Advantages and Risks of Copy Trading

Copy trading is a popular technique that allows beginner traders to follow the strategies of experienced traders. Beginners or traders with little time to commit use expert traders’ strategies manually or via automation to explore market opportunities. As the name suggests, you practically “copy” others’ trades. While using others’ expertise has several advantages, leaving your financial decisions to someone else’s discretion involves risk. This article takes a look at both the advantages and disadvantages of copy trading.

Advantages of Copy Trading

There are several benefits to copy trading:

Access to Expertise

New traders with little knowledge of the financial markets can benefit from the trading experience of expert trading with copy trading. They can take advantage of unique opportunities that often escape the eyes of beginners. This also works as a safety wall against beginner mistakes that may happen due to a lack of experience.

Learn as You Go

With copy trading, you can learn from the strategies of experienced traders. Usually, while learning or creating a new strategy, you would need a lot of time to develop a strategy, back-test it and then take positions in the live markets. However, with copy trading, you can continue to trade while you learn. Instead of spending months learning, you can start exploring newer markets and decide whether you want to dive deeper and develop your own strategy.

Simplified Trading

It simplifies trading for beginners. Cutting-edge copy trading platforms allow you to set your capital outlay and risk tolerance limits. All other technical details of timing and sizing your position and setting risk management parameters are taken care of by advanced algorithms in line with your chosen expert’s strategy. This retains the flexibility of managing your finances. 

Low Time Commitment

Since copy trading can be fully automated with Blackwell Invest, you do not have to commit significant amounts of time to monitor the markets or manually open and close positions.

Earning Opportunities

Expert traders also benefit from copy trading. They can earn when their trading ideas are copied by other traders. This gives them an additional income source, apart from their own trades.

Risks Associated with Copy Trading

The financial markets entail risk, and so does copy trading. And when you leave your trading decisions to others, some apprehension is natural. Here’s an account of the risks copy trading entails and the ways to minimise them.

Human Errors

Every trader, including experts, might make calculation or timing errors. This may cause you and other traders who follow copy their trades to lose money. Remember that there is no guarantee of profits with any trading strategy, even if they are your own. So, while copying other traders, do your own due diligence too.

FOMO

The fear of missing out can cripple anyone. If you or your chosen expert trader succumb to FOMO, irrational decisions can occur. This may expose your capital to higher risks than you signed up for.

Hidden Pricing 

One of the most common disadvantages of copy trading with a non-reputed or unlicensed broker is ambiguity in the pricing of copy trading. Ensure that you choose a trusted brokerage and thoroughly understand the applicable costs for copying expert setups and opening and closing positions. The best copy trading platforms will notify you of pricing changes proactively.

Latency

The markets can move very quickly. Therefore, the slippage or pricing you experience for a trade can be different from that of the expert you follow. This is because there is always (usually negligible) a delay in an expert placing a trade and the platform replicating it for you. This may impact your profit percentage and trading costs.

5 Tips to Mitigate the Risks of Copy Trading

1. Choose a reliable copy trading platform from a reputed broker. They have cutting-edge technology to minimise copying delays. They also have sufficient liquidity to optimise the number of trades that go through to reduce slippage.
2. Conduct research on expert traders to choose the best suited one. The highest-quality copy trading platforms show detailed information about expert traders, their gains, losses, risk behaviours, etc. These can help you choose one whose trading psyche aligns with yours. In addition to these, Blackwell Invest matches you with suitable masters and offers reports and smart filters, such as performance and drawdown levels, which help you make informed choices. 
3. Diversify the assets your trade and the traders you follow. You can distribute your capital across traders with distinct strategies. This mitigates the risks associated with an instrument and with copying a single expert. While choosing, instead of just focussing on the return percentage, check return volatility and loss frequency. 
4. Do not trust blindly. You must monitor individual experts’ specific capital groups to ensure that your overall portfolio performance is satisfactory. You can change the expert trader if you find that their performance in a certain asset or under specific market conditions does not meet your requirements.
5. Include the risks of price changes and traders’ errors in your risk calculations and configure copy trading settings accordingly. 

Stay mindful. Experts are also human beings and can make mistakes. Switching experts too quickly can increase the overall cost of copy trading. Moreover, all trading carries inherent risk. While deciding to switch from one expert to another, consider overall performance over a sizeable period. Begin copy trading with Blackwell Invest to accelerate your learning while trading more confidently. 

To Sum Up

• Copy trading allows access to expertise and unique opportunities.
• You get to trade while you learn.
• Your trades are immune to interference from your emotions.
• Copy trading entails technical and human error risks.
• Thorough due diligence when selecting the copy trading platform and the expert can minimise risks.
• Diversifying your capital across assets and expert traders can improve your copy trading experience.

Disclaimer:

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