What Is Copy Trading? - Getting Started as a Beginner

Michael Michael
12 min read

Getting into copy trading with no prior experience with trading felt like being a pebble in a haystack. I felt lost, confused, and had no idea where to start. It didn’t help that there was so much to learn and no one to guide me. If you are a beginner reading this, I am sure you must find my experience relatable, and that’s why I wrote this article — to hold your hands and make your copy trading journey easier than it was for me.

So, let’s start with the basics.

What is Trading?

Trading is the buying and selling of financial instruments, such as stocks, bonds, commodities, currencies, or derivatives, to generate a profit. Like every market, traders use trading activities to capitalize on short-term price fluctuations (quick and unstable changes in price). Various factors, including economic indicators, geopolitical events, company news, and market sentiment, can influence these fluctuations. Many traders utilize platforms such as stock exchanges, commodity exchanges, foreign exchange (Forex) markets, and online trading platforms, employing various strategies to achieve their financial objectives.

Now, imagine being able to imitate and apply the strategies and tricks of successful copy traders. The idea of such a possibility gave rise to the concept of copy trading. Not so hard, is it? 😉

Although it has existed for as long as the early 2000s, copy trading has become extremely popular among industry experts, investors, and speculators due to its profit potential and simplicity.

The most exciting fact about copy trading is that it levels the playing field for everyone, irrespective of their trading skill and experience, including you!

As you read, you’ll understand what copy trading is, how it works specifically in the cryptocurrency market, its key components, benefits, considerations/ risks, and how it compares to traditional trading methods.

What Is Copy Trading?

In simple words, Copy trading is a form of trading where beginners, or "followers," replicate the trades of experienced and successful traders, known as "leaders/gurus or signal providers." Instead of making their own trading decisions, followers automatically copy the actions of leaders in real time, typically through a copy trading platform like Wellat.

The idea is to leverage the expertise of experienced investors and diversify your portfolio without requiring in-depth market knowledge.

Critical Components of Copy Trading

To fully understand copy trading, several key components must be considered.

  • Signal Providers/Leaders:

On a copy trading platform, experienced traders act as signal providers, showcasing their investment strategies and trades that followers or copiers can replicate. These signal providers also display their performance metrics and give insights into their trading styles and risk profiles.

Such a display enables newcomers to copy trading and potential followers to make informed decisions about which signal provider to follow. Followers or copiers can examine the trading approach, risk tolerance, and historical success of signal providers to choose those that align with their investment goals and preferences.

  • Followers or Copiers:

Concerning copy trading, followers or copiers are as crucial as signal providers or leaders. These individuals actively engage in copy trading by replicating the trades executed by signal providers. Followers can allocate a specific portion of their capital to mirror the activities of their chosen signal provider (this allows copiers to tailor their investment strategy to their preferences and risk tolerance).

  • Platform:

The platform offers a decentralized investment system that secures deposits and serves as the boundary for copy trading activities. The system determines asset classes for trading and copying, as well as trader or fund manager analytic systems, and risk management parameters.

Let’s meet Trader Jamie on the Wellat copy trading platform. James has consistently achieved a 15% return on investment in their $1000 trading account. As a signal provider on Wellat, Jamie showcases his impressive performance, detailing his trading style and risk profile. Investors and followers exploring the platform can observe these metrics and decide to connect with Jamie. Now, followers who replicate Jamie’s trades in their accounts will also experience a similar 15% return on their investment. This transparency allows potential followers to assess Jamie’s track record and align their investment goals with the demonstrated success of this particular signal provider.

  • Automated Execution:

The best copy trading platforms demonstrate the efficiency and automation of trade execution, as seen in traders' real-time replication of actions. For instance, when a signal provider on Wellat, Madeline, opens a trade in their $10,000 account with an initial risk of 0.5% ($50), this action is seamlessly mirrored in the accounts of their followers or copiers. For example, if you were a copier/follower, with a $500 allocation, you would see the same trade executed, representing a proportional risk of 0.5% of your allocated funds, which amounts to $2.50.

Later, if Madeline decides to adjust the risk to 0.4% ($40), this modification will also be reflected in your account, i.e., $2.00, ensuring consistent risk management measures. This synchronization ensures that you, with your $500 allocation, experience the same risk management adjustments made by Madeline, both in percentage and monetary terms. The platform's ability to replicate actions with specific percentages and amounts for traders and copiers underscores Wellat's commitment to providing a responsive and user-friendly copy trading experience.

