There are two types of traders involved in copy trading activities: Investors and Professional Traders.
As Investors, newbie traders open a copy trading account in their selected broker’s website and invest a certain amount of fund. Then, they can browse through the names of available professional traders (usually called strategy managers/providers) and decide which one to follow.
When an investor follows a professional trader’s account, he can automatically copy the provider’s strategies and future actions. Therefore, whenever the professional trader opens or closes a trade, the investor’s account will do the same in real time.
Investors are free to decide the amount of money they allocate to the professional trader. Later, all of the trades will be copied and automatically calculated based on the proportion the investors have allocated.
For example, say that you have copied trading strategies from Trader A with a 100 USD investment. Trader A then uses 10% of his account balance to open trading positions. Therefore, your account will automatically open the same position using 10% of your allocated investment, which is 10 USD. Later, if the trades result in profit/loss, it will also be calculated based on your 10 USD fund allocation.
As an Investor, you are free to follow more than one professional trader to diversify your trading portfolio and maximize your profits. By following several traders and copying their trades, you will still have spares in case if one of your invested traders makes mistakes, and the trades result in losses.
For instance, you invest your capital in five different traders, as shown in the diagram. You can see which traders have been successful and which ones lost money. In the end, you gain $70 by diversifying your portfolio.
• Professional Traders
If you are an experienced trader who fully understands how Forex trading works, you can join copy trading as a Professional Trader (or Strategy Manager/Provider). Your job is to formulate the best trading strategy and appropriate trading actions, not only for the sake of your deposited funds but also for the sake of your followers’ who are copying your trades.
Copy trading will give you the incentive to conduct your trading actions more productively - extra risks and more income. When your account is followed by the investors’ accounts, all your trading strategies, fund proportions, and future trading activities are copied into their accounts. Therefore, if you successfully close your trades with a profit, the same thing happens to all your followers’ accounts. They will gain profits, and there is also a chance that you will gain extra income by charging a special commission from investors (for example, you charge 15% of the generated profits in their accounts).
On the other hand, if you fail in your trades resulting in losses, so do all your followers who have copied your strategies. As a result, you lose your money as well as your followers.
All these trading operations will be recorded in your trading history as a track record of your trading profile and achievements. Forex brokers rate their traders based on their past trading results:
All these copy trading operations are done in copy trading platforms that we have listed above.
Benefits of being an Investor
As previously mentioned, copy trading is the best social trading method for those who cannot or do not want to learn Forex trading from scratch. There are various appealing benefits offered by copy trading to those who join as Investors:
1. Get Started Immediately
By joining copy trading, even common people who know a little about Forex trading can immediately be a part of the vast and profitable Forex market as Investors.
They do not need to start learning about Forex business and how the value of a currency increases or decreases, let alone the overall functionality of a country’s economy, which will take a long time to master.
As an investor, you only need to open a copy trading account, make a deposit and start following the professional traders of your choosing based on their track record, trading history, and level of risks.
2. Simple and Efficient
Even if you are a Forex trader who has enough experience, manual trading is still complicated and time-consuming.
Traders who trade manually have to carefully calculate each of their strategies based on recent news, economic events, or technical analysis to decide which actions and positions to take. In this way, most of their time is spent on studying charts and digesting economic news.
On the other hand, with copy trading, inexperienced traders can simplify their trading experience by copying the strategies of professional traders. In the case of unusual economic events, you can review the actions of your copied trades, and if they didn’t fulfill your requirements, you could modify them according to your preferences.
3. Easy and Convenient
Copy trading is the modern-day investment method where you can participate in currency trading easily and conveniently.
You only need to register a copy trading account and copy the strategies of the professional traders. Then, you can just conveniently sit back, relax, let them do their magic, and reap your profits.
If you like their works, you can add more funds to your investments. If you don’t, then press the “unfollow” button. It is as simple as that.
4. Educational Practice
Learning by practice is believed to be the most effective educational practice, and copy trading is the actual proof of such a belief.
By participating in copy trading, you can watch and learn as the professional traders work on your funds and develop their strategies. This way, you can take the best trading positions, and therefore, make better trading decisions.
Smart people learn from their mistakes, but wise people also learn from others’.
5. Be mentored by Professionals
Joining copy trading means that you will be assisted by people who have way more experience than you. This way, you can also be mentored by those professionals. You can even ask questions and review the reasons why they made certain trades.
Benefits of being a Professional Trader
Professional traders who participate in copy trading as strategy providers/managers will also gain valuable benefits to enrich their trading experience:
1. More Income
It is a known fact that the ultimate goal of all Forex traders is to gain profits in spite of any other objectives they might have.
By participating in copy trading, professional traders will be able to earn extra income as a commission for every successful trade they make depending on the forex broker.
Therefore, aside from your profits, when you close profitable trades, you will get additional revenue from the commissions.
2. Additional Challenges
Professional traders can join copy trading network to experience additional challenges, where they are in charge of not only their capital but also the funds of other traders who follow their accounts.
As a professional trader, the more follower you have, the more people will entrust their funds to your trading expertise.
Therefore, every time you close your profitable trades, the same thing will happen to their funds. You gain profits, so do they, and you get a commission. But if you lose money, you may lose your followers along with it, let’s face it, nobody likes to lose!
That is where the challenge is!
3. Trading experiments and tryouts
Another benefit you get as a professional trader is the opportunity to experiment and try out different strategies without having to risk too much of your own money.
By joining the copy trading network, you can experiment and try various strategies and acquire different results, especially if your investors participate actively and join your strategies with their modifications.
Pros and Cons of Copy Trading
To sum up, here are some pros and cons you can consider before participating in the copy trading network:
• Inexperienced traders can participate in Forex trading as investors even with limited knowledge.
• Copy trading is a simple and efficient way of trading with easy access regardless of the place and time.
• Investors can diversify their trading portfolio by choosing professional traders with different characteristics.
• Availability of many options for investors to manage risk in copy trading
• Professional traders can get additional income and face new challenges.
• Professional traders can build their reputation in the Forex industry & earn so much more.
• Professional traders’ past performance does not guarantee that their future result will always be positive.
• Copy trading requires investors to trust other traders to “play” with their money and make trading decisions on their behalf; however, investors have various options to limit the risk.
• Investors still have to constantly monitor their fund progress and deal with any changes quickly regardless of good or bad results.
Ultimately, it is not 100% guaranteed that copy trading will work for everyone because Forex trading is a risky business. Nevertheless, it is considered a great start for novice traders and a popular way of earning additional income for investors!