Copy Trading involves following the trading decisions of another trader. You place trading capital into a broker trading account,and then authorizeyour broker platform to automatically copy the buy and sell activity of a Signal Provider. The intention is thatthe performance of your account should mimic thatof the Signal Provider; who is someone you have researched and followed and understand to have a trading methodology you also want to pursue.
Linking your account to a Copy Trader is relatively simple. The below graphic shows a snapshot of Signal Providers that can be linked to the MetaTrader 5 (http://www.mql5.com) service which has a tie up with various broker platforms.
The above is just a tiny sample of the numerous traders offering this kind of service; with so many options available it’s not surprising that any single account can be hooked up to more than one signal provider.
As a Subscriber you will be liable for the fee charged by the Signal Provider. The nature of this fee may vary across platforms and signal providers. Some charge a fixed monthly fee, others have no up-front fees but instead recoup their costs through the use of wider bid/offer spreads on the instruments traded. There are also additional charges that you would do well to research, as for example fees relating to withdrawing cash from an account or from financing positions overnight can quickly eat into trading P&L.
Traditional investing formats such as Hedge Funds work on the same basis that someone’s money is managed by another party. Whereas with a Hedge Fund structure funds are directly placed with the Fund/Investment Manager,when Copy Trading you keep control of the Funds by holding them in an account in your name. To comply with regulations Hedge Funds are also obliged to ensure only ‘suitable’ investors are allowed to invest in their products and also provide significant barriers to entry through the use of high minimum investment amounts. This isn’t the case with Copy Trading and you have to consider the pros and cons of this and how they might impact your capital.
From a regulatory perspective there is continued debate as to whether traders ‘sharing information’ about what they just did in the market constitutes them actually ‘advising a client’ or ‘managing investments’ on behalf of someone else. The way your national financial regulator interprets the situation may influence your ability to engage in Copy Trading. What is certain is that you need to be very careful about ensuring you keep control of your funds and that any Signal Provider is appropriately regulated.
There is a wide range of other risks associated with Copy Trading. The most pertinent factor to consider is that devolving responsibility for trading decisions doesn’t mean you remove the risk of losing some or all of your capital. There are also risks specific to Copy Trading, such as the possibility that for various reasons the performance on your account might not closely follow that of the Signal Provider. Partly because of the associated risks, some broker platforms offer a service where the subscriber can input stop loss instructions on the entire Copy Trading relationship.
Is Copy Trading Social Trading?
While some might freely interchange the phrases ‘Copy Trading’ and ‘Social Trading’ they are not actually synonymous. Copy Trading is a form of Social Trading but not all Social Trading is Copy Trading. Differentiating between the two might be made easier by noting that Copy Trading involves the automated following of trading signals whilst with Social Trading that is not always the case.