Copy trading is a popular trading strategy for newbies wishing to leverage the skills of other, more successful traders. Copy trading takes place on exchanges where users can publish and share trades with other people. You can manually copy another’s trades but exchanges typically offer an automated copy-trading feature.
The premise behind copy trading is that people who are better than you at trading exist, and that you can copy their orders. This way, you can profit without any trading knowledge. If you’re someone who has just joined the market and wants to trade immediately, following an expert seems better than perfecting the craft for months – and potentially missing out on gains.
But copy trading isn’t as simple as following someone’s lead. How do you know who to follow and whether the other person will remain profitable not only today but tomorrow as well? There’s a stark difference between copying Warren Buffet and Joe the pizza delivery guy.
Copy Trading: How It Works
Unlike many trading strategies, copy trading is fairly simple on paper. Your goal is to pick a good, profitable trader and follow his calls. You do so for as long as you like, or as long their strategies are profitable.
Exchanges have turned copy trading into social networks by allowing traders to make profiles and connect with other people. You can chat with traders, share ideas, discuss trading setups, and see their daily, weekly, monthly, and annual performance.
Once you follow someone and copy their trades, the process goes like this:
- Trader A purchases 5 BTC at $49,000
- You buy BTC at $49,000 with X capital
- Trader A sells 5 BTC at $54,000
- You sell X BTC at $54,000 and profit 10.2%
Alternatively, you can lose 10.2% if the trader makes a mistake and the trade goes wrong. But think about it, has the trader made a mistake or have you made the mistake by following the wrong trader?
How To Choose The Right Trader
Like many things in life, copy trading involves vetting people. The only way to know whether someone can make you money is by doing a background check:
- What is their track record?
- How long have they been trading?
- What is their win/lose ratio?
- Is it their first time trading publicly?
- Which assets do they tend to invest in?
You don’t want to copy just anyone’s trade. Maybe the person is at the same skill level as you or worse. And if the trader is profitable and made $3,000 this month, you want to know whether it was one lucky win or whether they consistently made money. Even a broken clock is right twice a day.
Think of it like this: would you let your careless friend trade with your money? If the answer is no, you likely won’t allow it with a stranger either. You want someone who’s dependable, smart, and great at trading cryptocurrencies.
What you also need is a person with similar goals and expectations. If you’re in the market for the long haul, you don’t want a scalper or day trader who constantly risks money and opens low-probability trading positions. You’ll want to follow a trader with the same risk appetite as you – otherwise there’s a looming possibility for loss.
But you don’t have to put your eggs in one basket. You can diversify your copy trading capital and follow multiple traders. That way, when one loses, you may at least break even thanks to other traders. Diversification also enables you to take on different strategies, both risk-focused and risk-averse ones.
To confirm your choice, I recommend you check the trader’s long-term track record – especially if copy trading is a long-term plan. You need to make sure that the trader isn’t just profitable this week, but has been profitable for months, if not longer. Sometimes people seem like professionals after having a good streak. Or perhaps market conditions favored their trading psychology at the time, giving the illusion that they’re always profitable.
Monitoring Your Copy Trading Account
Copy trading isn’t a set it and forget it strategy. You can’t just follow someone, return one-year later, and expect to find heaps of Bitcoin sitting in your wallet. Copy trading requires constant monitoring on your part, so that your progress and goals are on track.
Monitoring copy trading activity involves observing active trades, recording past trades, and analyzing your counterpart’s performance history. You can apply the same techniques and record similar data as when keeping a trading journal.
Let’s say that the trader you follow performs well for some time. But what if one day, they start losing more and more, entering positions that even you wouldn’t consider. If you spot their losing streak on time, you can reconsider copying them and choose a different trader or pause your activities.
Or maybe you hear about a rumor that some event might shake the market but spot that your trader has a long position open. You’ll want to step in and cancel the trade – you don’t want to automate losses that you can avoid. You have an edge against the trader, so it’s only normal to recalibrate your strategy.
Copy Trading: Pros and Cons
Before you follow a trader, you have to know about both the good and the bad sides of copy trading. Although copy trading offers numerous advantages, there are a few disadvantages that might change your mind.
- Passive income
- Introduces you to trading concepts
- Great way to meet other crypto traders
- Picking a consistently profitable trader is difficult
- Automated copy trading requires monitoring to prevent losses
- You can’t pick and choose trades without completely unfollowing trader
- Traders charge copy trading commissions
In short, copy trading is a great strategy for beginners because it requires no interaction from the trader and simultaneously introduces them to trading concepts – if the trader shares charts, ideas, and explanations.
But the hardest part about copy trading is the first step: following a trader. You won’t be profitable just by copying another person’s trades, what if they’re bad as well?
Another problem is that due to automation, you can’t pick which trades you want to follow through with. Most of the time you’ll have to unfollow the trader. And lastly, traders charge commissions, so prepare to pay if you want to win money.
Is Copy Trading a Good Option For Beginners?
Entering the trading world through copy trading is like learning to ride a bike with training wheels. You copy a successful trader’s positions and watch how they react to different market conditions, see the way they think, and learn about basic chart patterns. It’s like committing to trading but putting minimal time and effort into it – until you reach a level where you are self-sufficient.
If you’re new to both trading and crypto, the extra time will serve you well. You’ll be able to study new concepts without being overwhelmed and slowly integrate into crypto society. Moverover, your risk is minimized as someone is always there to hold your hand throughout your journey.
To learn more about crypto trading strategies, I recommend reading the following articles: