Loading...
No results

The Benefits of Copy Trading Forex

Fusion Markets

post content image

In this article, we go through everything you need to know about forex copy trading and how you can gauge the benefits and drawbacks it offers to both beginners and experienced traders.

  

What is Copy Trading?


Copy trading is software that is used to duplicate the trading strategies of selected traders.  

 
While this may sound like “mirror trading” (a technique used to mimic another traders strategies), the key difference is in copy trading the copying trader has their account linked to the account of the trader being copied. This means that whenever the trader being copied opens, closes, or alters a position these actions are also applied to the linked account (the copying trader).  



What’s the Difference between Social Trading and Copy Trading?


Before we dive into more details about copy trading, it’s important to distinguish between copy trading and social trading, as they are often mistakenly considered to be one and the same. Since we have already made clear what copy trading is about, let’s go into what social trading is, and how it might differ from copy trading. 


In essence, social trading is a combination of social media and investment. In social trading platforms, you can directly communicate with other investors, and exchange information about what trades to perform in a given time. This allows more people to collaborate. 


The main advantage of this is that you can analyse the trades yourself, meaning in some cases, you can try to see if there are any errors in making the trades before you execute them yourself. 


In mirror and copy trading, traders are in most cases using automated software to mimic the strategies of selected traders. 


In both mirror trading and social trading, you are not directly following someone’s trades, but are instead either automating their strategy (mirror trading) or manually following their strategy (social trading). 


In contrast, copy trading follows the trades of the selected trader, including when a position is opened and closed, as the accounts are linked. 


While social trading involves a closer look at trades and is great for people who want to learn trading by experiencing it first-hand, it also includes investing more time in research on the terminology and strategies of the industry.  


It should also be noted that with social trading, you might still be solely responsible for the trades that you perform. You only gain information from other traders within the social trading platform, and you can't automatically execute the trades based on other traders, as copy trading platforms allow you to do. 


In a sense, the main difference is in the way people approach trading in the first place.  


For those who are keen on learning everything about trading, social trading is a fantastic place to start. They gain knowledge along the way as they perform trades themselves. They copy other traders but also do their own research in the process, because they want to know the reasoning behind those trades.  


Copy trading, on the other hand, is for people who want a hands-off approach to trading, who prefer not to have to constantly monitor their trades. It’s for people who would rather just trust their trades to an experienced trader or someone they know personally.  




   Manual Trading     Copy Trading       Mirror Trading      Social Trading  
Beginner Friendly     No     Yes     No    Yes
Fully Automated
     No    Yes     Yes    No
Algorithmic     No    No     Yes    No

 


Why Should I Learn About Copy Trading?


These days, when markets are monitored around the clock, a variety of strategies are called for and across various asset classes.  


Investors might favour some strategies they have applied for a long time and with good results, but there’s no guarantee that those strategies will always work in the future. 



History of Copy Trading


While popular now, the first iteration of copy trading goes back to 2005, when researchers found a way to create an algorithm that could replicate trading behaviours.  


This use of algorithms quickly grew in popularity as investors and brokers picked up on it. This became the birth of mirror trading. 
 

However, it wasn’t long until brokerages and popular traders used the popularity of mirror trading to instead allow investors to link to their account, and for a small fee, allow investors to get complete exposure to their positions and strategies. 


Copy trading has turned out to be a unique way of getting access to the financial markets. The innovation spread to others who wanted to invest in foreign exchange, crypto or stocks but didn't have the time to follow markets, analyse information, or devise strategies they weren’t even sure would work.  



What Are the Benefits of Copy Trading? 


Copy trading has several benefits. These fall under two main categories: Income and Learning.  


You Earn Passive Income


Copy trade forex allows for passive income. You only need to set up your account, find a reputable investor that has hopefully been investing or trading for many years and has a reliable track record with few bumps along the road in their performance. Ideally, they take less risk than the average investor by holding fewer drawdowns and accessing markets you wouldn’t either get exposure to (e.g., Forex, Commodities etc.).  


In a way, to copy trade forex is to ride the wave that the experienced investor is creating and profit from it. 


Of course, investing in this way is not entirely risk-free. That is what makes the other benefit category, learning, more significant if you’re a beginner trader. 


You Learn from the Experts


One crucial benefit of copy trading, which beginners should be aware of, is that it can save them tons of time learning the fundamentals of forex trading.  


Learning how to analyse market information and plan a strategy from scratch can take a long time. Copy trading helps shorten that learning process by following the market in real time with actual skin in the game.  


You can experience how seasoned traders approach trading and pick up ideas from them. Eventually, you may even make your own variations of their strategies.  


You Learn How Experts Handle Losses


That doesn’t mean you should blindly trust what an established investor is doing with their trades. Even experts make mistakes.  


In fact, good investors study their past losses to identify errors in their approach and make adjustments, intending to minimise future risk further. 


