Pros and cons of Forex copy trading are essential to understand for anyone considering this investment approach. By its very nature, this means emulating the trade of expert professionals, thus opening the easy entry to the forex market even for complete beginners and busy investors. However, as much as this provides a perfect avenue to make money off the experience of other more seasoned traders, it also comes with a number of potential pitfalls that could very well affect your overall success. In this guide, we will look at both the pros and cons of Forex copy trading, helping you to ultimately make an informed decision on whether it is the right strategy for you.
Definition of Forex Copy Trading
Copy trading is where one trader’s position is copied to another trader’s account on the opening or closure. This can be both automatic and manual, hence it depends on an individual’s discretion as regards how they want to approach copy trading. Before you start copy trading, it’s important that you have done your own analysis on the position or certain market before you commit some real capital into it. Remember, even though you are following an experienced trader, still at risk is your capital.
Pros And Cons of Forex Copy Trading
If you have little or no previous experience following other traders, it is relevant to look into the pros and cons of copy trading and weigh them against each other in order to make an informed decision.
Pros of Forex Copy Trading
1. No Psychological Pressure
Since you are not making the trading decisions yourself, all psychological pressure related to trading will vanish. You needn’t worry about the fear of a trade, the greed, or the overanalysis of it. Copy trading automates the process for you, where you can depend on others’ expertise without emotional involvement.
2. No Deep Forex Knowledge is Required
Most importantly, you don’t need to become some sort of forex market expert to be successful at copy trading. You won’t have to study charts-which can be mind-bogglingly complex analyze trends, or second-guess the market in any other way. You can make money without the steep learning curve independent trading requires, simply by following the activity of seasoned traders.
3. Transparent Trader Information
When you come to choose a trader to copy, you have full information at your disposal: his profitability and its dynamics, the range of assets traded, account balance, and the number of copiers. You are also able to see the risk level of his strategy, which allows you to make an informed decision.
4. Full Control Over Your Funds
The trader you copy doesn’t even have access to your money, let alone any control over it. You are simply copying his trades into your account. That simply means you can only lose money if and when the trader loses money on a trade.
5. Higher Chances of Success
Your capital will have a greater chance to increase, relying on the opinions and actions of expert traders. Such traders have experience and strategies in place that could lead to more profitable outcomes than if you were trading independently without expertise.
6. Portfolio Diversification
It allows diversification by following several traders across different accounts. If one trader loses money, the profit gained with the others will offset the loss. This spreads risk over various strategies and reduces overall risk.
7. Time-Saving Opportunity
With copy trading, the tedious effort of market analysis no longer burdens you. While experts execute your buy and sell decisions, you may busy yourself with other areas, since you’ll also reap benefits from the market movements.
Cons of Forex Copy Trading
1. Investment Losses Caused by Inadequate Trader Selection
The moment you devolve your investments in the hands of others, once traders are not well selected, this can make your investment go sour. A wrong selection of a trader with low performance or one that takes on too much risk can be highly catastrophic to your wallet, especially when the markets are seen to fluctuate immensely.
2. Requires Ongoing Supervision
Copy trading is by no means a hands-free activity. You will need to be in constant observation of the activity of the traders you are copying and react promptly to their notices. Unless you do so, you are most likely to experience missed opportunities or other risks you were not prepared for.
3. Trader Selection Responsibility
While you are following another trader’s decisions, you do have to choose the trader that you are going to follow yourself. Unfortunately, without at least some knowledge of trading basics, even when markets are highly turbulent, it would be difficult to find a good and reliable trader. A poor selection will result in losses that can be rather easily avoided by an investor who is more knowledgeable.
4. Missed Learning Opportunities
The moment you follow other people’s recommendations, you yourself lose the chance to learn the market and develop some sort of trading strategy that is unique. This can reduce personal growth for a trader through copy trading when one is not actively engaged in making sense of why certain trades are taken.
5. No Accountability from the Trader
The trader you are copying is not liable to lose your money, nor does he take any risk against your account. Since you are just copying his trades onto your account, then if he goes into losses, your account would also face those losses. You carry the entire financial risk, notwithstanding that you are not making the trading decisions yourself.
Frequently Asked Questions (FAQs)
What is the copy trading platform?
- Social Trading is a copy trading platform from where members can copy professional traders’ trades into their trading account. Or vice-versa, one can become a managing trader and provide your trade for copying, and receive a commission from the profit as a reward.
How does Copy Trading work?
- And similarly, having subscribed to successful traders’ moves: one opens the same deals at the same time and closes them together with the trader, following his or her signal. Speaking of copy trading, trading can be automated: the platform will execute deals after the following trader. While in the case of copy trading, the user himself is responsible for managing his own deals and can take into account the signals sent by the traders he’s subscribed to.
How to start copy trading?
To initiate the process of copy trading, you will need to:
- Register with the trading platform;
- Select a trader to copy from the ranking in the copy section;
- Deposit funds into your account;
- Adjust the copy parameters to your taste and activate copying;
- Set the size of funds for copying;
- Select the type: proportional to your account, full-size copying 1 for 1, fixed size of each trade, % of each trade’s volume;
- Define levels of maximum loss and maximum profit.
Can I profit from copy trading?
Yes, of course. An investor can be trading profitably by copying trades of experienced traders. In turn, experienced traders boost their earnings: in addition to the profit from their trading, they get a percentage of the profit made by copying investors.
