What is Copy Trading?
Copy Trading is a type of investment strategy where investors follow in the footsteps of experienced investors. This is a legal method of investing and allows newcomers to get a leg ahead in the game by looking at the trading decisions made by established investors.
In this manner, investors can confirm their analysis or generate new positions without performing any technical or fundamental analysis.
During this time, investors can gain experience and build on their trading skills. On the other hand, people who are associated with professions outside of financial markets can save time and earn profits using copy trading options.
How Does It Work?
Copy trading is a legal method of increasing profits and ensuring better investment decisions. Therefore, brokers and trading platforms offer copy trading options for investors in addition to other features or investment services.
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Investors have to find the most profitable investor who is associated with a digital brokerage firm. The next step for the investor is to start following them and get notified about every trading decision that the investment mentor is making.
It is important for investors to enable their notifications from the investors to make sure that they are able to collect all the required information. At the same time, the copy traders have to remain active on the social media accounts or other platforms where their mentor investor is posting investment related updates.
With these simple steps, the follower investor is likely to make good investment decisions by retracing the steps of the experienced investor. It is important that investors follow an investor that matches their trading strategy and risk tolerance.
Social Trading Vs Copy Trading
Another form of tracking-based investment is social trading. In this method, the investors are not copying a particular individual rather they interact with their peers on social media and other forums.
Social traders gather information from exchanges and conduct market research and base their decisions on the opinions of like-minded peers.
In this manner, they are able to make trading decisions that are in line with the majority consensus in the market that in turn increases their chances of making profits.
Risks Associated with Social Trading
Social trading is a way to make trading decisions that align with ongoing price trends and adhere to market sentiment. However, social traders are exposed to investment risks as follows:
Social trading takes more time in comparison to copy-trading. At the same time, it is subjected to inaccuracies since the overall market direction is always in state of flux.
Social traders require the skills and technical knowledge to understand why the traders are making changes in their portfolio. Without this skill, social traders will not be able to accurately determine entry and exit points.
Mirror Trading Vs Copy Trading
Mirror Trading is a type of copy trading. However, mirror traders stick with a specified trading strategy which is generated from automated trading programs. An automated trading bot or algorithm is modeled on data generated from hundreds of professional investors.
Therefore, rather than following a particular investor, mirror traders follow the collective trading pattern complied by the automated trading program.
Features of Mirror Trading
The features of mirror trading are mentioned as follows:
Mirror trading is fully automated and requires little manual input from the investors.
Mirror trading can lead to considerable portfolio diversification based on rapidly changing market trends. Algorithms generate new trading signals based on overall data input within milliseconds that add or subtract different cryptocurrencies from the trading account of a given investor at a rapid pace.
Advantages of Copy Trading
Copy Trading is an automated method of investing. The investors have to give limited input into analysis or sifting through market data. Once they start following the trading signals generated by a given investor, they are able to mimic their trading decisions and continue to gain profits.
Copy traders can locate a profitable investor using filters available on online websites or using different metrics such as profit and loss readings and reward-to-risk ratios etc.
Copy traders are able to make practical decisions rather than based on psychological inclinations by mimicking all trading decisions made by the experienced investor.
Copy trading is a profitable and easy method of investing that is suitable for beginners. However, it also entails an inability to control investment risk since the investor did not conduct any market research before adding a new cryptocurrency to their portfolio.
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