Copy trading is gaining popularity as more and more people decide to try copy trading. They are lured by advertising from companies like eToro that features videos showing how anyone can trade like a pro with no previous knowledge. This is a very tempting proposition but is it true? Will copy trading really allow you to earn money while you relax and watch cat videos on YouTube? How do you best use copy trading and how to maximize your chances of success?
Will copy trading earn you money?
Copy-trading can be a good way to earn money but it will not guarantee that you will make money. There is no guarantee that the trader that you choose to copy will continue to earn money. Even the most skilled trader will experience losses and you are never guaranteed to earn money. It does not matter which trader you choose to copy. They might perform bad trades and lose their money.
Is copy trading a good investment alternative?
Copy-trading can be a good way to invest money and it can be a good alternative to other managed investments such as mutual funds. At least if you use copy trading in the right way. Copy trading is a tool that can be very useful when used the right way and very damaging when used the wrong way. A hammer is useful when you hit the head of a nail but can do a lot of damage if you use it to hit other things. It is important that you know how to use copy trading before you start copy trading.
You should never invest money that you think you will need in the next 24 months. This is true for all types of investing including copy trading.
Different types of copy trading
You can use copy trading to trade on a wide variety of different markets. There are trading platforms that allow you to copy trade stocks, Forex, CFD:s, options, commodities, and a number of other financial instruments.
Which types of financial instruments you trade using copy trading will have a large impact on what you should expect. Copy-trading forex and CFD:s is very high risk and there is a large risk that you will lose money. 70-80% of everyone who starts forex trading will lose money. This number will be lower if you copy an established trader but you still risk losing money. Copying a value investor investing in high-quality stocks will be a lot lower risk and is more similar to investing in a managed mutual fund.
We do not recommend that you engage in high-risk trading such as forex trading. This is true regardless of whether you trade yourself or use a copy trading service.
Copy-trading signals
There are many services that provide trading signals. Some are free, others cost a lot of money. These trading signals are usually not a good alternative. Many of these signals are scams being sold using faked trading history. It is hard to become successful in using these services. I do not recommend using trading signals.
Social trading platforms
A better option if you want to try copy trading is to do so using a social trading platform such as AVA Trade or eToro. These social trading platforms allow you to copy other traders’ trades. You can browse a directory of different brokers that allow you to copy their trades, the trades they made, and the returns they have achieved. The traders can not alter or fake their history. You know that the information you see is the truth. This allows you to make an informed decision about who you want to copy. It is usually completely free to copy another trading using these platforms. The broker and the trader you copy earn their money from the trading fees you pay. The trading fees you pay when you trade using a copy trading platform are usually in line with what you would pay if you chose another trading platform without this feature.
Using a social trading platform is a good way to find a good trader to copy and to avoid getting scammed.
How to choose a trader to copy
Your first thought might be to try to find the trader that has produced the highest return during the last year and then choose to copy her or him. This is seldom a good idea. The trader that has produced the highest returns is usually traders that make high risks trades and got lucky. No one remains lucky forever and you do not want to copy a trader that got lucky. You want to copy a trader that has achieved good returns by making skilled trades.
I recommend that you start by filtering out all traders that trade high-risk financial instruments such as forex and CFD:s so that you are left with a list of traders that trade stocks and other lower-risk instruments. Look at the trading history of each trader and see if the returns they have achieved are due to a large number of profitable trades or if they have gotten lucky with one or two stocks. Avoid traders that have produced a high return from a few profitable trades among many losing trades. Look for a trader that has a high percentage of profitable trades in a lot of different stocks. I trader like this is more likely to continue to make profitable trades and is a good trader for you to copy long term.
Copy-trading can be 100% automatic but that does not mean that you shouldn’t monitor it. It is highly recommended that you log in regularly to your account to see how the trading is progressing. Do not be afraid to stop copying a trader if their results are becoming worse.
Remember to never invest money you can not afford to lose. This is true for copy trading and all other investments.
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