If you are planning to take your first steps in the financial markets, you may want to consider copy trading as an easy entry point. Copy trading will enable you to learn from other traders and investors, hone your trading skills, save time, and overcome your current lack of experience. Follow the guide below and learn how you can start utilising copy trading in no time.
What is Copy Trading?
Copy trading is a function which enables you to allocate some of your funds to replicate the actions of another trader. Invented in 2010, CopyTrader™ was the culmination of the social trading revolution led by eToro.
The practice of mirror trading, which enabled investors to replicate the actions of a professional broker was a service offered by financial institutions, however, it was limited to specific brokers and usually incurred management fees and commissions. CopyTrader™, on the other hand, can literally be used by millions of people on the eToro platform.
Benefits of Copy Trading for new Investors
There are several advantages that copy trading can offer new investors:
- Overcoming lack of experience: Any trader or investor will tell you that experience is one of the most important factors when approaching financial markets. However, with copy trading, even those who lack experience can trade and invest.
- Learning from the best: eToro is home to some very successful traders and investors, some of whom are even professionals. By using copy trading, users can easily replicate the performance of other traders and monitor their actions closely. Moreover, many traders use the social news feed to discuss their actions and explain their rationale, presenting a real educational opportunity for novice traders.
- Saving time: Learning the ropes in financial markets takes time. No matter how talented any single trader may be, there is always a learning curve involved. However, with CopyTrader, new traders can spend their time researching which traders to copy, as their stats are transparently displayed on the eToro platform, instead of having the daunting task of researching individual assets.
- Approaching different markets: Try as you may, there is no chance of learning the ins and outs of all markets around the world. However, those who wish to diversify their portfolios into asset classes and stock exchanges with which they are less familiar, may want to consider using copy trading as a means of trading and investing in new markets.
How Copy Trading can help you Avoid Common Mistakes
Some of the more common mistakes made by new traders and investors can be avoided by using copy trading. For example, for some traders, it takes time to overcome emotional decision-making. “Going with your gut” or investing based on an obscure tip just because it “feels right” could be your downfall. However, with copy trading, you put your money in the hands of experienced investors, who have already overcome such barriers and are cool and calculated.
Another mistake often made by new traders is the proverbial “putting all their eggs in one basket,” meaning, failing to diversify. By copying other traders, you gain exposure to their diversified portfolios. By creating an entirely people-based portfolio, you can enjoy two layers of diversification: The first is the traders themselves, and the second is represented by the assets in each trader’s portfolio. On eToro, you can invest in ready-made, people-based CopyPortfolios, comprising a selection of traders, who were bundled together based on a predetermined strategy.
Are There any Risks to be Aware Of?
The short answer is “yes.” There are always risks involved when trading and investing in financial markets. However, there are some ways to reduce the risk, especially when using CopyTrader on eToro:
- Check out the Risk Score: Perhaps the most straightforward method is to look at the Risk Score of the trader whom you are planning to copy. A Risk Score is a numeric value, ranging from 1-10, with 10 being high risk and 1 being extremely low risk. Choosing a trader with a risk score of 4 or lower, means you are exposing yourself to relatively low risk.
- Monitor your copied positions: While you are putting your money in the hands of experienced traders, you don’t want to adopt a “fire and forget” mentality. Periodically look at your trades, go to the copied trader’s profile, read their posts and see if you agree with their strategy.
- Diversify, diversify, diversify: There’s a reason why most risk management guides focus on diversification. The more diverse your portfolio, the more spread out your risk is. It’s that simple. As mentioned before, you may want to consider investing in a people-based CopyPortfolio, however, make sure to read each CopyPortfolio’s description carefully and look at its Risk Score, to ensure it matches your risk appetite and long-term goals.
We hope this guide gave you some insight into the world of copy trading. Obviously, there is much more to know and learn, but if you read the above carefully, you will be ready to take your first steps and open your first copy position.