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Copy trading: All you need to know
Copy trading is the process of copying the trades of other traders. This way of investing allows you to trade with a small capital without being well-versed in the intricacies of the financial market. With copy trading, everything is taken care of by the managing trader or the so-called signal provider. The investor, in turn, can always set the maximum acceptable risk level to limit potential losses.
The copy trading concept was first introduced in 2005. Back then, many traders who were engaged in automated trading started copying certain algorithms. Brokers appreciated the potential such a system for copying transactions had. It eliminated the need for tracking signals by e-mail or in special trader chats. Since then, copy trading has become extremely popular.
How copy trading works
Copy trading is a form of so-called social trading. The signal provider sends signals. This process involves two stages:
· At the first stage, signals from the provider are sent to a special intermediary site. Then they go to brokers who have entered into a partnership agreement.
· At the second stage, the signals reach subscribers, who, in turn, can reproduce them automatically or filter them, choosing the most successful in their opinion.
Types of copy trading
There are three directions in copy trading. Let's take a look at them in more detail:
· MetaTrader trading platform. The mql5.com website contains all the necessary information on providers, as well as statistics. To access trading signals, you need to press the corresponding button. Then the investor chooses the type of subscription.
· Dedicated brokerage service. This type of copy trading is based on paying commission to signal providers, who have the so-called "master accounts" with the broker. This includes the AMarkets RAMM service.
· Third-party software. Such software provides trading robots embedded in the platform. They are also called Expert Advisors, and their algorithms vary in complexity. It can also be a standalone program.
Copying trades using signal services
This type of copying implies paying a subscription fee to get the signals. Normally, almost every broker offers this type of service. The main disadvantage of this type of copy trading is that an investor needs to have his trading platform running to be able to copy signals from a signal provider.
Investment through PAMM
PAMM accounts are another type of copy trading. With PAMM or Percent Allocation Management Module, an investor allocates his funds in the desired proportion under management. The manager is a professional trader who generates income through trading and profits from the changes in currency quotes. This copy trading type has a number of features.
· First of all, you can invest even a very small amount. Usually, the minimum investment amount is $100;
· To make a stable profit, it is important to choose a good PAMM manager;
· The managing trader gets access to the investor's funds for the duration of the PAMM agreement;
· An investor cannot interfere with the trading process and somehow influence it;
The profit from trading is transferred to the investor's account, and the manager receives an agreed percentage.
A RAMM account can be called an "advanced" alternative to PAMM investing since it has a built-in risk management system. An investor can copy trades from several traders at once. The features of RAMM accounts include:
· Signals are copied with 100% accuracy;
· Trades are copied proportionally, using the so-called Factor parameter. It's a copy multiplication coefficient, which guarantees the profitability of trading even with a small deposit;
· The investor can adjust the amount of the maximum drawdown on his account by setting the acceptable risk level. If this value is reached, copying stops automatically;
· Since the trader receives a percentage of the investor's profit, he is interested in the results of his trading;
· The investor can also trade independently on his investment;
· Investor funds are not transferred to the account of the trader. The investor retains full control over his funds and can pause or stop the copying process completely and withdraw his funds at any time;
Copy trading pros and cons
Copy trading has both advantages and disadvantages. The pros include:
· The ability to invest with no expert knowledge, experience or trading skills. This is all taken care of by traders (signal providers);
· An investor has the opportunity to choose the most suitable trading strategy, based on the statistics and the Strategy rating provided by the broker;
· An investor doesn't need to spend a lot of time at his desk, assessing the market in search of the best entry points;
· Ability to diversify risks by choosing to copy trades from several signal providers.
As for the cons, there are not so many of them:
· Risks. No matter how professional the trader is, there maybe be still periods of unsuccessful trading and drawdowns, which, of course, affects the investor;
· Inability to develop professionally. By copying other people's trades, the investor loses his skills in market analysis, and it will be difficult for him to trade on his own in the future ;
As you can see, copy trading is a very useful investment tool that expands the investor's opportunities. With the right choice of a signal provider and a managing trader, you can count on a steady income. However, copy trading is not a magic wand and cannot relieve an investor from risks.
This article does not necessarily reflect the opinions of the editors or the management of EconoTimes