The fast-paced and constantly evolving crypto space is an exciting field for investors, offering a unique opportunity in an asset class that has outperformed all others over the last decade.
However, the potential on offer is not without risk, and the volatility and permissionless nature of the crypto market can seem daunting to the novice trader. But what if there was a more passive way for newbies to capture some of the best opportunities without the trading skills, time, and analysis needed to keep track and manage risk? Enter copy trading.
What Is Copy Trading?
Copy trading is a form of social trading that has grown in popularity in recent years among investors who lack the expertise or time commitment in a particular market, such as crypto. It allows traders' positions to be replicated automatically by copiers, leveraging the skills and knowledge of those with more experience in that market.
Copiers can diversify their investment portfolio into more unfamiliar markets by allocating a percentage to expert traders in that field and copying new positions they take out at the same ratio. For example, if a copier allocates 10% of their portfolio to a particular trader, who opens a position worth 10% of their portfolio, 10% of the copy allocation would then take the same trade – equal to 1% of the copier’s overall portfolio. Alternatively, a fixed amount may be allocated to a trade or trader.
It allows traders' positions to be replicated automatically by copiers, leveraging the skills and knowledge of those with more experience in that market.
The entire management of the trade including the opening of a position, stop losses, take profits, and closing will be copied and executed unless the copier wanted to override that for any reason, retaining the ability to control and manage individual trades. Copiers can also end the relationship with a trader at any time as copy trading does not eliminate risk, past performance is no guarantee of future success, and copiers are still responsible for the trades made.
Therefore, it is not a completely passive process as analysis of the performance, activity, and track-record of traders will still need monitoring. A diversified balance of copy traders should be used to ensure copiers are not increasing risk unnecessarily with a reliance on too few traders copied.
How Does Copy Trading Work?
Copy trading works by harnessing the social networks on trading platforms, providing transparency over the positions and...
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