Social trading platforms are the new buzzwords for trading and investing, but how effective is copy trading and is copy trading too good to be true? Can you really make money from copy trading? Can you get rich from copy trading?
Let’s find out.
With the dismal drop-out rate of 95% of traders failing, it's easy to see why copy trading is becoming popular. It seems like an easy way to make money from trading. But are social trading sites legal and safe? Can you make money from copy trading, or is copy trading a scam?
Novice traders consider professional traders to be superior beings. Making money from trading is challenging for most traders, so if you can learn how to make money from copy trading, it's a perfect solution to an age-old problem, but how reliable is copy trading? What are the risks of copy trading, and can you lose money?
Imagine not having to do daily technical analysis or fundamental analysis or search for good setups each day. With copy trading, once you set up your copy trading account, you can go about your business and generate a passive income with none of the hassle of trading for yourself.
Many traders turn to copy trading to improve their trading skills. Rather than a passive income, they study professional copy traders and learn to replicate their trading finesse. It's expensive to pay for a trading mentor or a high-ticket trading course. So copy trading can be an inexpensive way to establish your trading future.
But is copy trading legal, and is copy trading a good idea? How profitable is copy trading, and what are the risks? Can you really make money from doing copy trading, and if so, how much money can you make from copy trading?
How much you can make from copy trading is dependent on several factors, most of which we cover in this article. There are some concerns with copy trading. But by the end of the article, you will know the potential risks of copy trading.
We will discover if you can make money from copy trading and whether copy trading is a good idea for you.
- What Is Copy Trading?
- How To Find A Good Trader For Copy Trading
- Is Copy Trading 100% Passive?
- What Are The Risks Of Copy Trading?
- How Do I Start Copy Trading?
- Recap Of Can I Get Rich From Copy Trading
What Is Copy Trading?
Leading social trading platforms offer copy trading to their clients. The concept is simple. You choose a successful professional trader (approved by the social trading platform), deposit funds and set up your copy trading account, and you're good to go.
The copy trader takes the trades, and your copy trading account replicates them. All that remains is for you to check your daily profits. It sounds great, yes, but is copy trading that simple, and can you really make money from copy trading?
All trading is risky, and if you hand over responsibility to someone else to make money for your copy trading account, it's essential to research the profile of the professional trader. Hence, you fully understand how they trade, and you can expect many profitable months ahead from copy trading.
How To Find A Good Trader For Copy Trading
Finding the best trader for copy trading is the first essential step to your copy trading venture. Can you trust a copy trader on a social trading platform?
To qualify as a professional copy trader, social trading sites, such as eToro, have stringent criteria for professional trader status.
Professional traders must have a verified trading account and explain their trading strategies. They must have money in their account and have a trading history with the platform for a minimum of two months. The professional trader has to maintain a risk profile level according to the social trading platform requirements. If the trader goes above that level, the platform intervenes.
Ideally, find a trader with a minimum of a year's experience. Even rookie traders can sometimes be profitable for a few months, so it is best to copy trade a professional trader with extensive experience. Look for a marriage between a decent monthly return and low-risk trading.
Be realistic about expectations and look for a trader with a minimum of 5% gains per month. If you see a professional trader showing high profits such as 20% a month, be wary. This trader may be implementing high-risk strategies.
Be sure that the trader isn't copying another trader. You can check their profile to see that they are trading directly. Thoroughly check their trades to see if you spot anomalies. Remember that a high win rate isn't necessary. A trader can lose 50% of their trades, but if their strategy rules incorporate a 4 to 1 risk to reward ratio (RTR), they will grow their account and yours.
If you want to make money from copy trading, take your time finding a trader to copy. Think long-term for consistent profits and monitor trading history to ensure the trader maintains low-risk, high reward trading.
Is Copy Trading 100% Passive?
Trading any financial instrument is challenging, frustrating and baffling for most traders. There are so many different ways to trade, all the different strategies and indicators, and then you have to decide what financial instrument to trade. So copy trading is appealing because it removes all of the work necessary to launch a trading career.
But, copy trading need not be passive. Trading is a learned skill, and despite the appalling failure rate, trading isn't difficult to learn.
Most traders fail because of emotional fallout. When faced with risk, our brain goes into survival mode. The amygdala response triggers the fight and flight reaction, and your brain turns to mush. That leads to impulsive trading, overtrading, chasing losses, revenge trading and increasing lot sizes.
