{"id":7624,"date":"2024-06-27T01:50:34","date_gmt":"2024-06-27T05:50:34","guid":{"rendered":"https:\/\/finestel.com\/blog\/?p=7624"},"modified":"2024-06-28T09:12:29","modified_gmt":"2024-06-28T13:12:29","slug":"what-is-copy-trading-and-how-does-it-work","status":"publish","type":"post","link":"https:\/\/finestel.com\/blog\/what-is-copy-trading-and-how-does-it-work\/","title":{"rendered":"What is Copy Trading and How it Can Change Your Trading Game in 2024"},"content":{"rendered":"

Almost all of us traders and investors have considered at least once in our journey to follow other expert traders or even hand our capital\u2019s management to them. This is especially true for beginners or those who have not been able to crack the trading game yet. Or, you might be a trader looking for more capital because you are competent enough but can\u2019t make ends meet with your own money. Well, this is where copy trading comes in, and in this article, I will address the question, \u201cWhat is copy trading<\/strong>?\u201d and is it still a good idea in 2024?<\/span><\/p>\n

First, I will begin by introducing the concept of copy trading. This will include a general overview of the process and the parties involved. Then, I\u2019ll delve deeper to show you how copy trading<\/a> works. I\u2019ll also present an answer for those of you wondering, \u201cIs copy trading profitable?<\/a>\u201d. Finally, I will make a definitive comparison between private and social copy trading and guide you on the first steps to begin your journey the right way. So, let\u2019s begin.<\/span><\/p>\n

<\/div>\n

What Is Copy Trading?<\/span><\/h2>\n

We\u2019ve all taken hard exams or exams we didn\u2019t properly study for. Well, I\u2019m not advocating for this, but our primary chance of passing was through copying the answers from others. Copy trading is the same, but of course, it is not as controversial as cheating on an exam. Yet, it is still controversial in a lot of different ways. More on that later.<\/span><\/p>\n

\""What\"<\/p>\n

Now, as an investor who either lacks the knowledge, time, or even passion to learn how to trade, copy trading is a straightforward solution. You leave the management of your money in the hands of pro traders, and they\u2019ll deliver the gains for you. You will then pay them some of the earned profits as compensation. This is clearly a win-win scenario.<\/span><\/p>\n

On the other hand, you might already be a consistently winning trader. However, who can really make significant income with small accounts (other than gamblers, of course)? In this case, it might be better for you to present your expertise to potential investors so they agree to let you manage their funds and take a share of the potential profits.<\/span><\/p>\n

With copy trading, you will have the chance to magnify your profits without making your losses bigger. While this might not be consistent with the risk-reward theory, it is possible through this method. Who can possibly dislike this idea?<\/span><\/p>\n

Find out the best crypto copy trading platforms in 2024<\/a>, and the best Binance copy trading platforms<\/a>.<\/p>\n

How Does It Work?<\/b><\/h3>\n

I suppose you now have a general answer to \u201cWhat is copy trading?\u201d. However, to see how it really works, let\u2019s have a deeper look. We have two primary parties connecting to each other via a specific platform: The master trader and the investor(s) (or follower, copier, \u2026). In the case of investors, the trader can have numerous investors pooling their funds to replicate his\/her strategy.<\/span><\/p>\n

\"How<\/p>\n

Now, the copy trading app connects the accounts of investors to those of the master trader, typically through <\/span>API keys<\/span><\/a>. This way, whenever the master trader executes a trade, the same position with the same parameters will automatically get executed on the investors\u2019 accounts almost instantaneously.<\/span><\/p>\n

Yet, you might ask how it is possible for a trade to be executed the same way on the master trader\u2019s account with balance X and the investor\u2019s account with balance Y. Well, the best copy trading platforms have tools and methods, like normalizing the risk percentage. I mean, when the trader sets a position with a 1% risk (of X), the investor\u2019s account will also open a position risking 1% (of Y). Some platforms also allow investors themselves to set a risk per trade percentage for every order they replicate from the master trader\u2019s account.<\/span><\/p>\n

