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Did you know you can copy the trades of adept traders in the online trading market? Yes, copy trading allows you to simply copy another trader’s positions without the arduous task of market analysis. This article will serve you well if you believe in mentorship or modelling your life after others. But let’s slow down.
As a beginner getting the knack of trading, you’d likely appreciate a mentor to take you through the baby steps. They’d give you valuable insights and information. But if you don’t have one, you are still safe with tech, which takes us back to where we started – copy trading.
Copy trading is now a popular investment strategy, especially for tenderfeet. It enables you to learn without the steep learning curve. This article provides particularised insights into copy trading for beginners in the UK. Find out what copy trading is, how it works, and the steps to start. You also learn the associated risks, legal considerations, and pros and cons.
In This Guide
What is Copy Trading?
Copy trading is a form of trading that allows you to copy positions opened and managed by a more experienced and successful trader.
Perhaps you’re saying that’s mirror trading. It’s not. It’s quite different from mirror trading, so don’t confuse the two. But they are both examples of social trading as they lift you the burden of directly engaging in the market, picking trades on your behalf.
The two are pretty similar, except that mirror trading.
Mirror trading refers to a trading style where you automatically copy trades executed by a variety of auto-trading and signal services. Copy trading is similar to mirror trading and enables you to directly copy a trade or a trader you want to emulate.
Both mirror trading and copy trading fall under social trading. Instead of directly trading the market, you follow, interact with, or mirror expert traders.
Mirror trading automatically follows every signal without your intervention, whereas copy trading lets you choose a specific trader to follow. When that trader makes a trade, your account replicates it. You select an individual successful trader to copy and focus solely on the trades.
Mirror trading, on the other hand, uses the trading patterns of multiple successful traders to guide your trades. Essentially, copy trading is an advanced option of mirror trading.
This automated trading strategy allows you to copy the real-time choices of a chosen professional trader, benefiting from the expert’s experience without needing to make your own trading decisions. By mimicking more experienced traders, you can achieve similar returns.
How Does Copy Trading Work?
Copy trading involves choosing a trader whose trades you want to copy. Once you have selected a trader, the platform will duplicate every trade the trader makes to your trading account in real-time. It happens each time your chosen trader places a trade. So, your account automatically makes the same trade whenever the trader trades. However, the trade size is subject to the capital you have allocated for copy trading.
A manual copy trading version also allows you to copy but offers discretion. You’ll copy the trades but decide when to enter or exit positions based on your intuition.
In automated copy trading, you enter and exit the position whenever your chosen trader does it. The systems monitor your trade based on this condition.
The three critical components of copy trading are the platform, the master, and the learner. Not all traders are masters, so there are not many. Copy trading platforms often rank them based on their historical performance. Here, a master refers to an experienced trader who serves as a mentor. Not all platforms support copy trading, so consider this when choosing your platform. Options like eToro and CopyFX are available for those interested in a copy trading platform.
As the follower trader, you can copy the trades of your masters, benefiting from their skills and strategies without the stress. The role of the master trader is crucial in this process, as their experience and success can significantly impact your trading performance.
How to Get Started with Copy Trading
Copy trading saves you a lot of headaches. You’ll skip a lot of requisite steps in typical trading. The key is getting the best platform with some of the best expert traders who trade you can copy. It’s a quick way to learn and earn money from trading.
In normal trading, before anything, you decide your style based on your personality and risk tolerance. You’d also consider your availability and the best time to trade as you must vigilantly follow the market and make quick decisions. Even in swing trading, where you may hold a stock or trade for weeks, you can’t pick your trades and abandon them.
In copy trading, your focus is on the trading platform. Anyway, here is a step-by-step guide.
Step-by-Step Guide
Step 1: Decide your copy broker
Step 2: Sign up and fund your account
Step 3: Pick your expert trader
Step 4: Allocate funds to the copy trader
Step 5: Monitor and review your performance
The internet is awash with brokers that claim to offer the best copy trading services. Don’t fall for their words. Choose a trustworthy copy trading platform regulated in the UK. Pay attention to the copying trading fees and commissions, payment options, withdrawal charges, and more. On this platform, we review and identify the best copy-trading platforms. You can pick any from the ones we have vetted.
The next steps are to create an account, verify it, and pick your preferred payment method. Deposit the trading funds.
Most copy trader websites list expert traders whose trades you can copy. Choose one from the available list based on their performance history, risk level, and trading style.
The platform will copy every trade your preferred copy trade makes. You need a budget even if you are not trading yourself. Manage your bankroll to stay within what you can afford. You may follow many traders, so subdivide your funds as you need them per copy trader.