But how about if you used a copy trader as a way of learning how to trade professionally? We can learn from watching others trade. So, if you want to become a professional trader, study everything a professional trader does. Open the charts and look at the price that the trader entered the market and where he took profit. Draw trendlines or support or resistance, or whatever is appropriate for the chart position.
What this activity does is shape your chart reading skills. After a while, it becomes possible to look at a chart and instantly identify potential setups.
You can choose to make a passive income from copy trading or use copy trading to improve your trading skills. Realistically, the second option is the preferred option, mainly because situations change. Copy traders may leave the platform or stop signals.
What Are The Risks Of Copy Trading?
You might imagine that copy trading is low risk and that the professional trader handles all the risk. But, this isn't the case. All trading carries risk, even if someone else is trading.
Consider the below factors before you sign up for a copy trading service:
- Incorrect settings – you could inadvertently allocate the signal settings too high or over-leverage, which could malfunctions and losses
- User interference risks – you think you won't ever do it, but you see a few trades losing or with a nice fat profit and suddenly find you have got involved. You've closed trades before the correct conclusion. Watching open trades can become addictive. Get into the habit of deciding your signal settings and then walk away.
- Failure to do due diligence – as mentioned earlier, thoroughly research the professional trader. Make sure they are trading manually and not using an automated bot. Most platforms disallow the use of bots, but it's still worth checking. Also, check that the trading account is a live account and not a demo account.
- Lack of diversification – diversification is vital for successful trading or investing. Check that the trader diversifies and trades different assets. For Forex trading, make sure that the trader isn't taking multiple trades for correlated pairs (meaning they all go in the same direction simultaneously) because this increases the risk on your account.
- Sudden market changes - news events, market crashes, interest or unemployment announcements etc. can influence prices and cause stop-outs in the same way as if you are trading yourself. Market risk always has to be a consideration.
- Broker risk – Whilst it's unlikely if you are with a regulated broker, things can still go wrong. Minimum lot sizes for the broker could be too high. That could cause a system failure, or they have reached the maximum of open trades.
- Copy trader risks – the copy trader could end the service without notice. They might change their strategy and start trading aggressively with more risk. Worst case scenario is the copy trader gets a margin call from the broker.
- Technical risks – it's recommended to use a VPS for copy trading. If you're using the home internet, you may lose WiFi at a crucial time during the trading session, which can result in losses. The trading platform could malfunction, or your trading account suddenly cuts off from the copy trader account.
We're not trying to scaremonger. The risks of using a copy trading service are not dissimilar to all trading risks. It's essential to weigh up the pros and cons before signing up with a copy trading service.
How Do I Start Copy Trading?
It's relatively easy to start copy trading.
- Check that copy trading is legal in your country – not all countries encourage trading.
- Choose a social trading broker – make sure the broker is established and regulated. Check their terms and conditions, deposit and withdrawal methods and levels of customer service.
Check if they have a Trust Pilot account and read the bad reviews. Users often write a negative review for a broker when the issue was their fault because they hadn't read the T & C and made assumptions. For instance, someone may complain they lost money from copy trading, but they had incorrectly adjusted the signal settings.
Finally, look at how many copy traders the platform has and the percentage levels of success.
- Deposit your funds – only trade with what you can afford to lose. Don't risk next month's mortgage or the kids' college funds.
- Choose a copy trader – it may be challenging to choose a copy trader as some social platforms have upwards of five hundred copy traders.
Decide if you want to follow a copy trader who scalps the market, day trades or swing trades. If you have preferred financial instruments, subscribe to a copy trader who trades that financial instrument. You might select Forex or stocks, options, cryptos or anything else.
When you find a few traders you like, dig deep into the copy trader profiles. Inspect their trades. What financial instruments do they trade? What is their percentage risk per trade? (1-2% is ideal) what is their risk to reward ratio (RTR)? Pick traders with a minimum of 2 to 1 RTR as it's very challenging to stay ahead of profits with 1 to 1 RTR.
- Set up your copy trading signals – check, check and triple-check that your settings are correct. Mistakes can be costly
- Adjust your stop-loss levels – you don't have to do this as it's a personal choice. If you have no idea what a stop loss does, leave it to the copy trader. If you adjust settings to, say, a 20-pip stop loss, the signals won't pick up for trades with stop losses bigger than 20 pips.
