Experience is indeed the best teacher. This saying is especially true in online trading, where your hard-earned money is at stake.
But let’s say you’re a new trader – do you have to endure significant losses to become profitable?
Copy trading may be the shortcut you’re looking for. By following the strategies of expert traders, you can learn faster, minimize losses, and gain confidence without having to risk it all.
Read here the reasons why you should start copy trading and boost your profitability.
What Is Copy Trading?
Copy trading is a strategy beginners use to participate in and possibly profit from the market even without sufficient experience.
As its name suggests, this strategy allows you to replicate the trades of experienced traders.
Here’s how it works:
Suppose you’ve decided to copy trade. What you’ll do is link your account to an expert trader. The moment they execute a trade, either of the two will happen:
- The trading platform will notify you about the trade, including the trade setup of the expert trader you’ve followed.
- The trading platform will automatically make the same trade as your followed expert traders.
The idea is to benefit from their knowledge and skills without needing to be an expert yourself.
Copy Trading VS. Social Trading
While copy trading automatically allows you to replicate successful investor trades automatically, social trading focuses on sharing information and strategies within a trading community.
A Deeper Look into Social Trading
Social trading is a broader strategy that incorporates social media elements into investing. Think of it as Facebook or X/Twitter; instead, it’s made specifically for traders to ask questions and discuss anything about trading.
Typically, social trading platforms provide community resources for members to learn from one another. Such trading resources include:
- Message Boards and Chatrooms: These spaces allow traders to share their trades and discuss strategies collaboratively.
- Customizable Social News Feeds: Similar to a newsfeed on a social network, these feeds keep investors updated on the recent trades and insights of their following traders.
- Comprehensive Trader Stats: Social trading platforms often provide detailed statistics. These usually include traders’ portfolio performance, risk score, success/failure ratios, and even their personal news feed.
Most social trading platforms are integrated into broker platforms. This raises important questions about the credibility of information shared within these communities.
For example, you might receive insights or recommendations that seem beneficial but are designed to promote the broker’s interests rather than provide genuine value.
Want to be part of an independent online trading community? TradersUnited offers CommuniTrade, which allows you to connect with thousands of traders to share trading insights, review brokers, and discuss strategies.
Reason 1. Follow Proven Strategies
One of the biggest advantages of copy trading is that you can mirror the strategies of successful traders. Instead of guessing or relying on untested methods, you follow proven tactics.
Imagine you notice that a trader named Maria has consistently made profitable trades in the tech sector over the past year.
By copying her trades, you benefited from her knowledge and experience. If Maria buys shares in a promising new tech startup, you’ll do the same and potentially reap similar rewards.
Reason 2. Save Time
There’s no denying the time-consuming nature of trading. This is especially true for beginner traders who spend countless hours researching and analyzing market trends.
Copy trading streamlines this process.
You can manage your investments without dedicating all your free time to market research through copy trading.
Let’s say you work a full-time job and have a busy schedule. Instead of spending your evenings researching stock trends, you can simply set up your account to copy a trader known for making quick, profitable trades.
Reason 3. Diversify Your Investment
Diversification is among the most important risk management techniques in trading. When you diversify your portfolio, you trade different financial assets.
By trading on different markets, you avoid overexposure to a single risk. If one of your positions loses, you have other positions that stand a chance of profiting in the market.
Copy trading enables you to diversify your portfolio more effectively. Instead of putting all your money into one stock or sector, you can follow multiple traders specializing in different areas.
For example, you could copy one trader focused on cryptocurrencies and another on commodities.
Read more: Portfolio Diversification: Strategies and Why You Need It
Reason 4. Learn As You Go
As you copy more experienced traders, you’re not just passively following their setups; you’re also learning. It’s cliche, but it’s true.
Why?
Simple: you get immersed in their trading process.
Over time, you’ll gain insights into market dynamics and develop your trading skills. Think of it as an educational journey—you’re not just investing but building your knowledge for the future.
Reason 5. Reduced Risk of Losses
Copy trading can help mitigate the risks associated with trading, especially for beginners. By relying on seasoned traders with a track record of success, you can avoid common mistakes that often lead to significant losses.
For example, if a new trader panics during a market downturn and sells off their investments, a more experienced trader may have a strategy to hold or buy more at a lower price.
By copying their trades, you can adopt a more strategic approach to market fluctuations, ultimately reducing your risk of loss.
