How Copy Trading Works in Forex

Copy Trading

Copy trading is a buzzword in the financial markets. Many young investors are interested in copy trading, but they do not entirely understand how it works and how it differs from social trading. In this article, we will discuss copy trading, its risks and benefits, and the best platforms for copy trading. 

3 Best Copytrading Services 

Justforex

The rising start of a copy trading market, Justforex, was launched just a couple of years ago, but it has already won the top positions in the rates. Justforex offers a number of financial assets, including crypto, numerous account types, simple and fast withdrawal, and a dozen of payment methods. The only disadvantage of this platform is that US citizens are not approved to use it. 

Pros 

  • Different account types including demo account
  • Account opening via mobile apps
  • Low speads

Contras

  • Non-available for US citizens 
  • Fresh broker

Toro

One of the first copy trading platforms, eToro won the hearts of many traders. Its simple and user-friendly interface does not require much time to learn. The platform offers Forex trading and Commodities, Indices, Stocks, and other financial assets. eToro claims the number of its users exceeds 1,200 thousand users. It is the most regulated broker on the market. Despite this fact, the company is not listed on the stock exchange and it does not publish its reports. 

Pros

  • Easy account opening 
  • Best social trading broker 2021 
  • Commission-free stock trading

Contas

  • High forex and CFD fees 
  • Slow customer support
  • Only one currency for account 

FTXM

Another popular service is widely spread in Africa and Asia. It positions itself as single-point access to all your trading services and attracts its audience with a low minimal amount. It is a good and reliable service, but the product range is limited. One of the strongest sides of this service is multi language support that answers quickly and provides professional help.  

Pros

  • Excellent customer service 
  • Demo account
  • Live webinars 

Contras 

  • Inactivity fees 
  • High withdrawal fee
  • LImited product line 

What Is Copy Trading?

Let us start with social trading as an investment strategy. We all know the famous sayings “fake it until you make it” and “follow the best.” In trading, it means that a young investor follows experienced peers to understand their strategies and methods. Such behavior is expected in the framework of social education. In the rapidly changing environment, classical education is not effective anymore. That is why learning from the experts can be more helpful. 

So, social trading is learning from the experts on the forex market. However, the copier can choose various strategies of following the experts. First, the younger peer can copy the general strategy or some tricks of the experienced trader. Second, the copier just repeats the deals of other investors. The first option could be more effective, but it requires some time for analysis. So, the second option is less time-consuming and attractive for young investors. 

How Does Copy Trading Work?

First, the copier should choose the platform for copy trading. We will discuss several popular social trading services below to make your choice easier. Many platforms provide top traders’ lists, historical returns (past performance index), and personal risks score. 

So, the second step of a young trader is to choose a top trader to follow. The choice requires some analysis and investigation. When the top trader is chosen, the young investor should set up the trading terminal to copy the real-time forex signal from another live investor. 

Then the copier starts to mimic the trading deals. The software blindly repeats every deal: if a top trader sells, it sells also, and if the leader buys, the follower buys, too. It sounds good and safe, but there are some related risks. So, the copying trader should monitor the account to avoid a sudden money loss. 

Is Copy Trading Legal?

The question about the legality of copy trading should be split into two parts. The first part – is trading legal? Yes, forex trading is legal, but unfortunately, this industry is a pirate bay for scammers. So, starting the discussion about legality, we’d recommend checking a broker: find some user reviews, check the registration, and so on.  

Then we move to the legality of copy trading. The answer depends on your location and citizenship. For example, it is legal in the US, but the requirements and limitations are stricter than in other countries. In the UK, for example, copy trading is classified as portfolio management services, with the corresponding regulations.

In brief, copy trading is legal but keep in mind local restrictions and the reputation of your broker. 

Most Suitable Markets for Copy Trading

In general, all financial markets are suitable for copy trading. If we go back in time, we will find the copiers that made a fortune following the leading traders at the stock market. The stock market is suitable for copy trading nowadays, too. The copying is especially helpful if the leading trader can have some market insights and make good deals short before market fluctuations. 

A forex market is a perfect place for copy trading. You can copy trade with currency pairs if you want to practice your trading skills, but you are short of time. The advantage of the Forex market is that the periods of high volatility always follow relatively calm periods. 

Also, you can copy trade with future contracts, indices, and commodities, if you prefer this type of financial asset. The crypto market’s copy trading is questionable: the crypto market is even more unstable than the Forex market, and the risk is also higher. So we’d avoid recommending copy trading on the crypto market, at least at present conditions. 

Copy Trading – How to Start

First, select a leading trader to follow. Collect all the available information about your short-list candidates: the number of followers, the return of investments, the number of funds they manage, the best and the worst deals, and so on. The more you know, the better trader you will choose. 

Second, define your investment amount and deposit it on your account on your favorite copy trading service. You can invest all your money into a single trader, but common sense advises not to keep all eggs in one basket. So, you can also split your deposit and allocate a certain amount to each trader you want to copy. 

Third, monitor the automatic copy trading. You will see how the platform replicates the orders in your account. Remember, you can stop it anytime. Please also remember that you should pay some brokerage fees, as you would pay for normal trading. 

Fourth, analyze the traders’ performance and make the next steps. If you like the results, add more funds for better profit. If the performance is poor and the deposit has diminished or gone, do not replenish this amount. 

Copy Trading Risks

Of course, copy trading has some risks. Some of them are typical for the forex market as well as for financial markets in general. Making speculative profits with financial assets is a high-risk and high-reward business. So, never invest in Forex your money you cannot afford to lose. 

Market risk

There is no stability in the financial market. The global economy rises and falls, and each fall means the negative trends on the market, up to the total collapse. So, even you follow the most experienced traders who perform perfectly; there is always a risk of losing everything for them and you. 

Trader personality 

Unfortunately, some leading traders pretend to be more successful than they really are. You can choose the wrong trader to copy, but you will not understand this till you see the actual results. So, we repeat our recommendation to distribute your deposit between several traders. 

Liquidity risks 

On a volatile market, sometimes the traders can face liquidity issues. It means there is no buyer for the chosen financial asset, and a trader cannot sell it. 

However, every copier should remember that the high-risk level is fertile soil for high rewards. 

Copy Trading Benefits 

Without any doubt, copy trading has numerous benefits; otherwise, it would not become so popular. 

Easy Start 

Many new investors dream about forex trading, but they feel unconfident and inexperienced to start. Starting as a copy trader could be easier than an independent trader career.  

Accessibility

There are no limits to copy trading. Your age, gender, occupation, and other factors do not matter – you can access copy trading. 

Fast Learning

Practical experience is always a good way to get a new skill. Trading with experienced peers, knowledge sharing, and information exchange will make your path in trading easier.

Diversification

You can diversify your investments within the single copy trading platform. Moreover, you can diversify your investment strategy by combining copy trading with other investing activities.

Free time

You should monitor your account when copy trading, but it takes less time than normal trading. So you have more time for your family or other activities. 

Final Words 

A financial market is a field for people who want to invest their money and get some profit. Successful forex trading is a mix of special skills and some art. Not many traders can perform effectively and show positive results for a long time. 

If you do not feel you are skilled and talented enough for normal trading, try copy trading. You can automatically repeat the deals of the more experienced peer. There are many special platforms, including Justforex, and you can start your career in Forex easily and quickly.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.