Copy trading is popular like never before. But anyone interested in this investment variant usually has many questions, which is why we will look at the advantages and disadvantages of copy trading.
Advantages of copy trading
In general, social trading links the social aspects of Web 2.0 with the possibilities of online financial trading. With copy trading, however, the platforms focus less on the social aspects and more on the presentation of experienced traders (top traders/signal providers) whose trading strategies can be copied.
Getting started with copy trading is easy. Registration on the relevant platforms is quick and free. Depending on the provider, the required minimum deposits differ (between 100 and 500 euros), but they are within the normal range. Almost all functions on the platforms are self-explanatory, which is why the barriers to entry are low.
Although the focus of the copy trading platform is not on mutual exchange, it still offers a framework for information exchange and discussions so that inexperienced traders have the chance to exchange ideas with experienced professionals and get helpful tips. It is particularly advantageous if copy traders can make personal contact with the top traders, which only a few platforms offer.
Thus, copy trading offers excellent starting and learning opportunities for beginners. Nevertheless, it is advisable to obtain additional information outside the copy trading platforms because.
In addition, copy traders benefit from a high level of transparency concerning data on trading strategies, portfolios, risks, and more. Strategies and investment tactics can be tested safely with the help of a free demo account. Extras such as tools for technical analysis or charts are also useful.
No expert knowledge is required to create your own portfolio or to copy trades and trading strategies. Instead, a click or “drag and drop” is often sufficient to copy someone or use any desired function.
Investors also always retain control of their portfolios and the trades made. If a top trader or their trades are not to their liking, investors can stop the copy process, close trades, and remove the top trader from the portfolio at any time.
In summary, copy trading offers a variety of benefits and gives investors the opportunity to get in on an inexorably growing trend. If you follow the right top traders, you can definitely achieve an attractive return.
The advantages at a glance:
- Easy entry into trading
- Free registration
- Minimum deposits (usually between 100 and 500 euros).
- Self-explanatory and easy usability of the platforms
- You remain in control of your own portfolio
- Exchange of experiences with beginners and top traders
- Active and passive participation in copy trading is possible
- High level of transparency about top traders, strategies, etc.
- Free demo account to try out your own trading strategies
- Useful extras (e.g., charts and analyses).
Now that you understand the advantages of copy trading, it is important to learn more about its disadvantages.
Disadvantages of copy trading
Social trading and, thus, copy trading still have a lot of room for development. Although some platforms have been in the business for a few years, the boom has only developed in the past one to two years. The effects of this type of financial investment are still largely unexplored, which is why it is still unclear whether the whole thing will develop positively in the long term.
However, one fact will not change: social trading offers no guarantee of profits either. Therefore, investors should always keep an eye on the risk and follow a well-developed money and risk management system.
One of the biggest disadvantages of copy trading is that the costs for the investor are significantly higher than with regular ECN or STP brokers since most platforms act as market makers. Another problem is that the rankings of the top traders create a great temptation to blindly copy the trades of the best top traders. However, in most cases, they involve a high risk of loss.
Unfortunately, numerous short-term ‘gamblers’ on the platforms want to quickly climb the rankings with risky trades. For this reason, it is imperative to vet, analyse and monitor top traders closely before adopting their strategies.
Disadvantages at a glance:
- High risk (as with all other tradable financial products)
- Higher fees
- Many top traders with risky strategies.
Who is copy trading suitable for?
Copy trading is suitable for those looking for an uncomplicated entry into trading or to develop further, perhaps to become a signal provider themselves.
But no matter what the motivation for using copy trading, an absolutely necessary condition is that investors know and accept the risk. A total loss can occur despite risk and money management, loss limitation, and diversification.
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