  • Risk Management:

Copy trading platforms often include risk management features, allowing copiers to set parameters such as maximum investment amounts, stop-loss levels, and risk tolerance. These features provide a degree of control over the level of risk associated with the copied trades.

How Does Copy Trading Work in the Cryptocurrency Market?

If you are as curious as I was as a beginner, I am very sure you’ve found yourself asking Google questions like “What happens when you copy a trader?” or “How does copy trading work?”

Copy trading works in a straightforward process that is easy to understand. In the crypto world, copy trading platforms connect followers with a diverse range of experienced cryptocurrency traders. Followers can browse through the profiles of these traders, analyzing their trading history, performance metrics, and risk factors.

Once a follower identifies a trader whose strategy aligns with their investment goals and risk tolerance, they can choose to copy that trader's trades. When the trader executes a trade, it is automatically replicated in the follower's account in sync with the amount allocated for copying.

This means followers don't need to monitor the market or actively make trading decisions. Instead, they rely on the expertise of their chosen traders to navigate the volatile cryptocurrency market on their behalf.

Benefits of Copy Trading

As a copy trader, you get to enjoy a truckload of benefits, all of which make it easier for you to explore cryptocurrency trading with very little expertise and technical know-how.

Here are four simple benefits you get to enjoy from copy trading:

  • Minimizing the Learning Curve:

One of the most essential advantages of copy trading for beginners is its ability to minimize the intense learning curve typically associated with trading. Learning how to trade cryptocurrencies can be overwhelming, especially for those new to the market. Copy trading enables beginners like you to bypass the complexities of market analysis, technical indicators, and trading strategies by replicating the trades of experienced traders.

With copy trading, you can start trading immediately without spending months or even years learning the intricacies of cryptocurrency markets. Instead, you can rely on the expertise of seasoned traders to make informed trading decisions on your behalf. This significantly reduces the time and effort required to become proficient in trading, allowing beginners like you to start building their investments immediately.

  • Access to Experienced Traders' Strategies:

Another benefit of copy trading is the access it provides to the trading strategies of experienced traders. In traditional trading, beginners often struggle to develop effective independent trading, leading to costly mistakes and losses. With copy trading, you can gain insight into the strategies and methods employed by successful traders by simply copying their trades.

By following experienced traders, you can learn from their successes and failures, gaining valuable knowledge and experience. This hands-on learning approach can accelerate learning and help you, as well as other beginners, become more confident and competent traders.

  • Diversification of Investment Portfolio:

Diversification is a basic but important principle of successful investing, and copy trading makes it easier for beginners to achieve. Instead of putting all your eggs in one basket, you can spread your investment across multiple traders with different trading styles and strategies. This way, you can reduce the risk of significant losses due to the poor performance of any single trader or asset.

Copy trading platforms cater to the diverse needs of traders, each with a unique approach to trading. You can diversify your investment portfolio by selecting traders with varying risk profiles, asset preferences, and trading time frames. This diversification can help protect your investment capital and increase the likelihood of long-term profitability.

  • Potential for Passive Income Generation:

Copy trading also allows you and other beginners the opportunity to make money passively. By copying the trades of successful traders, you can earn without needing to trade actively. This passive income stream can supplement your primary income and provide long-term financial security.

Of course, beginners must exercise caution and perform due diligence when selecting traders to copy. While copy trading offers many benefits, it's not without risks. Before copying their trades, beginners should carefully evaluate potential traders' track records, performance metrics, and risk factors.

Risks of Copy Trading

Being a copy trader comes with its risks. Like any investment, familiarising yourself with the risks associated with copy trading will make it much easier to prepare and create systems to navigate them.

Here are four significant risks of copy trading:

  1. Loss of Capital due to Market Volatility:

Market volatility refers to the rapid and unpredictable price fluctuations in financial markets, including those of cryptocurrencies. Copy trading does not shield investors from market volatility, and as a follower, you may experience losses if the market moves unfavourably.

Sudden price swings can lead to huge losses, especially if traders' strategies cannot adapt quickly to changing market conditions. You must understand the risks of the inherent market volatility and be prepared for potential losses.

