In times of low-interest rates, private investors are looking for alternative investment options apart from the less profitable banking products. As an online investment, copy trading offers an interesting alternative with attractive return opportunities. Top traders are simply copied, and their success transferred to their own portfolio. This way, even laypersons can easily get involved in the global markets without having to acquire expert knowledge for years.
Trading in the international financial markets can be complicated. This is especially true for newcomers who want to invest money in markets and assets such as stocks, ETFs, Forex, or CFDs for the first time. There are also many people who are so busy in their everyday lives that they cannot continuously follow the developments on the financial markets. In these two and many other cases, copy trading can be a good place to start trading. But what does copy trading mean, and how does it work?
What is Copy Trading?
It is a trading strategy in which you fully automatically take over the successful trading activities of a trader and can benefit from it. Copy trading – very often also referred to as social trading and sometimes also as mirror trading – offers you a wide range of options and high chances of success for higher returns. Most of the time, this principle enables significantly higher yields and that without being very active yourself. You can simply adopt the trading strategies from so-called signal generators, set a budget for trading, and the various providers do the rest.
For this reason, copy trading is far less complicated than normal broker trading, and you don’t need to have great expertise in what is going on in the markets or around the individual trading instruments.
This is how Copy Trading works
The principle is relatively simple and easy to explain. An experienced trader offers his own trading strategies with a provider and, in this way, enables other traders – such as you – to benefit from them by adopting and copying these strategies. Various brokers now offer such a form of trading; other brokers are still jumping on the bandwagon.
The broker himself only acts as an intermediary and brings the followers together with the signal generators. As with a social network, as a trader, you have an online platform available for this and can discuss with other traders 24 hours a day or copy the strategies. The broker’s database works live so that constant monitoring and intervention is possible – but not absolutely necessary. All events are always in view, and, for example, on Facebook or Twitter, you can see all the activities of the preferred signalers. You can quickly see the greatest success and take it over for your own trading activities.
With many social trading platforms, you also have the option of making comments or sharing individual strategy patterns.
In most cases, you can also carry out individual activities automatically. To do this, you select the signalers, set a budget, and the system does the rest. This means that you can use copy trading to trade successfully, even if you are not too well informed about market events or general trading.
It is also worthwhile for the signal providers to provide the trading strategies – they each receive a commission that can be all the more worthwhile if their success is greater.
Copy Trading Opportunities
Every copy trading platform advertises with first-class dividends and the opportunity to make big money without any prior knowledge. In fact, copy trading offers a number of advantages over conventional investment options.
1. Good returns and lucrative markets
Copy trading is limited to day trades and therefore aims for short-term profits. While this poses a much higher risk than ETFs, it also offers the opportunity to participate in lucrative markets that do not take advantage of long-term growth ETFs.
2. A broad portfolio
If you follow more than one popular trader, you can quickly create a portfolio with a very wide range. So, the risk can be spread very well with just a few clicks. Losses and undesirable developments on the market can be cushioned very well and still enable positive results.
3. Time saving
The interface of all platforms for copy trading is geared towards quick actions. Only a few parameters have to be set via the software, and trades are executed automatically.
Thanks to the copy-stop-loss function, trading is also associated with relatively little maintenance. Copied trades can thus be used as an addition to the actively managed portfolio.
4. Easy entry into trading
As a layman, you get a very pleasant and promising start to trading because the basics of trading can be quickly grasped. You learn from professional traders by copying and understanding their strategies. Once such strategies are internalized, you can use your own strategies (such as using the moving average).
However, the learning process is not limited to copying trades on one side only. Social traders and popular investors are also available to provide advice, answer questions, and, if necessary, explain their investment behavior and the basis for decision-making in more detail.
In addition, almost all platforms offer detailed instructions and a free demo account for a frustration-free entry into copy trading.
5. Use the knowledge of the community
The big advantage of copy trading is the active exchange with the community. Ideas, strategies, techniques, but also assumptions about further market development and information accumulation of economic and corporate events are actively shared and discussed. In this way, assets can be viewed from different angles, and risks can be better assessed together.
This mass of information also makes it easier to keep track of all assets. This enables new assets with a high risk to be better assessed and the risk to be minimized.
6. Tax benefit
Gains from copy trading are income from capital assets and are therefore subject to withholding tax. However, this only applies as soon as the profits are distributed. However, if the profit is immediately reinvested within the platform, the deferral effect applies, and there are no taxes.
7. Even advanced traders benefit
The social trading variant not only helps laypeople achieve their first successes but also offers experienced traders the opportunity to maximize their profits. First, most platforms reward their top traders based on their performance or number of followers. On the other hand, through their signaling function, they have a direct influence on the investment behavior of the community and, thus, also on the course of the course. This allows them to increase their profits even more.