Forex Copy Trading – What is it and how does it work?
Copy trading in forex is a concept, that as the name suggests, allows traders to copy someone’s forex trades. Obviously, the trader’s trades that you are copying should show a history of steady profits. The concept of copy trading, also known as social trading is the idea of copying another trader’s strategy and trades.
Copy trading is relatively new, just under a decade but it has become one of the key ways for some traders to take advantage of the retail forex markets. Copy trading has been around for a while but it was pioneered by Zulutrade. A website that allows traders to connect their trading history and allows other traders to copy the trades.
There are quite a few aspects to bear in mind. You simply cannot login to a copy trading website and randomly pick a trader whose signals you want to copy. The increase in the popularity in copy trading eventually led to many forex brokers starting their own copy trading programs.
Of course, if you are looking for a wider choice, besides Zulutrade, you also have the MQL4.com website which also allows traders to publish their trades for copy trading. Sometime, the concept of copy trading in forex might bring about mixed meanings. For example, in some ways, forex copy trading sounds somewhat similar to an FX managed account. It is also similar sounding to social trading. So what’s the difference?
How is copy trading different from managed FX accounts?
One of the biggest differences between copy trading and a managed fx account is that you still have full control of your money. With a managed forex account, you will simply give the fund manager your money. Quite often, you capital is locked in and the profits or losses are at the mercy of the forex fund manager.
The costs of opening a forex managed account are also quite high, which puts off many of the average retail traders.
With copy trading, you can sign up to a service for as little as $100. In this method, you simply connect to the trader whose trades you want to copy. This connection can be automatic, depending on the trading platform you are using. Or in most cases, the copy trading can be done with a custom expert advisor.
The trades from the main account are automatically copied onto your trading platform with little to no management required from your end. This also means that with a forex copy trading account the funds are still held by you. If at any point you see that the copy trading is resulting in losses, you have the choice to stop the service.
The cost for using copy trading can vary, but it is certainly cheaper compared to the fees charged by a managed forex account. Typically, the trader can charge a flat fee or charge a commission on a per trade basis.
Despite these fees, the overall costs are quite small, considering the fact that you are not trading the account yourself. Many traders however make the mistake of not making enough background checks into the trading account that they want to copy.
As a result, it can lead to using a service that is poorly managed or one that comes with a high risk and shows big returns in a short span of time. Signing up to such accounts can be risky and can even lead to losses at some point.
Why should you use a copy trading service?
As mentioned earlier, copy trading is not for everyone. It is to be used only if you do not have the time to trade, or do not have the skills. Copy trading, although lucrative as it sounds comes with risks as well. An underfunded highly leveraged trading account can be easily blown up if you do not use the appropriate copy trading service.
Still, it is a good way even for regular traders to make use of such a service in order to diversify their risks. The lower costs makes it easy for anyone to sign up to a copy trading service and have the trades being automatically replicated onto their trading accounts.
However, as with anything, it is advisable that traders apply due diligence before signing up for such as service, as it is just as easy to lose money even with a copy trading service.