So, to wrap it up, a copy trading software or platform allows master traders and copiers to connect to each other using API keys. So, any order the master trader executes or modifies will be identically replicated on the investors\u2019 accounts. Now, for crypto copy trading, platforms connect to crypto exchange accounts. On the other hand, in forex, it is done by connecting broker accounts to each other.<\/span><\/p>\n

\"How<\/p>\n

Copy Trading vs Manual Trading: Which Is More Popular?<\/b><\/h2>\n

The answer to this question depends on whether you are an investor or a trader. As an investor, it might be a good idea to invest some of your capital in a skillful trader. This not only helps your portfolio diversification, but also the trader\u2019s active management can lead to significant gains.<\/span><\/p>\n

On the other hand, for traders, this is a great opportunity. It allows you to attract investor capital to magnify your income from trading. Increasing your AUM without any significant risk is a great way to make your trading journey even more fruitful.<\/span><\/p>\n

Meanwhile, in terms of popularity, most individual traders have been trading manually over the last few decades. However, with \u201ccopy paste trading\u201d technology becoming more relevant thanks to bots, this method is gaining massive popularity, and it is primarily due to the reasons I\u2019ve mentioned above.<\/span><\/p>\n

Is Copy Trading Profitable?<\/b><\/h2>\n

Now, does copy trading work? To answer this one, let\u2019s get back to our example of school exams. We all preferred to sit beside the best students during a test so that we could copy the best possible answers and get the best grade. No one wanted to sit beside a friend who\u2019d even studied less than us. It is the same thing here.<\/span><\/p>\n

\"Is<\/p>\n

In order to have a profitable copy trading journey, you should <\/span>find the best traders to copy<\/span><\/a>, and it might not be the one with the most gains. In fact, the best master trader is the one most aligned with your goals and preferences. So, you can\u2019t blame your bad experience on the general concept.<\/span><\/p>\n

Moreover, for master traders, increasing your AUM is never bad, especially with limited liability. As a master trader, typically, the most you can lose is the funds you are given to manage by investors. So, you are not risking a single penny and gaining more AUM. Obviously, that\u2019s a very good deal.\u00a0<\/span><\/p>\n

However, this is not the whole picture. You might not get penalized for subpar performance, but you should always pay a subscription fee for using copy trading platforms\u2019 services. In fact, another important factor for profitability is the use of the best copy trading apps available. You don\u2019t want to go through this process on a bad platform. Additionally, the software might be good in itself, but the costs of using it may actually hurt your profitability.<\/span><\/p>\n

How Profitable Is Copy Trading?<\/h3>\n

You might also ask: \u201cHow profitable is copy trading?\u201d or \u201cIs copy trading a good source of income?\u201d Well, once again, it depends. In fact, the degree of profitability is also reliant on various factors. For investors, the primary profitability parameter is the master trader\u2019s competence. For master traders, this method can magnify their profits. But, of course, they should be profitable in the first place.<\/span><\/p>\n

Read more in “is social trading profitable?<\/a>”<\/p>\n

Types of Fees in Copy Trading<\/span><\/h2>\n

Copy trading platforms typically charge fees for their services, which can vary depending on the platform and the specific features offered. Here are some of the most common types of fees:<\/p>\n

    \n
  1. Performance fees:<\/strong> Some copy trading platforms charge a performance fee, which is a percentage of the profits earned by the investor. This fee is typically charged on a monthly or quarterly basis.<\/li>\n
  2. Spread fees:<\/strong> Platforms may also charge a spread fee, which is the difference between the buy and sell price of an asset. This fee is typically charged on each trade and can vary depending on the asset being traded.<\/li>\n
  3. Subscription fees:<\/strong> A platform might also charge a subscription fee, which is a fixed amount paid by the investor on a monthly or yearly basis. This fee may provide access to additional features or services on the platform.<\/li>\n
  4. Withdrawal fees:<\/strong> Copy trading platforms may also charge a fee for withdrawing funds from the investor’s account. This fee can vary depending on the platform and the withdrawal method used.<\/li>\n
  5. Inactivity fees:<\/strong> Some platforms may charge an inactivity fee if the investor does not use their account for a certain period of time. This fee is typically charged on a monthly or yearly basis.<\/li>\n<\/ol>\n

