Due to the speed of price movements, Forex trading offers high-profit opportunities. However, many investors are quite reluctant to invest due to their lack of experience. Copy trading offers important support in this regard. Traders can copy the investment recommendations of experienced traders and use them for their own strategies. Meanwhile, there are several social service providers where beginners can operate without special knowledge.
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Important facts about copy trading:
► Signal Givers are called traders, Signal takers are called followers.
► Signal takers can include several traders in their portfolios.
► The regulation and implementation of the portal are of great importance.
► The greater the number of leading merchants, the greater the success of the copy service provider. Etoro: 75% of private investor accounts lose money when trading CFDs with this provider
What’s behind the term “Copy Trading”?
Social commerce is part of a development that also affects other aspects of daily life. This can be summed up in the Web 2.0 keyword.
For example, the relationship between companies and customers is no longer conceived as a one-dimensional exchange, but as an interactive exchange. This development also extends increasingly to investments and financial advice.
Until a few years ago, it was assumed that investors obtained information about their investment through their investment bank advisor. Thanks to the Internet, investors now have many more options.
The challenge is usually to filter the right investment strategy from the multitude of information available. This is where the idea of copy trading comes into play. Instead of paid advisors, it relies on the intelligence of all investors.
The idea of copy trading is that all investors can benefit from each other through their strategies. On the one hand, some experienced traders make their successful strategies available. On the other hand, some potential investors are always looking for the right strategy.
Copy Trading service providers see themselves as a communication platform. In the meantime, a number of different suppliers have established themselves, each with their own specific goal.
We show what is important in choosing the right provider and what needs to be considered in copy trading.
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The principle of social commerce
To familiarise yourself with the principle of social commerce, it is useful to take a look at the procedure relating to funds. Here, financial institutions develop an investment portfolio in which investors can participate.
Traditional investment funds are actively managed by a fund manager. This means that the fund is continuously restructured based on the current market situation. A fee is charged to the participating investor for this service.
However, it is often the case that a fund’s performance falls short of that of an individual index.
Copy trading is a serious alternative to investment funds. Successful investors become fund managers that other traders can turn to. The reporters are not just private investors.
Meanwhile, experienced financial experts and renowned business journals also provide their own portfolios. For experts, this form of investment is much cheaper than funds. But without cost, social business doesn’t work either.
Find the right social commerce provider
Investors have several options for becoming a follower. These always depend on the copy service provider and personal preferences. In the simple variant, the tracker simply follows the information and activities of the selected signal provider.
They can then be tracked in their portfolio. While this strategy is very simple and non-binding, there are pitfalls. On the one hand, these are different budgets and, on the other, there is a time lag.
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Even small price differences ensure that portfolios evolve differently. This variant was the original form of social commerce, but it no longer plays a particular role in practice.
Automated trading, also known as mirror trading or copy trading, is now much more important. The follower’s trading strategy is entirely tied to the activities of the signal generator. The procedure varies by vendor. Some providers, such as ZuluTrade, etoro or Trade Match, act in this context as pure platforms that bring together the two groups of investors.
However, the offer does not include securities account management services. The follower must then open a separate securities account with a broker.
A link between the custodian bank and the platform is then used to establish contact between the reporter and the follower’s securities account. This way, the investor doesn’t have to worry about anything else.
Several portals offer their members to manage their deposit accounts and thus manage the financial products themselves. One such provider is ayondo.
Some social commerce providers go further. Not only can the strategies be automatically copied, but the certificates of the best traders, representing the portfolio, are also issued.
The certificates can be freely traded on the stock exchange. Unlike classic copy trading, only the certificate is present in the portfolio, but not the individual securities. This allows investors to save a lot of transaction costs.
The disadvantage, however, is the so-called issuer risk, which is always borne by the owner of the bearer bonds. In the event of the issuer’s insolvency, the invested capital would be lost.
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What else is there to consider?
In principle, the same rules apply to copy trade as to conventional investments. The opportunities for high returns are always associated with higher risks.
Investors can, in principle, assume that there is already some degree of diversification in the strategies of top traders. However, there are significant differences between the different signal generators with regard to the existing risk appetite.
Some strategies are broadly based and focus on sustainability. The emphasis is on maintaining long-term values. Furthermore, there are also a large number of leading traders offering highly speculative strategies. In addition to stocks, various leveraged products are also used.
Some platforms have specialised in some financial products. wikifolio.com presents itself in a relatively classic way with stocks, funds and indices. ZuluTrade, on the other hand, specialises in risky Forex trading.
In addition to currency pairs, binary options can also be traded here. The ayondo provider, in turn, occupies the field of CFDs in copy trading.
Overall, copy trading offers a very broad range of investments. Investors should first think about the risk they want to take with their investment.
Finding the Right Copy Trading Provider – Advice
How to recognise reliable platforms?
With well-known portals, it can be assumed that they work seriously and reliably. There have been no negative experiences of fraud or scams in this industry so far. In any case, the responsibility for customer deposits generally lies with the custodian bank.
The platform must help the investor find the best traders. Some suppliers focus primarily on the highest yield when making their selection. Others strive to provide a balanced search function. Other criteria include the widest possible selection of the best traders.
For whom is Copy Trading useful?
However, due to the lack of control and increased complexity of this trading concept, it is especially recommended for advanced traders.
Terms like risk diversification and strategy shouldn’t be foreign words to the investor. Successful trading is possible with copy trading only if the follower understands and can also understand the reporting strategy.
A communicative exchange between those who give the signal and those who follow it is not a prerequisite, but it makes sense. Many platforms are available for this, such as forums and online chats.
Conclusion on Copy Trading
Social commerce should soon establish itself as an integral part of the financial market. In any case, the investor must have some previous level of education.
This is the only way to weigh opportunities and risks. It is particularly interesting for investors who do not feel bothered by classic offers, but who due to their life situation cannot find enough time to trade around the clock. In this case, it is very useful to copy the individual strategies.
Copy Trading should only be seen as a support and not as a pure investment opportunity. Because there is also a risk.
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