Common traders’ dilemmas: Should you give copy trading a try? 

As someone who’s looking to take their first steps into the alluring yet extremely intricate world of trading, you may find it rather difficult to know where to start. Between trying to decipher the lingo and grasp basic concepts, learning about different markets, trading strategies, and platforms, the whole experience can be a bit overwhelming. But when challenges persist, so should you. 

While you struggle to get into trading, many will be quick to recommend a seemingly simple and accessible solution: copy trading. They’ll tell you it’s the easiest and quickest way to break into financial markets and start trading like a pro without actually becoming one. Most see it as some sort of shortcut since it allows one to skip the research phase and the lengthy learning process that is necessary for acquiring deep market knowledge and making successful trades, which, in theory at least, makes it the perfect option for beginners who are short on time and patience. 

But is copy trading really that simple and safe, or is there more to it than meets the eye? While taking shortcuts may be tempting, you should always be wary of solutions that promise great results with minimum effort, because when things seem too good to be true, they usually come with a catch or hidden pitfalls that are conveniently overlooked. That’s why it’s wise to run a deeper investigation into copy trading, analyzing both advantages and downsides, before deciding if it’s worth it or not. 

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What is copy trading? 

Copy trading is exactly what the name says: a type of trading where one copies the moves of other traders. This strategy appeared somewhere around the mid-to-late 2000s and has since become a common practice, employed by individuals from all over the world, particularly by newbies who often lack the confidence to make their own decisions. 

Copy trading is extremely popular among forex traders, but it can be applied across all financial markets, whether it’s stocks, commodities or crypto, which is increasingly seen as a mainstream form of investment and an integral part of global finance. 

The traders whose transactions are being copied are experienced professionals, being recognized for their extensive knowledge and skills in the field, and having a track record of consistent gains that validates their abilities. They are usually called master traders, leaders, or signal providers, while the parties who do the copying are referred to as copiers, subscribers, or followers.

In general, followers compensate leaders with a flat monthly subscription fee for accessing their trading signals. In some cases, followers may be charged a percentage of the profits they make by copying leaders’ trades. 

In the beginning, copy trading was a manual process, where copiers would receive signals from leaders and then proceed to replicate their moves manually. However, tech advances and the emergence of cutting-edge trading platforms have turned copy trading into a completely automated process, allowing copiers to follow every action and decision that signal providers make and execute the same operations in real time. Whatever the leader does is instantly mirrored in the follower’s account. 

Still, copiers can decide which trades they want to copy and which they want to handle themselves, or they can end the relationship at any time, maintaining full control of their trading experience. 

Sometimes, copy trading is mistakenly conflated with mirror trading, although the two are not one and the same thing. In mirror trading, one only replicates specific strategies from different traders based on a complex analysis, whereas with copy trading, the follower links a percentage of their funds to the account of their chosen leader, mimicking individual trades or entire strategies automatically. 

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The pros

Considering the description above, it’s not difficult to understand why one would resort to copy trading instead of taking a more conventional route. Convenience is probably the biggest incentive, as following the lead of seasoned traders simplifies the entire trading process, saving copiers a lot of time and stress, and potentially shielding them from making bad decisions that could result in losses.  

It’s just like copying school assignments from your smarter peers and getting the same results as them, but without putting in any effort. You simply let the experts do the heavy lifting and reap the reward of their hard work. 

Copy trading is ideal for inexperienced individuals, allowing them to enter markets even if they have little or no practice at all and limited trading skills. Mastering trading takes time and implication, and not everyone is willing or has the possibility to allocate resources to these endeavors. 

Some point out that copy trading can serve as a learning opportunity. Although you are not actively involved in making the trades and only copy what others are doing, by paying attention to their actions and analyzing their decisions, you may come to improve your trading proficiency.  

Copy trading can also help with portfolio diversification by giving followers the opportunity to connect with versed traders involved in markets that they may not be familiar with. For example, if someone has very little knowledge of the crypto market but wants to gain exposure to digital assets, they can simply copy the moves of a professional trader who has years of experience and a proven record of successful trades in this niche. 

The cons

Trusting the expertise of other traders also comes with downsides, unfortunately. Just because you have a highly skilled trader in charge of making decisions on your behalf doesn’t mean you won’t experience any losses. No matter how capable a trader is, they can still make poor choices, and the consequences of their bad calls will also impact your portfolio. 

Furthermore, overreliance on the guidance offered by professional traders can prevent you from advancing your own knowledge and skills and might also expose you to risks that you may not be aware of. That’s why copiers should remain engaged and try to understand the approach and strategies employed by the traders they follow.