Key Takeaways
- Copy trading allows users to imitate the trades of expert traders.
- Copy traders share their order flows and portfolio weights, enabling their followers to copy their trades.
- Followers can benefit from copy trading by imitating expert traders as they continue developing their trading experience.
- Because of its hands-free nature, copy trading in crypto is ideal for beginners. It enables them to profit from trading even when they don’t yet fully understand the cryptocurrency market.
Investing or trading cryptocurrencies can be a hard nut to crack, especially when you’re just a beginner joining the profession. What with all the trading styles and techniques that function differently that you need to learn within a short period. This guide introduces the subject of copy trading, explaining what it is and how new traders can benefit from copying the moves of expert traders.
What is Copy Trading in Crypto?
Copy trading refers to the act of imitating the trading behaviors and habits of other traders. In most cases, those who do it follow the example of expert traders, including following how they use trading bots. Copy trading can be done manually, which means tracking another trader’s actions on your own or automatically, where you use a dedicated platform or bot. This type of trading is more social than all other types of cryptocurrency trading since it involves directly interacting with other traders.
Some people sometimes choose to copy trade from individuals within their social circles, including friends or colleagues at work. Copy trading, therefore, becomes another way of tightening social bonds between old and new traders, where they learn from each other’s successes and mistakes. In this way, the strategy is built on the foundations of a mentor-mentee relationship, where expert traders help budding traders by allowing them to follow their actions, thereby building their level of trust in crypto trading. Apart from individuals and tools that automatically replicate the trades of professionals, some cryptocurrency exchanges offer this service as well.
How to Develop a Successful Copy Trading Strategy
While it’s true that you don’t need to have learned extensive market and technical analysis to succeed with this strategy, you need to develop an effective copy trading strategy to increase your chances of success. You want to carefully select the traders you want to imitate to manage your risk effectively. The following are some important factors to consider in developing an effective copy trading strategy.
A Tradable Market
Carefully consider the market preferences of the traders you intend to copy. While some traders specialize in particular cryptocurrencies, others prefer a diversified approach. Select traders whose trading styles and digital asset preference aligns with your preferred market.
Risks Tolerance
Decide the amount of capital you wish to allocate to each trader you intend to copy and how you will mitigate your overall risk. Most copy trading platforms allow users to set maximum loss limits or have them allocate a specified percentage of their trading accounts to each other. Consider a diversified approach to mitigate associated risks.
Market Analysis
Even though you’ll be copying the trades of experts, you must learn how to monitor your copied trades and make any adjustments based on changing market conditions. You, therefore, need to keep a tab on market news and changing trends and how they are likely to influence the trades you are copying.
Leverage
Copy trading on leverage increases the chances of profitability but equally amplifies the risks involved. Decide, therefore, if it’s a direction you want to follow. As a rule of thumb in crypto trading, learn the potential risks and only invest as much money as you can afford to lose with leveraged trading if you decide to take that direction.
Pros and Cons of Copy Trading
Like all other trading strategies, crypto copy trading comes with a set of advantages and disadvantages. The following are some of the pros and cons you need to think about before you start to copy trade:
Pros
Automated Trading: You can automate your trading by imitating professional traders. Once you choose who you want to copy, the system automatically executes their trades into your account, saving you time and effort.
Learning Opportunity: Copy trading enables you to learn from business experts. You gain excellent insights and improve your trading skills when you keenly observe their trading strategies and decisions.
Diversification: Copy traders can easily diversify their portfolios by following multiple traders using different trading styles. This can help them increase their chances of success in different market conditions while reducing overall risk.
Cons
Dependence on Trader Performance: Whether you succeed or fail will depend on the performance of the trader you choose to copy. Their good or bad choices will directly affect your account. Always choose to copy traders with a proven track record and regularly monitor their performance.
Market Risk: Like any other form of trading, copy trading also exposes you to market risks, meaning that market conditions like price fluctuations will directly impact your profitability.
Execution Risk: When markets move rapidly, there’s always the risk of execution delays or slippage, meaning there could be a difference between the price at which the trader you are copying opens a trade and the price at which the copied trade gets executed in your account.
How to Perform Copy Trading
The following is a step-by-step guide to get started with crypto copy trading:
Choose a Copy Trading Provider: Find a reputable crypto copy trading provider dealing with cryptocurrencies.
Select Traders to Copy: Browse through the list of available expert traders and choose one whose trading goals and risk appetite align with yours. Some important factors to consider when choosing include past performance, trading style, and risk tolerance.
Allocate Funds: Decide the amounts of capital you are going to allocate to each trader you are going to copy. Rather than put all your eggs in one basket, it’s advisable to consider diversifying. Different copy trading platforms allow users to set maximum loss levels or allocate a determined percentage of their trading account to different traders.
Monitor Performance: Don’t just sit back and wait for results; take the time to monitor the performance of the traders you are copying and make adjustments based on market performance and conditions. Assess their risk management strategies and trading results regularly, and don’t be afraid to make informed decisions as may be necessary.
Adjust Fund Allocation: You can decide to adjust your fund’s allocation to different traders as you learn more and start growing confidence in copy trading. You may choose to increase or decrease the capital you allocate to different traders based on their overall market performance.
Is Crypto Copy Trading Profitable?
Experts in the cryptocurrency market estimate that copy trading could make you anywhere around 30% return on investment if you copied from an experienced trader. There have been reported instances where individual traders made between 3% and 57% return on investment.
However, remember that most cryptocurrency copy trading sites are designed to halt any trades when your account zeroes out, meaning, unlike several other trading strategies, it isn’t easy to lose more money than you invested. Since success in copy trading depends heavily on the success or otherwise of the traders you’re copying, the secret lies in carefully researching traders before you decide to copy-trade them. Consider choosing traders with a decent amount of account activity, a reliable return rate, and a sizable following.
Conclusion
Crypto copy trading is one of the easiest and most effective ways to learn and make crypto trades. By learning from more experienced traders, you automate your trades as you learn the mechanics of the cryptocurrency market. Nonetheless, remember that crypto trading in itself will not guarantee automatic profits. As long as you carefully research traders, choose wisely, and continue to monitor their performance, you can increase your chances of success in copy trading.