    It’s important to carefully review the fee structure of any platform before deciding to use their services. Investors should also consider the potential returns and risks associated, as well as any additional costs such as taxes or fees.<\/p>\n

    Social Trading vs Copy Trading: Which One is Better?<\/b><\/h2>\n

    Copy trading and social trading might seem quite similar. However, there are major distinctions. Let\u2019s have an overview of the main differences.<\/span><\/p>\n\n\n\n\n\n\n\n\n\n
    Aspect<\/b><\/td>\nPrivate Copy Trading<\/b><\/td>\nSocial Copy Trading<\/b><\/td>\n<\/tr>\n
    Privacy<\/span><\/td>\nPrivate relationship between investor and trader<\/span><\/td>\nPublic or semi-public community platform<\/span><\/td>\n<\/tr>\n
    Customization<\/span><\/td>\nMore personalized settings and arrangements<\/span><\/td>\nStandardized features and settings<\/span><\/td>\n<\/tr>\n
    Interaction Level<\/span><\/td>\nDirect, one-on-one communication<\/span><\/td>\nBroader community interaction and discussions<\/span><\/td>\n<\/tr>\n
    Transparency<\/span><\/td>\nTrade details and performance are private<\/span><\/td>\nHigh transparency with publicly available metrics<\/span><\/td>\n<\/tr>\n
    Educational Value<\/span><\/td>\nLimited to the investor-trader relationship<\/span><\/td>\nHigh educational value from community learning<\/span><\/td>\n<\/tr>\n
    Suitability<\/span><\/td>\nSuitable for professional traders and investors<\/span><\/td>\nSuitable for beginners and casuals<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    Privacy<\/h3>\n

    First, in social trading, you can transparently observe any move made by the master trader. While this is very beneficial for investors, it can be a huge disadvantage for traders. This is because practically anyone can replicate the orders and the copy trading strategy. Not everyone is okay with letting their edge, which they\u2019ve worked so hard to gain, be leaked.<\/span><\/p>\n

    This can even make the trader redundant, as investors can figure out the strategy on their own and stop paying any performance fees to follow the expert. Therefore, while social trading apps are very beneficial for beginners to learn how to trade, they are not so attractive for experts. <\/span>Private copy trading<\/span><\/a> is much more appealing in this case.<\/span><\/p>\n

    Automation and Interaction<\/h3>\n

    Copy trading is also highly automated. Yet, social trading includes this feature and also offers a more interactive experience. The former focuses solely on mirroring trades, while social trading tools and platforms create a wider range of social interactions. Meanwhile, the degree of customization available on private copy trading platforms is much higher than social ones.<\/span><\/p>\n

    Furthermore, Copy paste trading is more passive and ideal for those serious investors who prefer a hands-off approach. Social trading, on the other hand, encourages active engagement with the trading community, suitable for those who want to learn and interact more.<\/span><\/p>\n

    Custody<\/h3>\n

    Moreover, social trading platforms generally operate as custodial services. This means that when you sign up and deposit funds, the platform holds and manages your assets on your behalf. The platform executes trades, processes transactions, and maintains the security of your funds within its system. This might not be what many users want, especially in the risky and highly unregulated crypto space. On the contrary, the best copy trading platforms are non-custodial and link users\u2019 personal accounts through API connections.<\/span><\/p>\n

    Check out this article for a more detailed <\/span>private copy trading vs social trading comparison<\/span><\/a>.<\/span><\/p>\n

    The Pros and Cons<\/b><\/h2>\n

    Now, you\u2019re aware of the difference between social trading and private copy trading. Yet, there are still some advantages and disadvantages to copy trading that we should discuss.<\/span><\/p>\n

    \"The<\/p>\n

    Benefits<\/b><\/h3>\n

    Here\u2019s a quick overview of the pros associated with copy trading:<\/span><\/p>\n