In the world of trading, the new buzzword is “social trading”. This concept applies to traders who are new to trading and aren’t sure about their trading knowledge and decisions. These traders can take help of other more experienced professionals in making their trade decisions to ensure they make a profit. This concept uses a method called copy trading, where you can automatically set your trading account to copy the movements of another expert trader in the market. Once you start copying someone, you will automatically start making all the trades they make from that point onwards.
Social trading is definitely a concept that new traders can benefit from. While they are learning the ins and outs of trading, they can still make winning trades by following other expert traders. Moreover, with copy trading, they don’t have to make difficult market analysis on their own as they can rely on experts to guide them. However, copy trading comes with its own set of complications. It’s extremely important that you select the right traders to follow because if you don’t, you can end up with more losses than profits.
Just like with other trading methods, copy trading also requires you to use some basic techniques that allow you to copy trade strategically. Just picking up a trader at random and following them is not a wise move and strategic planning regarding who and when to follow is a must for copy trading. So, to help you with your copy trading, here are some tips and techniques that you will definitely find helpful:
- Choose a Platform Carefully
There are several social trading platforms operating today that allow you the choice of copy trading. You shouldn’t select the first network you come across though. Different platforms offer different trading options, which should be carefully reviewed when you are copy trading. To minimize your risk, make sure the platform you select offers you the option to pause and resume copying a trader.
This way, when they start making wrong trades, you can stop following them while still continuing to follow their previous trades. Similarly, there are other beneficial options that are available in copy trading so make sure you select a platform that offers the best copying terms.
2. Make Use of Demo Accounts
Most platforms today offer demo accounts, even for copy trading. So, make sure you use these accounts wisely before you start trading with your hard-earned money. Using these demo accounts, start copying a number of traders and follow their progress closely for the duration of your demo period. Notice the industries in which their trade decisions turn out correct and how good they are at predicting uncertain market movements.
Also, using this demo account, learn to make some basic analysis on your own. This will later help you decide when to follow and un-follow a trader by analyzing the market on your own and comparing your analysis with theirs. Don’t switch to a real account until you start making a sufficient profit on your demo account.
3. Profiling of Traders
The most crucial thing is to pick the right traders to copy. First, don’t pick a single trader and follow the rule of diversifying your profile by picking up multiple traders to follow. A single trader isn’t supposed to make winning trades all the time so minimize your risk of loss by following multiple traders who use different trading strategies and tactics. More importantly, understand a trader well before you start following him/her. Try to get familiar with their trading style and analyze how they perform in different market conditions.
Also take a look at their past performance and their drawdown rate to see how many people have stopped following that trader. If a lot of people have un-followed a trader, it shows that they tend to make a lot of wrong decisions. Create a risk profile of the trader and match it with your own risk profile. To ensure that you only take risks you are ready to take, select traders whose risk portfolio matches your own.
While copy trading is indeed a simpler way to trade, it still requires market analysis to some extent on your part if you want to make a profit. You can’t simply pick up a random trader and start following them in the hopes of making winning trades. So, get your strategy in place and practice with demo accounts before you actually start copy trading with your hard-earned money.