Your attention may not be necessary for picking trades, but your portfolio performance. Manage your bankroll and use risk management tools like stop-loss orders to limit losses. Also, make the necessary adjustments, like adding more funds or reducing your allocation to a specific expert.
While copy trading offers a convenient way to follow successful traders, it’s important to be mindful of how trading or investing can impact an investor’s mental health. Discover more about the psychological aspects of trading to ensure a balanced approach.
Risks of Copy Trading UK
Risk and investment are seismic twins; you can’t have one without another. In trading, risks happen for various reasons, and with them come opportunities and threats. The unwritten rule in trade and investment is the more you risk, the higher your expected returns, the lesser risk you take, the lower your expected returns.
By participating in copy trading, you might have less control over your investments, which could expose you to more risk and market changes. Some people worry about giving up decision-making power to someone else, seeing it as a form of discretionary service. But, most copy trading services operate as non-advised or “execution only” platforms. So they require a lower level of regulatory authorization.
It’s important to find a balance when copy trading. Interacting with other traders and sharing information can be helpful. You must, however, avoid the heard mentality – doing something because others are doing it. If a large part of the market does the same thing, there could be a market bubble and instability.
Relying too much on others’ performance, which copy trading makes you do, also inhibits the development of your trading skills.
All in all, we summarise the risks associated with copy trading as follows:
- Market Risk: The financial markets are inherently risky, and even experienced traders can incur losses.
- Dependency on Master Trader: Your success is tied to the performance of the trader you are copying. If they make poor decisions, you will also incur losses.
- Platform Risk: The reliability of the trading platform is crucial. Technical issues or platform failures can impact your trading results. Ensure that the trading platform is regulated by reputable authorities to protect your investments.
- Regulatory Risk: Change in regulation can affect your income from copy trading or put legal constraints on how you do it. Already the FCA has raised concerns over the popularity of this trade. Always be on the lookout for any legal changes.
Other than the above unique risks, as a trader, there are risks generally associated with trading like possible loss of funds. You should take the necessary cautionary steps to alleviate them. Once you understand these, you can quickly find a balance and be prepared for the challenges that may come up along the way.
Legal and Regulatory Considerations in the UK
All matters of finance regulation in the UK are under the Financial Conduct Authority (FCA). So, it regulates trading, which includes copy trading.
The FCA is among the best regulators in the world. It has strict rules to protect traders and investors by ensuring that trading platforms are fair and transparent. If you use a platform that follows the FCA’s rules, you’re helping to protect your investments.
The FCA views copy trading as the automatic execution of trade signals. It groups it under portfolio or investment management. So the same rules are as financial instrument derivatives. These rules follow the MiFID Directive by the European Securities and Markets Authority (ESMA). But it is different in cases where you are minimally involved in execution. When you don’t approve each trade as a copy trader, the FCA may not consider your activity as portfolio management. You should know how the FCA groups it as this helps you make a better choice.
Pros & Cons of Copy Trading
Many newbie traders love copy trading as because it shifts the focus from the burdensome statistics. It’s an ideal option if you are less interested in how trades work and are seeking a hands-off trading approach. But it’s not without shortcomings.
Pros:
- Access to Expert Strategies: You benefit from the expertise of successful traders.
- Time-Saving: Since you don’t decide which trades to pick, you neither spend time crunching numbers nor make trading decisions.
- Learning Opportunity: You can observe the trading moves and learn from experienced traders.
Cons:
- Performance Risk: Reliance on the performance of the copied trader means you have no decision on which securities to pick.
- Costs and Fees: Some platforms charge fees for copy trading services, thus, it could cost you more than if you trade by yourself.
FAQs
Is copy trading allowed in the UK?
Yes. Pick a broker authorised by the FCA. Such a broker has a license to offer clients copy trading legally.
Is copy trading good for beginners?
Yes. Copy trading allows traders to earn while just starting to trade potentially without extensive market knowledge. They also learn from experienced traders.
How profitable is copy trading?
There are no guarantees of profit. Profitability varies and depends on the performance of the trader being copied. Also, other factors like market conditions, risk management, and the cost of trading may affect it.
How much money do you need to start copy trading?
The minimum amount varies by platform, but typically you can start with as little as £100.
Conclusion
Copy trading is a good way for new investors in the UK to join the financial markets. It is ideal for new traders seeking a hands-off trading approach. It simplifies entry into trading in markets. You can trade forex, derivatives, stocks, and cryptocurrencies without any prior skills. It is, however, crucial to understand the risks involved and choose a regulated platform. Also carefully pick the best copy trader platform and actively monitor your investments.
So, are you ready to copy trade? Start your journey here by finding the platform that best suits you, and benefit from the expertise of our professional traders. Happy copy trading.
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