  1. Dependence on the Performance of Selected Traders:

Copy trading involves relying on the performance of selected traders to generate returns. If the traders being copied experience losses or underperformance, followers may suffer financial losses. Even experienced traders can encounter periods of drawdowns or losses due to market uncertainties or unforeseen events.

To be safer, you must carefully research and evaluate the track records, trading styles, and risk management methods of potential traders to minimize the risk of dependence on underperforming traders.

  1. Potential for Slippage and Execution Delays:

When the price at which a trade is executed differs from the expected price, often due to market volatility or liquidity constraints, slippage occurs. Copy trading platforms may experience slippage and execution delays, especially during periods of high trading activity or market turbulence.

You may not consistently achieve the duplicate entry or exit prices of the traders you're copying, which can lead to discrepancies in performance and potential losses. You need to be aware of the possibility of slippage and execution delays when copy trading.

Managing Risks and Considerations Involved in Copy Trading

Like any other financial endeavor, copy trading has risks and downsides. Here are a few key considerations to keep in mind when evaluating those risks.

  • Do Your Due Diligence:

While most copy trading platforms provide access to successful traders, you must understand the need to engage in due diligence and extensive research on signal providers to make informed decisions.

Examining signal providers' trading histories provides insights into their past performance, enabling copiers to assess the consistency and success of their strategies over time.

Additionally, scrutinizing risk management practices is crucial for understanding how signal providers navigate market volatility and protect their capital.

A comprehensive evaluation of the overall trading strategy ensures alignment with your investment goals and risk tolerance. By conducting due diligence, you can make strategic and informed choices about which signal providers to follow, ultimately enhancing the likelihood of a successful and mutually beneficial copy-trading experience.

This proactive approach enables you to choose signal providers whose trading strategies align with your preferences, leading to a more informed and strategic investment journey within the copy trading ecosystem.

  • Understand Market Risks:

Copy trading does not eliminate market risks. You must remain aware of the inherent volatility of financial markets and acknowledge and understand the associated potential risks.

Past performance, although informative, is not a guarantee of future results. This recognition of market risks underscores the importance of incorporating risk management strategies into your approach.

Implementing tools such as stop-loss orders and carefully diversifying portfolios can help mitigate potential losses.

Furthermore, maintaining a realistic understanding of the dynamic nature of financial markets ensures that copiers like you approach copy trading with a well-informed perspective.

By acknowledging market risks, you can adopt a prudent and strategic approach, enhancing your ability to navigate the uncertainties of the financial markets while still benefiting from the insights and expertise offered by successful signal providers.

Comparison to Traditional Trading Methods

In traditional trading, individuals make their own trading decisions based on analyzing market trends, technical indicators, and fundamental factors. They execute trades manually through brokerage accounts or trading platforms, taking full responsibility for their investment decisions.

However, traditional trading can be daunting and risky for beginners with limited experience or knowledge. Copy trading offers a more straightforward alternative by allowing them to piggyback on the expertise of seasoned traders.

Unlike traditional trading, copy trading requires minimal effort and time commitment from followers. They can benefit from the trading skills and strategies of experienced traders without needing to conduct extensive research or analysis themselves. This makes copy trading particularly appealing to beginners still learning the ropes of cryptocurrency trading.

How To Become a Copy Trader?

Questions like How to Become a Copy Trader? are great because they put you on the path to finding out how you can kick-start your copy-trading career.

To start copy trading, you need to do the following:

  1. Choose a reputable copy trading platform, create an account, fund your account with the minimum required deposit, and browse through available traders to follow.

  2. Evaluate the performance, risk level, and trading strategies of these traders.

  3. Select a trader that matches your investment goals and risk tolerance.

  4. Link your account to copy their trades automatically.

Conclusion

Copy trading in the cryptocurrency market allows beginners to utilize the trading strategies of experienced traders, offering them a low-risk and accessible entry point into the trading world.

A clear understanding of copy trading and how it works will make it easier to choose a suitable copy trading platform and increase your chances of maximizing its benefits in your investment endeavors. With copy trading, beginners can leverage the expertise of others, gain exposure to the potentially lucrative cryptocurrency market, and minimize the learning curve and associated risks of traditional trading methods.

Do you want to see more articles like this? Click the follow button and subscribe to learn how to make the most of your copy-trading endeavors!

0
Subscribe to my newsletter

Read articles from Michael directly inside your inbox. Subscribe to the newsletter, and don't miss out.

Written by

Michael
Michael