Copy Trading — The Explanatory Guide for Beginners
Beginners tend to be apprehensive about opening new trades in the crypto market. Lack of knowledge and experience about crypto trading holds them back when it comes to deciding between high-earning positions and not-so-profitable ones.
If you want to trade in crypto and don’t know how to get started, copy trading might be your go-to strategy. It is a type of strategy involving automation to buy and sell crypto assets. It enables you to mirror another trader’s approach to the market, so you don’t have to go through the hassle of analyzing the market yourself.
However, while this method seems pretty much straightforward, there are some obstacles that you must avoid. This article will discuss the concept of copy trading, how it works, its advantages and risks.
What Is Crypto Copy Trading?
Copy trading in cryptocurrency refers to an automated trading strategy that enables traders to follow the trading pattern of experienced traders. This essentially eliminates the need to spend the whole day researching a particular coin to invest in. With copy trading, newbies can buy and sell crypto assets and earn as much as the experienced trader they are following. So the primary task for the new trader is to source for professional traders and literally duplicate their moves.
The whole concept of copy trading is not a new thing; in fact, it is widely used in other financial markets such as stocks, forex, and much more. Instead of picking market trends, the automated system just mimics another trader and applies the same concepts. For example, if an expert trader risks 10% of their capital trading Bitcoin, the copy trading software will also risk 10% of the beginner’s capital on Bitcoin.
Copy trading is not only for beginners. Even if you already have a total understanding of the crypto market, copy trading can be a resourceful tool. It’s simple, convenient, less hands-on, and time-saving. Also, studying trading strategies from experts can, in some way, help you analyze and build your own preferred methods.
How Does Crypto Copy Trading Work?
Crypto copy trading basically works with automated software that typically mirrors the expert trader at all times. The whole process of setting one up takes time and effort, but once it is perfectly set up, it becomes effortless to use. You can either configure the software to invest the same amount as the front trader, or you can customize and tailor your strategy to invest only a fraction of their funds.
The key is finding a trader with good signals. There are tons of trading signals out there with good performances, but you will have to dig a bit deeper to filter out the good ones. Check how long the signal has existed. Look at the trading history of each signal. How steep was the highest drawdown of the signal? These are the things you should take into consideration before you connect to the signal.
Good signals with big profits are often using high leverages. So, if you are on a low budget, say less than $1,000, your exchange won’t open the trade. That’s because your capital to trade is pretty low. You will need to customize the leverage from big to small. For example, the trader uses 150x leverage; you can customize and reduce the leverage to about 20x, depending on the crypto exchange platform you are using. Conversely, if you find a good signal, but the leverage is small, you can increase the leverage.
Let’s go a step further. You can choose more than one trader to diversify your portfolio. Once you have found several good traders to follow, you can allocate your investment and determine the chunk of funds you want to allocate to each lead manager. Also, it is essential to note that these lead traders charge small fees to enable users to copy their trades. The cost usually fluctuates around 8% of the profit made. Thus, the system works to feed subscribers and earn lead traders even more money.
Many people might find this concept a bit strange, but it is not. Truth is, it is time-tested. Copy trading has been around since 2007, and it is widely recognized by the Financial Conduct Authority, European Securities and Markets Authority, and other regulatory organizations. Since it is well-regulated, you can be rest assured you are implementing a legitimate trading method.
Benefits and Drawbacks of Crypto Copy Trading
As with all aspects of our life, almost everything has bad sides. The same principle applies to crypto copy trading. The following are the benefits and downsides of the training strategy.
Benefits of Crypto Copy Trading
- Convenience
The first benefit of using copy trading strategy for crypto is convenience. Consistently tracking market prices can be burdensome. Copy trading essentially removes this stress, as it automates your process.
- Beginner-Friendly
Copy trading seems to be an ideal option for newbies starting to get familiar with the whole concept of crypto trading. With this strategy, they can trade the market and simultaneously learn the trading technicalities used by lead traders.
- Portfolio Diversification
Using other traders’ strategies makes your portfolio more diverse. Instead of sticking to a single method, you can evaluate traders’ approaches to the market and tailor them to build your own system. . Following traders investing in various assets also allows you to diversify your portfolio.
- Eliminates FOMO
Since the software is doing the work for you, you get to invest your funds based on statistics instead of your usual emotions that can judge your trades. Copy traders can focus on other tasks while the software trades for them.
Drawbacks of Crypto Copy Trading
- Restrictions
Your trades are only as good as the settings of your software and the trader you follow. If the trader makes a profit, you do, too; however, if they make any losses, you also tend to be affected by that.
- Not Flexible
You don’t get to approve every trading decision, so you don’t have absolute control.
- Slippage
Since your trades are always behind a lead trader, your trades can get canceled out in a highly volatile market, preventing you from making the exact results as the lead trader.
- Copy trading Fees
You may need to pay a small fee, usually around 8% of your profits, to the lead trader for allowing you to copy their trades.
Wrapping Up
Overall, crypto copy trading can be a simple, convenient, and effective way of entering crypto trade positions. Copying trading strategies from expert traders can automate your trades at the same time, while learning more about the crypto markets. However, as with any other crypto trading strategy, you must always do your personal research before getting started with crypto copy trading.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
