Copytrading, also known as social trading, is a tool that has been popularized by the broker eToro and allows its members to be able to automatically copy the positions of the best traders registered with the broker.
Very attractive on paper for beginners, it is worth trying to identify the pros and cons of this approach to see if it can be incorporated into a strategy for starting out in trading.
What is copy trading ?
Copy trading is an approach that allows traders registered with a broker to automatically copy the positions taken by the best traders on the platform, after selecting them on criteria such as: return, risk level, invested market, or nationality.
What are the advantages of copy trading ?
The main advantage of copy trading is that it allows novice traders to copy the positions taken by more experienced traders, and thus hope to obtain an interesting profitability. The profitability is precisely very impressive with some traders, who show double-digit returns per year, knowing that the average return for the best traders on platforms can reach 30% per year for example.
What are the risks of copy trading ?
Copy trading involves a number of risks, which it would be foolish to ignore. Indeed, from the moment you put the risk on the decisions of another trader than yourself, you are potentially exposing yourself to mistakes from them, especially if you select investors who operate in volatile markets, such as cryptocurrencies.
Although trading platforms allow you to select traders on a number of criteria, primarily performance over large time units, there is no guarantee that a trader’s success, even over several months, will automatically continue without any accidents.
Also, you should be aware that the use of copy trading does carry the risk, as with any investment in the financial markets, of losing your capital.
It is also important to check when choosing the traders you are going to copy that they are operating with a real account, not a demo account. Indeed, traders who use a demo account are much less emotionally involved, and can afford to take many more risks and thus post performances that result from choices they would never have made with a real account.
Is copy trading complicated to set up ?
No, absolutely not, this is indeed one of the advantages of this investment technique, namely its great ease. Indeed, once you have selected the trader(s) you are interested in according to their profile, all you have to do is click on « copy », so that all their future position taking is automatically copied.
What is the best trading app for doing social trading ?
Unquestionably, the best trading app to start copy trading is eToro. It is not only the pioneer broker in this technology, but also the broker that offers the most interesting and technically advanced tools. The broker offers two investment options: either copy traders from the platform, which the broker calls « CopyTrader », or automatically copy thematic investment portfolios, which are managed by trading professionals. This is what the platform calls the « CopyPortfolio ».
What is the minimum amount for copytrading ?
You should know that you will be forced to start by meeting the minimum deposit required by the platform. Next, you should ask yourself how much you are willing to invest and therefore potentially lose before engaging in social trading.
Overall, most analysts say it is reasonable to start with a minimum of $1000, although there is nothing to stop you starting with a smaller capital if the platform allows you to.
How to choose a copytrading service
There are several aspects to consider when choosing a good copytrading platform. Among them are: the platform’s fees, the number of subscribers, the fluidity of the platform, the reputation of the broker hosting it.
Indeed, the quality of execution, as well as the offer of copytraders, are two fundamental aspects. Obviously, knowing whether the platform is regulated, even if copy trading still suffers from a certain legal vagueness with regard to these issues in most international regulations, is fundamental. It is also important that the broker offers a platform that is easy to use and intuitive, given that this tool attracts the most beginners.
How to choose a trader to copy ?
Most of the time, copy trading platforms allow you to select copyable traders based on many criteria. To help you navigate through all of these criteria, we recommend that you focus primarily on the trader’s performance (and the time horizon that is associated with that performance), as well as the degree of risk that is associated with their trading.
The other important criterion that may be interesting to consider is the number of followers the trader has, which may be an interesting clue as to whether he is a good trader to copy or not. Finally, we have noticed that the traders who have the best performance are those who justify their choice a lot, through videos or educational articles.
Should copy trading be recommended to a beginner ?
Copy trading can be interesting for a beginner to get his first taste of the financial markets, and especially to discover how they work. Indeed, by automatically copying the most experienced traders, the beginner will have access to the analysis of their traders and will even be able to interact with them, which is an interesting way of learning to exploit, in addition to other trading training devices.
However, it should be borne in mind that a trader’s performance, however impressive and long term, is no guarantee of future profitability.
For this reason, we do not consider copy trading to be a long-term approach, but rather a means of learning about the financial markets in a safe and low-risk manner.