In today’s post, we’ll be looking at copy trading and how to apply it in crypto trading.
Crypto trading in the past involved lots of research and practice, to get started as a beginner.
But with the advent of copy trading, it becomes way easier for people to get into crypto trading.
As you read further, you will get to understand how this is done, the benefits attached, and tips on how to choose a trader to copy.
Tag along as we delve into the crypto copy trading world!
The topic of the day will be discussed under these key points:
- The Concept of Copy Trading Explained
- What is Crypto Copy Trading?
- What To Look Out For When Choosing A Trader To Copy From
- Pros and Cons of Crypto Copy Trading
The Concept of Copy Trading Explained
You can choose to watch this video below for insight into what this is and other aspects of it.
Copy trading is a trading method that allows anyone to automatically – in the financial markets – replicate the exact trades of proven investors.
It is a system that completely automates the entire trading process.
Copy trading is different from mirror trading, which is a method that allows traders to copy specific strategies.
With copy trading, a portion of the copying trader’s funds is linked to the account of the copied investor.
Henceforth, any trading action made by the main (copied) investor – like opening/closing a position or assigning a “Take Profit” order – also executes in the copying trader’s account.
The copying trader also has the option to manage the copy trade, to confirm if the copied trading suits their needs or needs adjustments.
Presently, copy trading is a very active trading method and is gaining more awareness in the crypto space.
Below, we will break down how this method is being used in the crypto trading ecosystem.
What is Crypto Copy Trading?
Crypto Copy Trading allows a crypto trader to automatically replicate the trades of a proven crypto investor.
Now, traditional crypto trading involves a lot of research and extensive studies of the market.
This makes the process very tedious, especially for beginners.
You also have to be very vigilant in monitoring the market to know when to buy, sell, or exit the market manually, if need be.
These processes are now made easier with copy trading techniques
With copy trading, a crypto trader – old or new – can simply start trading and making a profit without having to reinvent the wheel.
This is a completely automated process, unlike the manual traditional trading method.
All the trader needs to do is to sign up with a reputable platform like Binance that offers a copy trading service and pick a trader to copy his/her trade.
Speaking of choosing a trader to copy: How does one even know who to pick and who not to?
Fret not, reader!
I dropped some tips on that in the next subheading.
Just scroll down.
What To Look Out For When Choosing A Trader To Copy From
Choosing good traders to copy from is not such a simple task, especially for beginners, as they are not familiar with the specs to look out for.
Below, I listed some points to consider so the selection process can be easier:
1. Trusted Traders
Looking for the number of people who trust a trader is one of the easiest ways to identify a good copyable trader.
Note that traders with the most followers don’t necessarily mean they are good traders.
Some might have just found ways to boost their rankings through questionable actions, like copying activities of other good traders.
Again, find out the amount of real money (not demo accounts) that other people have invested with them to get signals from the trader.
The amount of money invested in the trader is a better performance indicator than the number of copiers.
You might also want to consider the profits those followers are getting by following that signal provider.
Obviously, negative returns are bad, but overly high returns (though appealing) require that you tread with caution.
Annual returns of around 70% or more are not usual and are most likely due to luck or high risk.
Scale your analysis down to a monthly level for better understanding.
Be sure to check out the traders’ profit charts. You want to go with someone who has had a consistent rise in profit for a while.
This can be gotten from the chart when you see a smooth, steady rise in profits.
Anyone with an irregular graphical representation is probably gambling around.
3. Number of Trades
Another important factor when choosing a good social trader to follow is the number of trades the signal provider undertakes.
A high amount of closed trades (like 100 and above) is a good indicator.
This can help assess that a trader is an expert and their success is not down to luck.
This also depends on the trader’s strategy.
More long-term traders tend to hold their positions for a longer time, and thus, a smaller number of trades can be justified by this.
4. Risk Score
Most social trading platforms calculate this on a scale of 0 to 10.
You want to look for traders with consistent risk scores that do not change much over time.
In addition to having a consistent risk score, the score, however, should also be as low as possible while still ensuring you get the results you want.
In investing and trading, there is an inverse relationship between risk and expected returns.
To be on the safer side, it’s recommended you choose a risk level between 0 to 5, depending on how conservative you want to be in your approach.
Also, stay away from traders who forget to use the Stop Loss function – this is a key principle of risk management.
As with most things in life (if not all), consistency is key.
A trader with consistent successive profitable months (say 12 months) with minimal losses makes for an ideal candidate.
Again, ensure that your guy has been in the game for a while (consistent) for at least 12 months – don’t copy beginners whose success might be down to temporary luck.
6. Maximum Drawdown as well as Winning Trades
Drawdown is the amount of money the trader lost before they began to make profits again.
It represents the reduction in your capital after several losing trades.
It is normally calculated by subtracting a relative trough(bottom) in capital from a relative peak(high point) and expressing it as a percentage of the trading account.
Remember, a drawdown is not an actual loss but rather the loss seen before your social trader begins to make profits again while the trade remains open.
An actual loss would be the loss seen when the trade is finally closed.
Social traders with very high drawdowns are extremely risky to work with.
They might drive your account into a margin call, especially when you don’t have enough capital to withstand a series of losses.
7. Trader Level
Some social trading platforms rank their traders by levels – traders have to fulfill certain conditions to move up their levels.
These conditions may include controlling the drawdown, increasing the real money invested, ensuring constant gains, etc.
Generally, the higher the level, the more the guarantee that the trader is not a novice.
8. Average Trade Size
The average trade size reflects a trader’s money management.
Staking a substantial amount in deals compared to the account balance is a sign that they are probably taking extremely high risks in their trading.
It’s like putting all the eggs in one basket.
Similarly, keeping the average trade size low is a reflection of flexibility.
Such a trader’s overall performance is not dependent on a single deal, and the risk is therefore spread out.
You might want to go with an average trade size lower than 10%.
That’s it for the tips!
Moving on, we will be looking at the pros and cons of Crypto Copy Trading.
Read about that below.
Pros and Cons Of Crypto Copy Trading
- It lets you take care of other stuff while the trading software does most of the work for you..
- You get to invest your money based on statistics which helps prevent rushed trading decisions due to panic.
- Since you’re following expert traders, you can make informed trades without having to do all the research and learn about the cryptos yourself.
- Crypto Copy Trading allows you to closely see what other investors are doing, so you get a lot of insight into how the crypto market works.
- Copy trading lets you try out other people’s tactics and using other investors’ ideas makes your portfolio more diverse.
- You don’t have total control of the system as you are somewhat sharing the account with the trader you’re copying from.
- Your trades will only be as good as the trader you follow. Picking the wrong trader to follow can cause you to lose money.
- You can encounter issues if you’re using all of your savings to copy a trader who has a high-risk tolerance and a lot of money to play with.
- Since your trades lag slightly behind the lead traders, a very volatile market can keep you from getting identical results.
- You may need to share a small percentage of your profits with the lead trader to compensate them for their work.
Here you have the pros and cons of Crypto Copy Trading.
Let’s move on to the next section to round up this post.
This is where we take a break for now on our Crypto Copy Trading tour.
Above, we learned that Crypto Copy Trading is a trading model that involves copying experienced traders in the field to follow their ways and make a profit.
But remember that following the trading methods of experienced investors that worked in the past doesn’t guarantee the same results.
In other words, do your own little research before making any investment decisions.
In my next post, I will give you a list of the top crypto copy trading platforms you can work with.
Bet you thought I missed that😊
Remember to always invest with caution and thank you very much for reading.
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