What is copy trading?
Copy trading is popular with traders who lack expertise in a specific market and those who have limited time to commit to trading. Here, we explain what copy trading is and how it works.
What is copy trading?
Copy trading is a branch of social trading, where one trader’s positions are copied by another trader’s account when they are opened or closed. This can be either automatic or manual – and it’s up to an individual to decide how they would like to approach copy trading.
Before you start copy trading, it’s important that you have carried out your own analysis on a position or particular market before you commit real capital to it. Remember that even if you are following the methods of an experienced trader, your capital is still at risk.
How does copy trading work?
Copy trading works by relying on social networks and social trading systems. When one trader opens a position, they can broadcast this information to other traders on the network, who can then decide whether they want to open the same position – or their automated trading systems can do it without additional input from the trader.
Often, the primary trader who broadcasts their positions has experience in the underlying market – and the copy traders might lack experience in this specific market, or they might be entirely new to the financial markets as a whole.
Forex copy trading is a popular strategy, because price movements are often small but frequent, and constant monitoring is required. Copy trading in forex means that a trader can simply copy another trader’s positions rather than scanning the fast-moving forex markets themselves.
Trading platforms such as MT4 are popular platforms for social trading due to MT4’s large user base and various online user forums.
Example of copy trading
For an example of copy trading, let’s suppose that there was a domestic market crash in Brazil and you wanted to get exposure to the Brazilian real. If you felt that you didn’t know enough about Brazilian economics, politics or central banking policies to be able to make an informed decision, you could turn to copy trading and the expertise of another trader who is familiar with these matters.
At the same time, you would hope to get some experience and expertise in a market that you wouldn’t normally get exposure to.
However, as previously mentioned, before committing real capital to the advice of another market participant, you should carry out some analysis of your own – even if you are unfamiliar with the underlying market.
Pros and cons of copy trading
Pros of copy trading
Copy trading enables you to diversify your portfolio into markets that you are unfamiliar with but want exposure to.
Through copy trading, you can access another trader’s expertise or make the most of seasonal trends that you wouldn’t usually consider as a potential opportunity.
With copy trading, you can make the most of your time by basing your decisions on those of traders with proven track records.
Cons of copy trading
Copy trading can provide little incentive for traders to do their own research and learn about the markets.
Copy trading does not eliminate risk – and sometimes the copy trading notice boards could be used by traders that are seeking to influence a market’s price for their own financial gain.
While copy trading can help you when you first get started, it is not the only trading strategy available – but the allure of potential profits with little work might be enough for some people.
What to know before copy trading
Before you start copy trading, you should do your own market research – especially if you are unfamiliar with the way that a particular asset works. IG Academy can help you here, with resources and message boards to bring you up to speed with anything that you feel you could know more about.
We also offer in-platform trading signals, alerts and technical chart indicators. These enable you to receive notifications about how a market is behaving. Our technical indicators will help you to analyse historical price action and make predictions about what might happen to an asset’s price in the future.
To start copy trading today, follow the steps below:
- Create or log in to your IG account
- Do some preliminary market research
- Find a social trading board
- Copy the trades within the IG trading platform and open a position, making sure to set stops and limits to manage risk
- Monitor and close your position
The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.
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