Copy trading – or social trading as it is also known – is an increasingly popular form of trading. It involves automatically following the trades of another person, thus replicating their success or failure.
It has numerous advantages, including being a relatively passive form of investment, allowing you to let it run in the background whilst you get on with your day and trades are copied on your account.
However, some question whether it actually works in practice – or in other words whether you can make money from copy trading.
The answer to this is of course – “yes” – but much like with any other form of trading, you can also lose money and there are no guarantees of success.
There are some tricks of the trade you can use though to give yourself a better chance of succeeding and make copy trading work for you – we will go into those below.
How Copy Trading Works
Before getting into the nitty-gritty of the art of copy trading, a quick word first on how it works in case you are new to it.
There are a few different copy trading sites around these days. Some of the main ones are:-
Some of these sites allow you to copy traders directly on their site – for example Etoro and Naga. Others like Zulu Trade and DupliTrade require you to connect a broker account.
Either way, once you are set up the next step is to choose how much you want to allocate to following a trader.
As mentioned above, just as with any other form of trading, your capital is at risk with copy-trading you could lose your money. Sometimes it can be deceptive to see a trader’s record and think that they will go on producing the same results, but as the old saying goes “past performance is no guarantee of future success.”
In any event, once you have selected the capital you want to allocate to copy trading, it’s then a question of selecting which trader(s) you want to follow. Most platforms have a wide variety of choice and there are different aspects you can focus on in making your choices – but we will go into more detail on that below.
Some platforms allow you to choose your risk level, whilst others have a fixed level they select for you.
Then really it’s just a question of letting it run and checking the results! In general most of these platforms make it pretty simple, particularly ones like Etoro that were very much set up around copy trading.
When Copy Trading Works Well
If done correctly, copy trading can work well. If you find some good professional traders to follow and stick to a sensible staking plan, it can deliver good returns.
And as we say, an added benefit is that it’s relatively passive, so you don’t have to spend hours studying charts, graphs and indicators and worrying about every piece of market-related news. You can just go about your business and allow the trader you are copying to do that! And to (hopefully) act appropriately according to their own trading strategy.
There are many example of successful copy traders who have made substantial profits for their followers. Here are some examples:
From Etoro, there is a trader known as “CPH Equities” who was a solid record going back over four years:
He has made profit in each of the last four years and is well in profit for 2021.
His profit in the four previous years was 23%, 26%, 10% and 44% respectively which is very consistent. You can see the profit and loss each month is fairly consistent and there have been no outlandishly big winning or losing months.
Another example from Etoro is a trader called Ed Butler:
Ed has made an impressive overall profit of over 600%, but a large part of that was made up of one outsize year when he made over 540% profit.
However, he has had other good years of 11%, 50%, 19% and 22%, with one small losing year of -4%. So followers would have done well copying Mr Butler over the past few years.
This trader had made over 8,000 pips profit at the time of writing over the course of nearly three years. As you can see from the profit graph, the progress has been pretty smooth and upward throughout.
With such great results this trader is followed by over 4,000 people with over $3m in capital allocated to following them in total. The trader has achieved an impressive return on investment of 59% and they have been one of the most popular traders to copy on Zulu Trade.
So as you can see from these examples, copy trading clearly can work in some instances if you are following a top trader and they produce results like these.
Of course, there are no guarantees and just as with any other form of trading you could lose money, even following traders with the best records out there. Past performance is of course not indicative of future results.
In terms of the actual process of copy trading, using a trusted copy site like Etoro or Zulu Trade should mean things work smoothly with the trades being copied correctly – the technology these days is quite impressive.
We have run live trials of five different copy-trading platforms here at Trade Stocks and Forex and whilst there can be some hassle in setting things up – particularly when you need to connect a separate broker account – generally once it is up and running we have found copy trading to work well. Trades were executed as they should have been and we matched the trader’s official results.
Overall then we would say copy trading does have its advantages and can work well – it is more a question of making sure you get the most out of it and giving yourself the best chance of success. We will now take a look at how you can do that.
Using a “Portfolio Approach”
One way to approach copy trading is instead of just choosing one trader – even if they have a really good record – is to spread your risk around across a number of traders in the same way as you might do with a stock portfolio.
You wouldn’t just buy one stock – you would have a portfolio of different stocks, perhaps in different sectors to balance your risk. That way if one stock does badly it doesn’t ruin your investment and wipe you out – hopefully you will have others that do well and balance things out.
The same thing applies to copy trading – it is probably better to spread your risk out rather than just follow one or two traders. For example if you have an amount of capital to invest you could split it across five or even ten traders, rather than allocating to a single individual.
You could also look at following traders with different styles and specialisms. For example some traders might focus on forex, whereas others may be experts in commodities or indices. Or some may be day traders whereas others are medium or long-term traders, holding positions over weeks or even months.
Having a combination of different styles could help to diversity your portfolio and not leave you over-exposed to one particular asset class should there be a major crash or correction.
And whilst it is a little more hassle, it could be worth considering following traders on different platforms as there are likely to be good traders spread across different platforms and not just limited to one of them.
Finding the Best Copy Traders
Obviously the key to succeeding at copy trading is finding the best traders to copy. This isn’t as easy as it sounds though and there are a number of different ways you can approach it.
Some people just focus on recent results in terms of who is “in form” or who has made the most profit overall, but that is not necessarily the correct way to select which traders to follow.
A trader might have done very well recently for example but have a poor long-term record. Their recent results could have just been luck or natural variance and not represent an edge over the market.
A trader with the most overall profit could just be a result of having larger funds and making bigger trades. Or it could be mainly down to one or two huge trades that went their way and really boosted the results, but does not reflect a long-term winning strategy.
We would focus instead on looking at the following factors:-
- Long-term record – how long has the trader been operating for? The longer the better, and if over a few years then it presents a good picture of whether they have an edge over the market.
- Trade success rate – how many of the trades are winning ones? There is no “right” level for this as such but it will give you an idea of whether they are a high-percentage trader or looking for a small number of big wins.
- Any unusual or outsize trades – as we say, sometimes results can be obscured by one or two outsize winning (or losing) trades that either boost the results or drag them down.
- Profit graph – they say a picture speaks a thousand words and looking at a profit graph can tell you a lot about a trader. Is it smooth or are there lots of big ups and downs? Preferably you are looking for the former.
- Percentage of winning months – a good indicator of how consistent a trader is can be seen from looking at the ratio of winning months they have. Anything over 70% would be seen as a good, consistent record.
- Use of stop losses/take profit targets – this information isn’t always available and depends on the platform but if it is there it’s useful to know if a trader uses protective stops or just lets positions run. Using stop losses would be a sign of a sensible trader.
- Biggest wins/losses – seeing a trader’s biggest winning and losing trades can help to establish what kind of trader they are. If their biggest wins/losses are way out of range of their average trade then it could be a red flag.
Taking all these factors together then should give you a good idea of how to find the best traders. In summary you are looking for those with a consistent long-term record and with a smooth profit graph. You want to avoid erratic traders with big ups and downs – it will not be an easy ride following them!
Conclusion – Copy Trading Can Work but it Depends How You Use It
Copy trading is a popular form of trading these days and there are a number of different platforms out there now offering the service.
There are some traders with good records out there and if you had followed them over the past few years, you would have done well. There are no guarantees that such results will continue of course and past performance is not indicative of future results.
To give yourself the best chance of success though it is important to research the traders you want to follow thoroughly beforehand and understand their records, manage your risk sensibly and take a “portfolio approach” rather than putting all your eggs in one basket by following a single trader.
With that said, good luck with any copy trading you do and here’s hoping for some success!