How Do Copy Traders Make Money?
26 May, 2017
Successful copy traders know the secret of generating similar or even higher profits than regular forex market traders.
Have you ever thought about why these people choose copy trading and how they make their portfolios profitable? Let’s start with the ‘Why?’. There are many ways to create income online and many places where to invest money, so what draws people to copy trading?
Copy trading advantages over direct trading
- It is easier to learn compared to independent trading. Copy traders need to have a generic view of the market in order to select good strategies, but it takes a lot less time than learning fundamental and technical analysis to trade independently. Key parameters for copy traders are profit-to-risk ratio, trade frequency, average drawdowns, etc. -- all of them are listed on a signal providing platform. You can get clearer picture of how the market moves by following strategies on a demo or real account.
- Copy traders have more free time than direct traders There is always something happening on the financial market. When the trading day ends in the USA, it starts in Asia, then in Europe. If you want to trade yourself you need to keep up with this rhythm. Copy traders pass this responsibility onto signal providers they chose to follow. We are not saying that you should use ‘set-and-forget’ approach to copy trading. It’s best to review performance of your selected strategies regularly, but that still would take a lot less time compared to trading yourself.
Copy trading advantages over other passive income investments
- Copy traders can start with a very small deposit. Compared to investments in real estate and bank deposits, forex or stocks trading brings much higher returns and doesn’t require huge initial payment (some brokers accept deposits from $1 USD). However, trading yourself can only be considered a passive income investment if you are using very stable long-term strategies, which a lot of traders don’t do because they want immediate returns. Copying others requires a lot less time and energy from a copy trader, and therefore can be used to build a passive income stream with limited initial capital.
- Copy traders are more flexible Liquidity is an important parameter, people often ignore when investing. What if you have to sell your assets immediately either to make a better investment or to pay for an emergency expense? Real estate is not a liquid asset, which means it can’t be sold quickly whenever you need the money (at least not at the best price). In copy trading you can choose to exit one or all strategies anytime.
Despite all the advantages mentioned above, not all copy traders become successful/ Most common mistakes why people fail are:
- Assigning large portion of portfolio to one strategy To minimize risk don’t put all your eggs in one basket. Distribute your capital between several strategies to protect it from unexpected drawdowns
- Not leaving enough margin. Remember that markets are not 100% predictable and even experienced traders may face severe temporary drawdowns. If you don’t leave enough money on your account and the balance runs too low, your trades might be automatically closed by broker (before it happens your broker will warn you about reaching critical level - margin call).
- Following similar strategies. Proper diversification is key. Some currencies or assets, such as Gold and Silver or Iron Ore and Australian Dollar move in close relation to each other, so these choices mark poor diversification. Others, sucha s Yen and Japanese stock market indices usually move in the opposite directions, so buying both at the same time will eat a lot of your profit. Try to find and follow strategies that trade assets barely connected to each other (for example, Euro, Oil and Japanese stocks)
All copy traders have their own algorithm for selecting strategies. If you want to succeed in this investment niche, experiment with different approaches until you find one that suits you and then stick to it. Having your key principles set in writing will help you get best results in minimum time.
You have permission to republish this article in any format, even commerically, but you must keep all links intact. Attribution required. Republishing formats