What Is Social Copy Trading?
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eToro - N#1 Social Copy Trading Platform
Copy trading is the process of replicating the trading actions of an experienced trader, either automatically or manually, so that you benefit from their knowledge and strategies.
Your account will follow theirs exactly, whether buying, holding or selling.
Copy trading is similar to social trading; in fact, copy trading is often seen as a form of social trading.
In social trading, a trader may well replicate the trading actions of another more experienced trader, but the main focus of social trading is on communicating with and learning from other traders and sources of trading information.
This could include what to invest in, current events that affect trading markets or understanding the pros and cons of a particular strategy so that you can develop your own trading skills.
The main difference between copy trading and social trading is that the latter assumes you will put in the time to learn about trading, whereas the former is often seen as a shortcut to profit.
Think you might be ready to trade but want to make sure? Read Signs You Are Ready To Live Trade.
How Does Copy Trading Work?
This will largely depend on whether you want to automatically or manually copy trade.
Manual Copy Trading
Manual copy trading can be a time-consuming process if you want to catch every purchase or sale a particular trader makes, especially if they have a diverse and substantial portfolio.
Of course, you may decide to simply copy one element of their portfolio, such as forex.
Automatic Copy Trading
If you choose to automatically copy trade, you will generally use a trading platform that offers copy-trading functionality.
Choose the trader or traders you are interested in and copy their portfolio. Your account will continue to copy that trader until you tell it to stop.
Alternatively, they may charge a share of your profits to allow you to copy the portfolios of their experienced traders. Other platforms will instead charge a withdrawal fee.
You are free to copy multiple traders, but this may lead to trading actions that are in opposition to each other; for instance, where one trader invests in an asset and the other sells that asset.
This is exactly the kind of situation that demands you have the trading experience to support whatever stance you take.
We mentioned earlier that copy trading is often seen as a shortcut to profit. That ‘shortcut’, however, carries a level of risk, especially if you use it with no knowledge to support the trades you make.
It is always advisable to investigate the trading markets for yourself so that you understand exactly why it is better to copy one trader rather than another.
Remember, a higher likelihood of profit is usually accompanied by a higher risk that you may lose a substantial amount of money.
Interested in learning about stock trading? Read The Best Stock Trading Courses.
Copy Trading Example
Let’s say you are a complete beginner at trading. You have no real idea what you want to trade in (for instance, forex, shares, cryptocurrencies or commodities), but you like the idea of investing in the renewable energy trend.
- You join a trading platform that offers copy trading and you investigate who the most successful traders are.
- You then look into which of these individuals trade specifically or predominantly in renewable energy.
- You research the trading assets in their portfolio. These might include shares, commodities or ETFs.
An ETF (exchange-traded fund) is a basket of assets that can be traded on an exchange. It might include shares, commodities, bonds or any asset that can be exchange-traded.
Each ETF has a marketable price. Generally, the assets contained in an ETF will have a common theme.
In our example, the individuals you are researching trade in renewable energy ETFs, which is perfect for your interests.
Using the mechanism of the trading platform, you copy the trader of your choice.
Each trading action that they make, your account will also make. Your profit, or loss, will reflect their own but at a percentage relative to how much capital you invest.
For instance, if the trader has invested $10,000 and you invest $1,000, your profit or loss will be a tenth of theirs.
Your account will continue to copy that trader until you tell it not to.
Remember that, although a trader’s portfolio may match your trading interests, such as renewable energy or healthcare, or include the type of trading assets you favor, for instance, forex or commodities, it may also include other assets.
If you automatically copy that trader, you will generally invest in their entire portfolio.
Want to learn more about how trends like renewable energy may affect trading? Read What Are Megatrends?
Advantages and Disadvantages of Copy Trading
Copy trading may seem like an ideal way to begin or automate your trading, but what are the pros and cons?
Advantages of Copy Trading
- You can learn about markets that you are unfamiliar with. For instance, if you are interested in trading forex but you have no idea what pairs to invest in, copying a trader who is experienced in the forex market can be an excellent way to learn.
- You can diversify your portfolio, by copying an experienced trader alongside making your own informed investments.
