Copy Trading Forex

Copy trading is a popular way for individuals, especially novice traders, to enter the forex market without the need to develop and execute their own strategies from day one. By replicating the trades of experienced traders, copy trading allows a trader to benefit from their expertise while learning about market dynamics in real-time.

Of course, copy trading also comes with its own risks, including the risk of the person you follow making poor decisions and depleting your bankroll.

Using copy trading to avoid having to learn anything about forex trading is also risky, as a person who does not know at least the basics will find it difficult to properly evaluate the traders available to follow, or even pick a high-quality broker and platform for the copy trading.

In this article, we will take a look at the concept of forex copy trading, how it works, its advantages and disadvantages, and tips for those how are interested in getting started.

What Is Forex Copy Trading?

Sponsored Brokers With Copy Trading

Copy trading is a system that allows you to automatically replicate the orders of another trader in your account, e.g. buy orders, sell orders, stop-loss orders, and take-profit orders.

When the trader you follow opens or closes a position, the same action is executed on your account proportionally to the amount you’ve designated.

Forex copy trading can be applied to various currency pairs, making it a versatile option for diversifying your forex portfolio without having to become an expert on all these currency pairs.

Today, there are several trading platforms available that have very strong support for copy trading, e.g. eToro, ZuluTrade, and Myfxbook. Such platforms connect traders and makes it possible for you to browse and choose available traders to follow based on data published about their historical performance, risk profile, trading style, etc.

How Does Copy Trading Work?

  1. Choose a Copy Trading Platform
    Start by selecting a reputable platform that offers copy trading services. Look for features like transparency, user reviews, and appropriate regulatory oversight. It is best to pick a platform that is regulated by a strict financial authority known for having and enforcing strong trader protection.
  2. Browse Traders
    On the platform, you can view profiles of traders who offer their strategies for copying. Profiles often include details such as historical performance, risk level, trading frequency, and preferred assets. Serious platforms will typically provide detailed information about the traders you can copy, including their trading history. This transparency allows you to make informed decisions.
  3. Allocate Funds
    Once you’ve chosen a trader to follow, allocate a portion of your funds to copy their trades. Most platforms allow you to set limits on how much of your capital is tied to a single trader. This is an important part of risk-management for copy trading.
  4. Trades Are Replicated Automatically
    When the trader you’re copying makes a trade, the same position is opened in your account. The size of your trade is adjusted based on the percentage of your allocated funds relative to the trader’s account.
  5. Monitor and Adjust
    While copy trading is largely automated, it’s important to monitor the performance of the traders you’re copying. You can adjust your allocations, stop copying a trader, or add new traders to diversify your portfolio.

Important: This guide is based on how it works on many copy trading platform, but it is important that you do not trust it blindly. You need to read the terms and conditions applicable to the specific platform you wish to use and make sure you understand how that particular platform works before you put any money on the line. Copy trading is offered by a multitude of companies scattered across the globe, and there is no guarantee that each and every one of them will function in the same way.

Advantages of Forex Copy Trading

Accessibility for Beginners
Copy trading allows beginners to participate in the forex market without needing extensive knowledge or experience. By following skilled traders, you can learn from their strategies and gain insights into how the market operates.

Time-Saving
For those who lack the time to analyse markets or develop strategies, copy trading provides a hands-off approach. The automation ensures you don’t have to monitor the markets constantly.

Note: It is still highly advisable to check in on your account regularly and be ready to cut ties with traders that are no longer trading in accordance with your expectations.

Diversification
Copy trading lets you follow multiple traders with different strategies and currency pairs, helping you spread risk across various assets and approaches.

This can be useful even for an experience trader. When we try to achieve diversification on our own, it has its limits, since we are still the same person making the choices. It can also be difficult, even for an experienced trader, to suddenly jump into a new market or asset type. Therefore, even experienced traders sometimes take advantage of copy trading platforms to achieve a higher degree of diversification.

Learning Opportunity
By observing the trades and strategies of experienced traders, you can gain valuable insights and improve your own understanding of forex trading. This is not only useful for forex trading beginners, but for anyone who wish to branch out and learn how to speculate on a new currency pair or implement a new trading technique.

Disadvantages of Forex Copy Trading

Dependency on Other Traders
Your success depends on the performance of the traders you’re copying. Even experienced traders can experience losing streaks or make mistakes.

Market Risks Remain
Even with skilled traders, the forex market’s volatility and unpredictability can lead to losses. Copy trading doesn’t eliminate market risk. Even if the traders you follow have excellent trading records, the market can turn against them at any moment. Do not let copy trading lull you into a false sense of security.

Limited Control
Since trades are executed automatically, you have limited input over individual positions. This can be frustrating if a trader takes actions that don’t align with your preferences.

Platform Fees
Some copy trading platforms charge fees or commissions on copied trades, which can reduce your overall returns. Be sure to review the fee structure of your chosen platform before you commit any money.

Risk of Over-Reliance
While copy trading is convenient, relying solely on others’ expertise may prevent you from developing your own trading skills and strategies.

Scams

As with any other type of trading, scammers are active in the copy trading field. It is very important to pick a reputable broker/platform that is regulated by a strict financial authority. If you sign up with a shady broker/platform and your account is depleted through copy trading, it will be exceedingly difficult to prove fraud since you willingly gave someone else control of your trading account, and the trader or traders you picked just happened to go on a losing streak, or carry out trades that really racked up the trading costs.

In addition to picking a reputable copy trading platform, be extremely sceptic about people or companies who are offering copy trading adjacent services, e.g. third-party plug-ins or systems that will somehow facilitate or boost the profitability of copy trading.

It is a good idea to read up on common scams to learn more about how to spot the warning signs from a distance. This way, you can avoid wasting time and resources on fraudsters.

Tips for Getting Started with Forex Copy Trading

1. Research Platforms Thoroughly
Choose a reputable and regulated platform. Check reviews, compare features, and ensure the platform aligns with your goals. Check with the applicable financial authority to make sure the company is actually holding a current and valid license.

2. Evaluate Traders Carefully
Don’t get mesmerized by high returns. Look at a trader’s risk profile, consistency, drawdown history, and more. A trader with steady, moderate gains over a long period of time is often a safer choice than one with extreme but inconsistent results or a very short trading history on display.

3. Diversify Your Copying Portfolio
Follow multiple traders with different styles and strategies to spread your risk. Do not put all your funds into a single trader even if they seem very promising.

4. Start Small
When you begin copy trading, allocate a small portion of your capital. This allows you to observe the platform and the traders’ performance before committing larger amounts.

5. Monitor and Adjust
Even though copy trading is automated, it’s important to review the performance of the traders you’re following regularly. Adjust allocations or stop copying traders who no longer meet your expectations.

Is Forex Copy Trading Right for You?

Forex copy trading can be an excellent option for beginners and those who want to learn more by observing other traders. It provides a way to benefit from the expertise of other traders while gaining exposure to the forex market. However, it’s not a guaranteed path to profits, and understanding the risks involved is crucial.

If approached thoughtfully, copy trading can be a valuable tool for learning and diversifying, and to supplement your overall investment strategy. Take the time to research, choose platforms and traders wisely, and monitor your portfolio regularly to maximize your chances of long-term success.