Copy trading is the perfect method for new investors to build their trading knowledge by copying trades of experienced investors. In this article, we will discuss how to copy investors, assets investors invest in, investment fees and many more. We will also look at the different factors to consider when choosing a top investor to copy.
Summary
One of the best ways to learn how to trade financial instruments is by receiving guidance from experienced traders. Copy trading offers you access to some of the best traders in the world, so you can watch their trades closely and copy them in real time. It is a good way to get some real life experience in trading, usually at a cheaper price than many mentorship programs.
Copy trading is a form of social trading that allows traders to automatically replicate the trades of other experienced and successful traders to provide similar results. As a copy trader, you choose a trader whose trades you wish to mirror, and the platform automatically replicates the trades on your own account.
The benefits of copy trading are clear – the copy trader could potentially gain from successful trades made by the experienced trader they mirror. However, the same is true in reverse. The copy trader could lose a lot of money if the trader they are copying loses money due to a mistake or bad trading decision. For this reason, it is important to understand the risks involved in copy trading, manage them properly and choose the best traders to copy.
This article is a simple guide for traders who are interested in copy trading, but don’t know how to pick the right investors and how to manage risk while copying trades. We will go through how to copy investors, factors to consider before copying investors, the pros and cons of copying best investors and the different assets you can invest in while copying trades.
How to Copy Top Investors
To copy successful investors, there are a few steps you should take. They include:
1. Create an Account with an Investment Platform
Choose a reputable platform that aligns with your investment goals and offers access to the assets you’re interested in. Platforms like eToro, Pepperstone, etc. are good examples of copy trading platforms to look at. Before you settle on any platform, consider their fees, minimum account requirements, available tools, customer service, and other important factors.
2. Search for Credible, Successful Investors
Look out for investors with experience and a long-term proven track record. Don’t focus on investors who have made a few successful large short-term gains. Study their trading strategy, risk management, drawdowns, and performances over a reasonable period. Spend as much time as possible analysing investors you wish to follow.
3. Follow Pros in Different Market Sectors
Diversify your exposure by following investors across various sectors to spread risk and capitalise on opportunities in different areas of the market. For every investor you follow in a different market sector, analyse their sector expertise and investment strategies to ensure that it aligns with your overall goals.
4. Exercise Patience
It takes time to become a successful trader. Kill any ideas of hitting it big overnight or making just one trade that would change your life. Chasing quick gains from market fluctuations when they don’t align with your overall strategy could cause more harm than good in the long run. Stick to your investment strategy and trust the process even during periods of volatility.
5. Look for Accumulation by any Investor
Sometimes, successful investors actively buy or increase their holdings in specific assets. This could be a signal that they have loads of confidence in those assets. Pay attention to these instances. This is not a guarantee of success, but it could be a pointer and is worth considering along with other important factors.
6. Conduct your due Diligence
You have an obligation to do your own research and protect your investments by yourself. Don’t blindly copy successful investors’ moves. Research the assets they invested in, understand the underlying businesses, and evaluate their long-term potential. Remember, copy trading is not an opportunity for you to lazily copy other people’s trades, but an opportunity for you to learn and understand why successful investors do the things they do.
7. Invest in Assets picked by Top Investors
Allocate your trading capital to assets picked by top investors based on your research and trading goals. Consider the proportion of your portfolio you’re comfortable dedicating to each asset. Do this carefully, keeping in mind that copying only a portion of an investor’s portfolio might not replicate their exact returns due to differences in allocation and timing.
8. Monitor your Investment Portfolio
Regularly track the performance of your investments and the investors you’re following. Once in a while, evaluate your strategy and holdings. Ensure you adjust your strategy as market conditions change or as your goals evolve.
Pros and Cons of Copying Top Investors
Some of the benefits and downsides of copying investors include:
Pros
- Access to expertise of successful traders.
- Diversification of risk and exposure.
- Helps save time.
- Provides a good learning opportunity for new traders.
Cons
- Risk of losing trading capital.
- High fees.
Factors to Consider Before Copying Top Investors
Before you choose a top investor to copy, there are some factors you need to keep in mind. They include:
Years of Experience
The length of a trader’s experience doesn’t always guarantee their success, but it provides you with enough data for you to analyse their decision-making and evaluate their consistency. When considering the length of experience a trader has, look at their performance over different market conditions (bull and bear markets), and across various asset classes.
If a trader is consistent in generating considerable returns in different asset classes and across different market conditions over a period of time, they are most likely reliable traders to be considered.
Performance
Stellar past performance isn’t a guarantee of future success, but it offers valuable insights. When looking at performance, it is important to look at common metrics like the trader’s overall returns, but it is also important to look at less common metrics like their maximum drawdown. This helps you understand how they manage risk in the worst times.
Risk Management
Ask basic questions like:
- Do they use stop-loss orders to limit potential losses?