- Get clear on what you want – try not to be greedy. Let the copy trader do his job, and week by week, compound your profits. That way, your trading account grows organically
- Respect losses – even professional traders lose. Losses do not indicate poor trading practices. If there are strings of losses over a period, you could temporarily halt trading signals and watch to see if the trader improves. Don't jump ship after one or two losses
- Feel free to change your mind – if you start copy trading but don't feel comfortable, stop the signals until you work out what is worrying you. Don't deposit funds that you may need later. Trading anxiety is not uncommon, but it becomes worse if you repeatedly check open trades.
If you decide you don't like how the copy trader trades, terminate the signals and look for another trader to follow. Trust your gut instincts.
- Have fun – if you have picked the right copy trader, they will do well for you. After a few months, your account is growing nicely, compounded at a minimum of 5% a month. 5% may not seem a lot, but if you put your money into a traditional savings account, you'd be lucky to get 5% a year.
Recap Of Can I Get Rich From Copy Trading
We've established you are unlikely to get rich from copy trading. But with the right social trading platform, such as eToro, which has over 120,000 registered users, and a consistently successful copy trader, you can make gains every month.
Is copy trading a good idea? Only you can answer that question.
If you have limited time to learn how to trade, copy trading could be a good idea. Or, if you have tried trading and found it too difficult or frustrating, a copy trading service could be just the thing for you.
The trick is to find the right copy trader, and that might take a little work. Some social trading platforms have hundreds of professional traders available for copy trading.
Try not to measure the success of a copy trader by the monetary amount of profit. For example:
Trader A may have a $20k trading account, and trader B has a $10k trading account.
Trader A monthly profit - $1000
Trader B monthly profit - $1000
Which trader has had the best month?
Trader A returned a 5% gain, and trader B produced a 10% gain for his subscribers. Dig deep to uncover the finer details before you register for a copy trader service.
Most traders can make short-term gains. Making consistent long-term gains is the challenge. For this reason, choose a trader with at least one year's documented trading experience.
Decide what type of trader with whom you would like to subscribe. Maybe a day trader may be your preference or a trader who scalps the market. If you are comfortable with overnight trades or open trades for a few days or more, swing trading might appeal. With the latter, there are fewer trades but a heftier return when trades close.
If you prefer a specific financial instrument, weed out the copy traders not offering that service.
Copy trading is not without risk, and it's essential to weigh up the risks with the potential rewards.
You can use a copy trading service for 100% passive income or utilise the professional trader's skills to improve your trading skills.
Finally, have fun copy trading. Don't trade with money you cannot afford to lose, and always opt-in for low-risk copy trading.
Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.
Trading or investing in financial instruments may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.
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eToro have proven themselves trustworthy within the industry over many years – we recommend you try them out.
Your capital is at risk. Other fees may apply
Is copy trading too good to be true?
Copy trading is either effective or not, depending on the professional trader you follow for trading signals. Copy trading is a growing pastime for many traders who cannot trade for themselves.
On balance, copy trading may be the better option for most budding traders as the chances of individual success with trading or investing is minimal. Professional traders may have spent many years perfecting their trading skills and trading mindset, so they can now share their expertise with other traders.
Copy trading is legal and exists on social trading platforms.
Choose an established and regulated broker, such as eToro. Never start copy trading with some random guy off YouTube who promises you great riches and a brand new car in six months.
Why do professional traders share their trades?
Social trading platforms offer generous incentives for professional traders to share their trades. Depending on the AUM (Assets under management) for each trader, they earn a fixed rate or a percentage each month.
If a copy trader has many subscribers, they can earn a decent living by providing signals and on top of profits from their trading results.
How reliable is copy trading?
Reliability depends on how well the professional trader performs. Choose an experienced copy trader with an impressive copy portfolio and at least one year’s documented proof of successful trading. That way, you have more chance of making a reliable, consistent income from copy trading.
Can you make a living from copy trading?
Making a living from trading is not easy unless you have a significant amount of capital. If your professional copy trader makes a 5% return each month and you have $2,000, that's a $100 a month profit.
If you are a middle-range income earner, let's say $30k a year, to replace this income with trading income at 5% profit a year, you would need $600,000 trading capital. How confident would you be trusting a copy trader to take care of such a significant amount of money?
Final thoughts: Don't give up your day job just yet.