Copy Trading (CT) is a method that began in 2005 when traders started to replicate specific algorithms intended for automated transactions. The technique has grown in popularity; at the same time, experts have identified both advantages and drawbacks of this approach.
Peers can share information with traders with similar interests by collaborating and exchanging knowledge.
The rise in popularity of copy trade in Australia creates more opportunities for people to make money, but it also opens up the market to more risk.
Contents
What is copy trading?
Copy trading is when an investor follows the trades made by another investor and replicates those investments into their portfolio with just one click of a mouse. This can be done via social trading platforms like eToro, or directly through some financial brokers.
The benefit of following another trader is that you don’t have to spend time choosing your investment strategy and finding funds—you follow what someone else does best. That means no studying graphs, charts or reading company reports is required.
When talking about trading, there are different methods that traders can use to achieve success. Some people prefer to trade manually, while others use automated trading software or robots. However, a new and increasingly popular way to trade is through copy trading.
The main issue with copy trading is that it’s risky because if the traders lose money on their investments, it also affects you. So, while the other trader might be making money, you could still be losing it.
Although copy trading can create opportunities for people who otherwise wouldn’t have had them, there’s no guarantee that your account will consistently grow – and if the market changes quickly and dramatically, you risk taking a beating.
As always, investing in this way should only be done by those who understand the associated risks and manage their money.
The benefits of copy trading
Increased liquidity
One of the main benefits of copy trading is increasing liquidity. When investors copy the trades of other investors, this creates a larger pool of buyers and sellers, leading to better prices and a more efficient market.
Lower costs
Because there is increased liquidity, copy trading can also lower investors’ costs. Because there are more buyers and sellers, the spread between the buy and sell price becomes smaller.
Diversification
Copy trading can also be used to achieve greater diversification. Instead of investing in a single security or asset, investors can spread their risk by copying the portfolios of multiple traders.
The risks associated with copy trading
Lack of control
One of the main risks of copy trading is that investors lose control over their portfolios. When investors copy trades of other traders, they are automatically copying all of the trades made by those traders, including the good and bad ones. As a result, investors can end up with a portfolio that is not fully aligned with their risk profile and investment goals.
Fraud
Another risk associated with copy trading is fraud. There have been multiple cases where traders have copied the trades of fraudulent traders, leading to significant losses for investors.
Inexperience
A third risk associated with copy trading is inexperience. When investors copy trades of other traders, they may be copying trades that are not suitable for their portfolios. Doing this can lead to losses and could potentially even cause the account of an inexperienced investor to be closed due to significant losses or excessive risk-taking. Avoid making frequent losses with copy-trading.
Bottom line
As copy trading becomes more popular, investors should consider both the benefits and risks of using this service. While it can provide some benefits, such as increased liquidity and diversification, those looking to use copy trading should also carefully assess whether or not it will suit their specific needs. Some investors may experience better results by using mirror trading instead, where they still have complete control over their portfolio trades.
