, and let the other trader make the trades.
Now that we know what copy trading is and how it works, let’s talk about the structure of copy trading. According to Investingoal.com, there are 5 basic components that makes the structure of copy trading. These are The Market, The Broker, The Trader, The Investor, and The Platform.
The Market, or The Financial Market, is essentially the base. This is where all of the trades happen, where all the traders meet and do their jobs. However, copy trading was made relevant in the foreign exchange market or FOREX Market. And with the rise of CFDs, the majority of other markets went To the FOREX Market. And with them, they brought stocks, commodities, ETFs, Bitcoin, etc.
The Broker is virtually essential in copy trading. Because without it, you basically can’t make any trades. You need a broker to get a trading account so that you can receive your copied trades from another trader. And this is all done on a Copy Trading Platform. To put it simply, It’s basically a bridge that connects a trading account to a trader. In some cases, some Copy Trading platforms also acts as a broker.
The Trader, also known as The Signal Provider, is the trader you decide to copy. All of his actions and open trades is what your account follows and makes. If he makes a good trade, you make a good trade. If he makes a bad one, you make a bad one. Although you can just copy a trader straight away, you need to know the trader’s performance before you copy him. Some Platforms evaluate the strategy used before allowing it, while others just record their data the moment they joined. This all makes data that the user can use to determine whether this trader can make good profits or not.
The Investor is obviously you. There’s not much to explain here. But Since trading in general is flexible and, most of the time, unpredictable, it’s your job to know the goals and the risks of copy trading.
The Platform, or Copy Trading Platform, is the most important component in this structure. because without it, it would be impossible to do any copy trading. As I mentioned before, the Broker is a bridge between a trading account and the trader. The Platform is where everything takes place.
Some well known Copy trading platforms are ZuluTrade, eToro, Darwinex, PAMM, and many others.
Different Copy Trading Platforms
There are various types of Trading platforms out there, but we will focus on these 3 platforms, which are ZuluTrade, eToro, and PAMM accounts.
ZuluTrade is a Copy Trading platform for the FOREX market founded by Leon Yohai and Kosta Eleftheriou in 2007. They use bots or expert agents, which use algorithms that are programmed with programming languages like MQL5. As of now, there are currently over 100,000 traders that can be copied from their platform.
Setting up an account with ZuluTrade is fairly easy, but the only difference is ZuluTrade is not a broker. You need to have a brokerage account that can add ZuluTrade. Also, you need to pay extra commission as well, unless you have a Triple A Effects account. There are two types of accounts for ZuluTrade, Live account and Demo Account. The difference is that with a demo account, you can practice your copy trading there and not lose any money.
The way that ZuluTrade works is that an Investor would create either a demo or a live account, and follow a trader. Then the traders(which are actually bots) follow the market for 24 hours and issue signals of purchase to Zulutrade, which then they follow the traders and signal them to your broker. Then your broker receives the signals, which they will use in the FOREX Market.
Many users believe that ZuluTrade is great because of the quality of service they provide, and because it is user friendly as well.
I have only known eToro from one of their advertisements, particularly the “Steve and Dave” advertisement. eToro is a social trading brokerage company that focuses on copy trading services. They are founded in 2006 by brothers Yoni and Ronen Assia and David Ring. eToro has two trading features: Manual trading and Social Trading. Social Trading is where the copy trading happens, while Manual trading is for people that like to do their own trading.
eToro also operates on full transparency. Which means that they provide users with their clients data, such as risk percentage, risk score, etc. They also have long-term investment instruments called CopyPortfolios, which are ready made investment portfolios. Unlike ZuluTrade, eToro is a financial broker. Which means you don’t need to add a brokerage account in their platform.
eToro works by connecting all its Live accounts with one another. Once a trader or investor opens a new position, a commission is then made automatically through what is called a spread. Then all the accounts of the other investors, that are copying the actions of that trader or investor, the same operation will be open, and another commission will be paid. Basically, eToro will gain profits from the spread generated from the signals from the trader or investor and by those accounts that replicated them.
Currently, eToro is the #1 Copy trading platform.
PAMM, or Percentage Allocation Management(or Money) Module, is a form of pooled money forex trading.
What it does is it allows investors to allocate their money in a desired amounts to traders they think are good. These traders then manage multiple FOREX trading accounts using their own funds to try and gain profit.
PAMM works by having investors, who have no experience or knowledge in trading, give a percent of their money to more experienced traders for trading. The trader also uses their own money along with the investors to increase their funds. Then after a trade has been made, the experienced trader(or money manager) charges the investors for a percent of their profit. To put it simply, you and give an amount of money to a trader, then with their funds, go and do your trading.
Unlike copy trading, where you are trader that copies another trader’s actions in hopes of gaining a profit, PAMM utilizes on investors paying traders to do their trading.
So that is Copy Trading in a nutshell. Which is quite simple, really. In my personal opinion, copy trading is only good if you know what you are doing. Although the perks and benefits that copy trading provides are great for both beginners and experienced traders alike, there are still some heavy downsides to it. Like unusually large commissions, bad open trades from traders, unreliable traders, breaking even on a trade because of unforeseen events, scam traders, and many more. In the end, copy trading is a one slippery slope. And one should approach it with caution.
That’s it for today, unfortunately. Stay tuned for more blog posts and other topics. Bye for now!