- How well do they diversify their portfolio?
- How transparent are they about their risk tolerance?
When analysing their risk management, looking at their maximum drawdown is also important.
Style of Investment
Study the style of investment used by the trader you wish to copy. Different traders have different philosophies that may align or conflict with your own. The trader may believe in value, momentum or growth investing to influence their decisions. Also, check if the trader is a swing trader, day trader or position trader. This information helps you determine if the trader is the best fit for you.
Assets Top Investor Invest in
Some of the assets that top traders invest in are:
Stocks
Stocks are financial instruments that represent a part ownership in a company. By owning stocks, investors position themselves to receive potential profits from stock dividends and stock price appreciation. On the other hand, stock price depreciation could lead to loss in trading capital.
The stock market is one of the most traded markets in the world, with millions of stock traders trading trillions of dollars worth of stock daily. It is a good investment option for you if you are interested in part ownership, voting rights, potential dividends and capital gains. However, this means you are open to company-specific risks and market downturns that could cause you to lose your trading capital.
Forex
Forex trading involves buying and selling of currencies in the foreign exchange market. Investors can trade forex to hedge against inflation or take advantage of volatility in the market. It is the world’s most liquid and largest financial marketplace, boasting a daily trading volume exceeding $6 trillion. This high liquidity allows investors to enter and exit positions easily and at low costs.
Unlike stock markets, the forex market operates 24 hours a day, five days a week, providing ample trading opportunities and flexibility to investors across different time zones. It also allows investors to trade different currency pairs so that they can diversify their exposure and hedge against risks better.
Bonds
A bond is an IOU between a borrower and an investor. People who buy bonds essentially loan money to the company or government for an agreed period. The borrower promises to pay you back the principal amount you loaned, in addition to regular interest payments until the bond matures.
If you are interested in receiving regular income from the interest payments, then bonds might be a good option for you. Bonds are also good for investment diversification and as a hedge against inflation. However, they provide far lower long-term growth potential compared to other assets like stocks.
Commodities
Commodities are basic goods used in commerce, which are interchangeable with other goods of the same type. They include goods like oil, wheat, cattle, soybeans, and gold. Trading commodities can be a great way to hedge against inflation and diversify your trading portfolio.
Trading commodities can also come with its own problems, as they can be very complex to analyse and volatile to trade.
Real Estate
Real estate trading involves investment in physical properties. These investments can provide a source of income in the form of rent, and offer potential capital appreciation if the property grows in value. Like other asset classes, real estate investment acts as a form of portfolio diversification.
On the other hand, real estate investment can be troublesome as it could involve physical management of properties and involvement with property managers. Real estate is a good investment for those who have a long-term investment strategy.
ETFs
Exchange Traded Funds (or ETFs) are baskets of securities which can be traded as a single stock. ETFs can hold a variety of assets, including stocks, bonds, commodities, and even other ETFs. Since they offer a variety of assets, they are often desired by investors who like to diversify their trading portfolio. They are also very tax efficient and flexible.
Still, ETFs, like every other asset, comes with its own risks and can be more complex than many other assets.
Mutual Funds
A mutual fund is an investment vehicle that pools money for a number of investors and invests it in a variety of assets like stocks, bonds, and other securities. All investors involved in the mutual fund contribute to the pool of money, and a professional money manager determines how to invest it.
While they are good for diversification of trading capital, they also charge higher management fees that can eat into investor’s potential profits.
Cryptocurrencies
Cryptocurrencies are digital currencies designed to work as a medium of exchange. Unlike traditional currencies issued as legal tender by governments, they operate autonomously on a decentralised platform known as blockchain technology. Blockchain technology is a digital ledger that records transactions with high levels of security and transparency, making it virtually impossible for scammers to shortchange the system. This way, they keep the security of cryptocurrencies strong while keeping it decentralised.
While some people focus on the potential of cryptocurrencies to become a globally accepted medium of exchange, many others focus on investing in cryptocurrencies for its possible potential rewards. However, cryptocurrencies are more volatile than many regular financial instruments and are prone to crashes. This highlights the need for rookie traders to copy and learn from experienced crypto traders using techniques stated in this article.
Minimum Deposit Needed to Copy Top Investors
The minimum deposit required to copy investors on copy trading platforms depends heavily on the platform you choose to trade with. The minimum deposit amount ranges from around $50 to $500. Some platforms may even have higher minimums, exceeding $1,000 in certain cases.
eToro offers minimum deposits as low as $200 for customers interested in copy trading. It also has a maximum deposit amount for copy trading – $500,000. You can follow up to 100 investors on the platform.
Investment Fees Incurred when Copying Top Investors
Many investors take the plunge into copy trading without a good understanding of the fees associated with this form of trading. Some common fees you will come across as a copytrader are:
Brokerage Fees: These are fees you pay for trading securities with a broker. They include:
- Spreads: A spread is the price difference between the buy and sell price of an asset. Tight spreads mean lower costs and vice versa.