- If you start copy trading as a complete beginner to trading, you can use it as a way to learn about trading strategy, the markets and a general trading how-to. Trading is an ongoing learning curve; there is always more to learn at any stage in your trading journey. Copy trading is an excellent tool to further that education.
- Unless you feel the need to constantly monitor your progress, automatic copy trading through a trading platform can be a real time-saver. In comparison, manual copy trading may still take up as much time as other forms of trading.
- Copying the actions of another trader, especially one who does not live in the same country as you, may enable you to trade in other time zones.
- Copy trading removes the emotional responses and knee-jerk reactions that may hinder your trading decisions because the choice of what to trade and when is up to someone else.
If you think your emotional responses might get in the way of your trading success, have a look at our article on mindful trading.
Disadvantages of Copy Trading
- Copying the portfolio and actions of another trader means that you have no control over what trades you make, other than when you stop copying that trader.
- Tied in with the lack of control is the element of risk. You are relying on the expertise, watchfulness and general good judgment of another trader. You may find that the price of an asset changes, but the trader does not act on that price change at the point where you would have. You are risking your capital on the success of the trader you copy.
- Copy trading can tempt traders into blindly copying another trader without doing their own research first.
- Traders may seek to influence market prices by encouraging other traders to copy their portfolio.
- Rely too heavily on copy trading and you may lose all confidence in making your own trading decisions.
- You may forget to check that the trader you are copying is still successful and just let your capital ‘ride’.
Earning an income through investment may seem like a financial dream, but here are our Top 10 Reasons To Invest.
Is Copy Trading Legal All Over The World?
Copy trading is legal in most countries, although it is always worthwhile researching this for your own country.
For instance, the Dodd-Frank Act in the US placed several restrictions on all forms of trading.
However, even though copy trading is legal in a particular country, you may find that trading platforms may not operate or offer copy trading there.
This is generally caused by an inability to obtain financial regulation in that country. Check before you sign up with any trading platform.
What Are the Best Social Copy Trading Platforms?
There are many national and international social copy trading platforms around the world, but here are our top three:
Established in 2007, eToro offers both CFD and stocks trading opportunities. Copy trading is available through their patented software CopyTrader, which provides the opportunity to copy the portfolios of top-performing traders.
As a first step, try out a demo copy-trading account with virtual funds to build an understanding of how the process works.
eToro also features an online community in which you can join discussions with fellow traders and learn more about trading and the various markets.
eToro is available in over 60 countries. In 2018, it began to take on US customers but is still only available in certain states.
Due to the Dodd-Frank Act and related legislation, US traders may only copy other US traders.
To find out more, read our eToro review.
67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
2. IC Markets
Founded by entrepreneur Andrew Budzinski in 2007, IC Markets offers CFDs across forex, indices, commodities, stocks, bonds, cryptocurrencies and futures, as well as the opportunity to copy trade through their software AutoTrade.
IC Markets also offers a demo account as a starting point.
IC Markets operates globally but there are some countries where it is not available. For instance, IC Markets does not operate in the US.
It is therefore advised to check whether IC Markets is available within your country of residence before opening an account.
Established in 2006, AvaTrade offers forex and CFD trading, plus the opportunity to copy trade through AvaSocial, launched in 2020.
As the name suggests, AvaSocial is promoted as a social network. It offers you the chance to ask questions of experienced traders, either on a one-to-one basis via messaging or in a group chat.
AvaSocial can also be linked with your Facebook, Twitter and Instagram accounts.
As with both eToro and IC Markets, AvaTrade offers a demo account to build your knowledge and confidence.
AvaTrade and AvaSocial are available in many countries worldwide, but not all.
AvaTrade is not regulated in the US and therefore not available to US customers.
As with any other trading platform, it is advised to check that you can access AvaTrade in your country before signing up.
To find out more, read our AvaTrade review.
Copy trading may seem like a quick and easy way to begin trading but it is always advisable to take the time to carry out your own research.
Rather than a shortcut to possible profit, copy trading should be seen as one more way to learn about trading and develop your trading skills.
WikiJob does not provide tax, investment or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.