According to a report, copy traders can fare 6-10% better than average traders, and 4% better than people who use traders of their choice. Hence, copy trading is now one of easiest ways to get a fast track into investing. But you do not want to be wrapped up in common oversights that people do while using this practice. Find out 5 most important aspects to consider while copy trading.
Researching the Trader’s Track Record
Selecting the right trader is an important aspect of your copy trading journey because you do not want to copy someone who has a weak portfolio ridden with losses. During a down market, losses are inevitable. But what steps has the trader taken to navigate a similar loss-making situation to make it better is important to consider. Here, track record also means how quick they have been in monitoring their investments both on a good day and bad. Furthermore, what has been their performance so far overall could also speak volumes about their strategy. You can also use platforms like eToro who give detailed performance indicators about the investors that you are tracking.
Understanding Trading Strategies
Strategies are often picked up when you observe the long-term consistency of a trader. It is not just about their recent performance, but also their trading strategy, risk management practices, and consistency over time. For example, if you are interested in a long-term investment approach, finding a trader who focuses on steady growth rather than high-risk, high-reward strategies would be more suitable. Look beyond short-term gains and consider how their strategy aligns with your financial goals.
Risk Management Practices
Like every other investment strategy, copy trading carries risks. Here, you will be entrusting your money to another investor’s decisions, which may not always align with your expectations. For example, if a trader you are copying employs leverage or engages in speculative trades, it could lead to higher potential returns but also increased volatility and risk of loss. Educate yourself about the risks involved and consider starting with a smaller allocation until you are comfortable with the process and the traders you are following.
Diversification Across Traders
The simple rule is that you do not want to put all your eggs in one basket. While you are monitoring, pay attention to other investors of note. What are they doing? Is there a particular niche they are paying attention to, and if so, then why in that niche? What is their reasoning behind this? All these questions help you stay informed about what is going on in the industry, and how to mitigate risks. An example of diversification is you can allocate a certain amount of your capital to a trader who might specialize in forex, and another to someone who is focused on stocks and commodities. Spread your investment across traders with different trading styles for better profits.
Monitoring and Staying Informed
Copy trading is not a set it and forget it strategy. It requires ongoing monitoring of the traders you have chosen to follow. Regularly review their performance, market conditions, and any changes in their trading strategy. For example, if a trader you are copying starts taking on more risk or their performance declines, you may need to reassess whether to continue copying them or adjust your allocation.
By keeping these aspects in mind, which are choosing wisely, diversifying, monitoring performance, and understanding risks, you can navigate the world of copy trading more effectively and increase your chances of achieving your financial goals.
