Copy Trading is a relatively new financial concept which is continuously gaining momentum. The best way to think of copy trading is if you took a social network such as facebook and mashed it together with a trading platform.
So What is Copy Trading
There are lots of different platforms but the basic idea is the same. A trader makes trades as usual (or a robot in some cases) and these trades are shared publicly so that other traders can copy. Copy Trading platforms aggregate the traders so you can see over time which ones are making are profit. They also allow you to automatically copy the trades.
Robots or People?
There are two types of copy trading platforms and I like to categorize them as “robots” and “people”. A platform like ZuluTrade lists mainly forex robots. These robots use algorithms to try and beat the market and make a profit. Then there are platforms like eToro which only lists real people.
But which one is more profitable? Forex robots never make profits for more than a few months. I’ve tried Zulutrade in the past and haven’t been able to make a consistent profit. There is just way to much risk. eToro on the otherhand which doesn’t list forex robots and has more finanical instruments to trade (such as stocks etc), tends to be more reliable.
What is the difference between Copy Trading and Social Trading
The main difference is the ability to connect with the actual investor by leaving comments and liking posts/trades etc. I consider a platform like eToro to be both a social trading and copy trading platform. In my opinion the more “social” the better. Transparent investors are better investors and social trading encourages investors to connect with their followers.
Does it Actually Work
A 2012 study at MIT found that people faired around 6-10% better when they copied a guided investor. And during the more recent Brexit event, the majority of investors made a profit on the eToro network. For beginners, it’s definitely going to be more profitable to copy a trader than try and go it alone.
So how do you actually make money from Copy Trading?
- Spread the risk – Don’t just copy one investor. Instead copy 2 or 3.
- Look for low risk investors with a strong profile. Platforms like etoro will show you who are high and low risk traders. Look for investors who have trading data for the past 6+ months. Don’t copy someone who has just begun trading.
- Don’t panic. Markets go up and down. Don’t expect to make a profit every week.
- Invest in a diverse portfolio. Copy investors who invest across forex, stocks, commodities and other CFD’s.