The world of forex is vast and can be confusing for beginners, but we don’t think this should be the case. It’s appealing to many because it promises greater financial freedom, a clear alternative to the traditional 9–5 working day, and the potential for large profits. However, navigating it can be challenging and requires a lot of learning, which can dissuade some novices.
That being said, there are ways to make the initial immersion process more manageable. One of these strategies involves copying traders with more experience, providing insight into their thinking and rationale. In this article, we’ll look at the copy trading method in more detail.
The Forex Landscape
Before getting too involved in the specifics of copy trading, we first need to run through the basics of forex trading and where the market is. In case you’re unaware, forex stands for foreign exchange and refers to the currency trading marketplace active worldwide and in many different countries. Unlike the stock market, the forex market is open all day during the week, making it easier for traders to access markets on the other side of the world and make more reactive moves.
Not only is it highly active, but the forex market is also the most liquid trading market, with a daily trading volume of over $6 trillion. This means there is potential for a fortunate few to make a considerable amount of money in a very short time, but this also comes with risks, and understanding the global market conditions is vital for success. This can be quite overwhelming for a novice trader. This is where copy trading can come in particularly useful and interesting.
What Is Copy Trading?
Because this isn’t a technique that’s super well-known among most forex traders, we’ll give you a brief understanding of what it is and how it works. In short, copy trading involves copying the moves made by more experienced traders in real time without making many decisions yourself. This method — also known as social trading or mirror trading — can be done automatically using various tools. It removes some of the risk associated with forex trading but may require more capital than usual.
How Does Copy Trading Work?
First, you’ll choose a reputable platform or copy-trading facilitator. These providers will connect you with traders and investors who are open to having their trades copied. Think of it as a marketplace of sorts. Next, you’ll want to choose a strategy that aligns with your trading goals. Each seasoned trader will have a style and level of risk that they’re comfortable with, so choose one that you think is the best fit — you can always change at a later stage.
Once you’ve settled on a trader you want to mimic and have decided on a rough strategy, you’ll need to determine how much you’re willing to risk when placing trades. They don’t always need to be done at the same level, but you should always check this beforehand. A seasoned trader will likely have more money to spend than a beginner or novice. You’ll then need to set your open and close positions in place, which will be synced to your chosen trader and done instantaneously.
Finally, you should regularly reflect on how your trades have performed and assess your overall strategy. Monitoring your bottom line and adjusting when needed is a skill that will be especially useful moving forward and will allow you to become a seasoned trader, but it will take time to master.
Risks and Considerations
While copy trading can have the potential to generate huge returns for traders looking to copy the actions of somebody with a lot more experience, there are still a few things you should be aware of. One of the most significant is the risk of loss and your overall risk tolerance, as this can derail your activity if you are prone to pulling out your capital before your trades have had the chance to come to fruition. A successful trader will know when to trust their guy and avoid panicking — this will take time to get right.
Copying a trader with a diverse portfolio is also something worth considering, as it will help shield your trades from industry-specific events that have the potential to ruin all of your hard work. Many successful traders will always have a diverse portfolio containing short and long-term investments. At the same time, they will actively review this at regular intervals to ensure that they have the balance just right. When they look to diversify further, they will always do their due diligence, which you should also do.
Copy trading has the potential to change how traders get into the world of forex, which will be sure to have a positive impact long term. It will allow beginners to find their feet and place real trades without the risks associated with being a novice, all because they’ll have a seasoned trader as a reference point. If you’re a newbie and want to try this, let us know how you get on.