Pretty much exactly what it sounds like. Copy trading is a type of technology that lets ordinary investors copy the trades of other investors. This can be a game changer for those just starting out with investing and trading because it means you can mimic the moves of experts (or more experienced traders) if you’re not comfortable placing your own trades.
In theory, you automatically replicate the actions of other investors, imitating their every move without lifting a finger. You follow them, they make trades, you automatically copy those trades; and hopefully, if they’re successful, so are you. However, the opposite is also true – their failures become your failures too. There’s no such thing as a free lunch, even if you happen to have the same lunchbox as your neighbor.
In most cases, copy trading works by using a separate piece of software alongside your existing trading platform or brokerage. However, some trading platforms now have integrated software that allows you to browse and copy other trades. The basic premise is that by copying the trades of someone with more experience, you can improve your chances of being successful, but that’s not always the case.
Essentially, when you decide to copy someone, you can opt to automatically copy what they do (whether that’s buying or selling). Usually, you don’t have to copy the same monetary amount, just the type of trade. For example, if they’re placing a buy trade with $10,000 you can copy it with a much smaller sum of say, $100 for example. Always check this though so that you don’t end up investing more than you’re comfortable with.
Certain platforms will also let you choose whether to copy all trades or just a portion, but that can complicate things as trading often relies on the assumption that some moves won’t work out. So if you cherry pick your trade to copy, you could end up just copying all the losing trades from that investor.
Finding the best copy trading platform to use is going to depend largely on your preferred investing strategy and which interface you like using for copying trades. There are several platforms and tools available to US investors, although availability can vary by broker, product and state. Here are some popular examples of copy trading platforms and tools:
With most of the platforms that allow copy trading, you can also opt to become a copied trader. So, you can attempt to build up a following and get other investors to copy your trades.
You’re probably not going to want to do this until you’ve got plenty of experience under your belt and a proven track record of successful trades (otherwise no one is going to want to copy you, obviously). But, if you do reach this stage, you can get paid commissions and bonuses based on your trading performance (and sometimes the size of your following).
Here’s a straightforward step-by-step guide if you’re considering copying the trades of other investors:
"It depends. Copy trading can be a useful tactic if you’re dead set on wanting to trade but have minimal experience. However, it’s still an investing method that sits on the higher end of the risk spectrum. Typically, beginners and less-experienced investors shouldn’t really be looking to trade at all. It’s often better to aim for steady growth with strategies that are more long-term focused.
That being said, if you want to trade and are just starting out, copying the moves of traders with much more experience and a track record that you can see for yourself is potentially a better plan of action. Just keep in mind that copying traders who’ve been successful in the past isn’t a guarantee of future success or a simple way to make loads of money (otherwise everyone would be doing it). There’s plenty of risk involved and this has to be weighed up against the possibility of any profit."
It can be. For example, data and statistics from ZuluTrade show that uninterrupted copy trading (mimicking a trader’s move exactly without tinkering or making adjustments) can have a success rate of between 73% and 79%. This is pretty much a complete flip of the odds of retail investors who trade manually, who have roughly a 70% chance of losing money.
However, this means you’ll need to copy the exact moves and there is still a fairly significant chance you can lose money. One interesting component is that shorter timeframes seem to perform better than longer timeframes (for example, 3 months of trading has a higher success rate than 12 months). So the longer you spend trading (rather than long-term investing), the more the odds of coming out on top swing against you.
Here’s a quick look at the possible benefits of copy trading:
These are some of the important drawbacks you need to consider:
Copy trading can be an interesting way to dip your toes into the trading waters even if you’ve a relatively shallow pool of investing knowledge. It allows you to piggyback off more experienced traders and potentially make profits while you continue to learn.
However, this is still a risky investing strategy, that not only comes with market risk but also the danger of picking a poor trader. Past performance doesn’t dictate future results and even the best traders won’t consistently make winning trades over long periods of time. So make sure you’re fully aware of the risks and do plenty of research before diving in.
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