- Commissions: Some brokers charge traders a commission for trading stocks and other securities. The higher the commission, the more you have to pay per trade. Brokers like eToro are commission- free, meaning you don’t have to pay any commission per trade.
Platform Fees: These are fees you are likely to pay specifically for copy trading. They include:
- Subscription fee: Some platforms charge an annual or monthly subscription fee for using their copy trading platform.
- Management fees: Some platforms charge a percentage of your assets under management (AUM) as a fee for copying investors. Platforms like eToro don’t have any management fees or other hidden costs.
Additional Fees: Other fees you are likely to incur include;
- Deposit/Withdrawal fee: This is a fee you pay when you deposit to or withdraw from your trading account on a platform.
- Inactivity fee: Brokers often charge inactivity fees when you leave your account dormant for a long period, like 6 months or 1 year.
What are the Risks of Copying Top Investors
Many newbie investors see copying best investors as a guaranteed way to avoid all risks and get the same results as the top investors. However, this is not always the case. There are many risks involved with copying investors, and it is important to know them before you start copy trading.
Some of the risks involved in copying investors include:
Differing Investment Objectives
If you are a risk-averse investor seeking steady income, while the top investor you want to copy focuses on high-growth, volatile tech stocks, this could pose a serious risk to your investment goals and objectives. A top investor’s strategies may be aligned to their own goals and objectives, but not necessarily yours.
This is why you need to assess their investment objectives before jumping into copying their trades.
Success is not Guaranteed
Like other forms of trading, copy trading doesn’t guarantee success, even when you copy the trades of the most successful investors around. The past performances of top traders doesn’t guarantee future success, and there are many limitations to just copying trades from a successful trader without understanding their thought process or adjustments they make when they access real-time information.
Stock Price Might have Changed
Stock prices, like the prices of other assets, are not always stable. Sometimes, they vary widely within a short time gap, and this could lead to major losses for you as a copy trader. The time discrepancy between when the top investor you are copying places the trade and when you place your trade could be enough to cost you a good amount of your capital.
For example, let’s say the top investor buys shares of a promising company at $10. By the time your copy trade executes, the price has risen to $12 due to increased demand. This means you end up paying a higher price, potentially impacting your overall returns.
Copying Investors vs Copying Traders
While both copying investors and copying traders involve replicating someone else’s market plays, they often involve different approaches and underlying philosophies. For example, copying investors usually involves building diversified portfolios over a long time period, while copying traders generally requires capitalising on short-term price movements and market trends, primarily through active trading.
Long-term investors trade by managing their risks and protecting their capital with strategic asset allocation, while short-term traders carry out frequent trades to act on market trends as quickly as possible, often putting their trading capital at risk.
What Reddit and Quora Users Say About Copying Top Investors
Part of the research required before you start copying investors is finding out what other people (mostly seasoned investors) think about the process. We went through two of the most popular social communities, Reddit and Quora, to see what people there thought about copying best investors.
Reddit is one of the internet’s largest social communities and has a large number of groups where they discuss copy trading and trading in general. We went through a few of those groups to see what they thought about how to copy investors.
In the first post we found on r/Etoro, a copy-trader explained that it was necessary to be mindful of who you copy from, as some so-called top traders made money from people copying them, and didn’t have any incentive to carry out successful trades.
In another post, a redditor asked for recommendations on the best investors to follow on eToro and where to get good investing tips and tricks.
Another Redditor responded, telling the OP (Original Poster) some recommended names to follow on the platform. They also recommended that the OP studied “The Intelligent Investor” by Benjamin Graham.
Quora
Quora is a social community with millions of people who discuss on a wide range of topics. We went through some discussions on the platform to see what users there thought about how to copy the best investors.
In the first post we came across on Quora, the poster wanted a few tips on how to follow investors and copy trade. One Quora user commented that the best way to do this was to study publicly available information of top investors like Warren Buffet and the others and use information from their annual letters to strengthen your trading foundations.
In another post, a quora user wanted to know how to start copy trading step-by-step. Another Quora user who is a professional investor gave him tips like choose a trading platform, create an account, find a trader to copy, set the amount you wish to trade and monitor your trades.
Bottom Line
Copying the best investors is a great way to learn and gain expertise on investing. This guide article looked at how to copy top investors for newbie investors. We studied a step-by-step process to begin copy trading, looking at how to analyse signal providers and the kinds of assets to invest in. We also explained the risks involved in copy trading and the differences between copying investors and copying traders.
It is important to note that while copying investors could open you to potential earnings and a great learning experience, it could also open you to losses and bad learning experiences if you pick the wrong one. It is therefore important that you learn how to properly analyse and pick the right investors to copy if you wish to enjoy copy trading.