Among the things you can also learn from copy trading, then, is how to recognise these mistakes for yourself, despite an expert’s opinion or because of an expert’s mistake, when a trade will result in a loss. 


And from the expert traders’ example, you learn how to learn from your mistakes. 



What Are the Drawbacks of Copy Trading?


Like all other investment strategies, copy trading has its fair share of disadvantages across any platform.  


Even Experts Make Mistakes


As mentioned before, even professional investors can make mistakes. They might trade something they wouldn’t normally trade, or refuse to close a trade when they should have. These are common mistakes we can all make due to our hidden biases. It's best, therefore, to partially monitor your investments as well, and not passively hope for the best. Ideally, you’re following along and can understand the reasoning for why the trader you’ve followed has done what they’ve done.  


Investing Involves Costs 


For people keen on investing in high volume, the commission fee that professional investors take can sometimes add up if money has already been lost through a bad or missed strategy.  


With a copy trading platform like Fusion’s, you only pay fees for any positive performance. There are no hidden management fees or entry or exit fees. You simply agree to the performance fee when signing up and away you go.  



Dealing with Drawbacks


Like everything else, copy trading has its pros and cons. With careful decision-making, proper research, and intelligent risk management, you can maximise the benefits of copy trading and minimise its drawbacks.                                      



Final Thoughts 


There isn’t much difficulty to copy trading. All you're doing is finding someone you know with a decent track record which has steady gains with minimised risk and hopefully mimicking their strategies for trading in the markets.  


That can be done by looking at investors’ trade history and analysing their trade entry (both buy order for long positions and sell order for short positions). At least two years of history is a good place to start.  


Overall, copy trading can minimise the risk of capital loss if you have found the right trader. For professional investors already familiar with various strategies, copy trading is still a good option - it might get you access to an uncorrelated asset class they might not have traded before or sharpen their own skills by following and learning from someone else.  


If you’d like to get started with copy trading, Fusion offers a range of options for both beginner and seasoned traders. Fusion+ allows traders to copy trade some of the most successful traders in the financial markets.  
 

We also offer a copy trading service through our partner DupliTrade. For those who wanted more of a social trading experience we also provide that with our partner, Myfxbook Auto Trade. 


If you’d like to learn more, contact us and we’ll happily answer any questions you have about copy trading, Forex or CFDs.  




FAQs


What’s the main benefit of copy trading? 


The main benefit of copy trading is to automate the investors' trading and minimize risk. It can also prevent slippage in buy and sell orders because most copy trading platforms are fast and automated. 


How does copy trading work? 


It works by copying the strategies of other experienced investors and applying them to your portfolio. 


Can I use MT5 and MT4 for forex trading? 


You can use MT5 and MT4 for forex trading. While MT4 is explicitly designed for forex investments, MT5 has a range of other assets, both centralized and decentralized. 


What are the risks of copy trading? 


The main risk of copy trading is that even experienced traders whose strategies you might copy can make mistakes. You have to monitor your own investments to spot issues at once if something goes wrong. 


Thousands of brokers are ready to help you invest. Experience copy trading with MT4 or MT5. Sign up now! 


We’ll never share your email with third-parties. Opt-out anytime.

Relevant articles

Trading and Brokerage
post image main
Index CFD Dividends | Week 30/09/24

Read time: 3 minutes.


Please see the table below for any upcoming dividend adjustments on indices for the week starting September 30th, 2024.



undefined

* Please note these figures are quoted in the index point amount

 



What is a dividend?


Dividends are a portion of company earnings given to shareholders. As indices are often composed of individual shares, an index dividend pays out based on individual shares proportional to the index’s weighting.


Trading on a CFD Index does not create any ownership of the underlying stocks, or an entitlement to receive the actual dividends from these companies.

 

What is an ex-dividend date?


An ex-dividend date is the cut-off date a share must be owned in order to receive a dividend. If an investor buys a share after the ex-dividend date, then they will not be entitled to earn or pay the next round of dividends. This is usually one business day before the dividend.

 

Do dividends affect my position?


Share prices should theoretically fall by the amount of the dividend. If the company has paid the dividend with cash, then there is less cash on the balance sheet, so in theory, the company should be valued lower (by the amount of the dividend).


Due to the corresponding price movement of the stock index when the ex-dividend date is reached, Fusion must provide a 'dividend' adjustment to ensure that no trader is positively or negatively impacted by the ex-dividend event.

 

How will the dividend appear on my account?


The dividend will appear as a cash adjustment on your account. If your base currency is different from the currency the dividend is paid out in, then it will be converted at the live FX rate to your base currency.

 

Why was I charged a dividend?


Depending on your position, given you are holding your position before the ex-dividend date, you will either be paid or charged the amount based on the dividend. Traders shorting an index will pay the dividend, whereas traders who are long the index will be paid the dividend.

 

Why didn’t I receive my dividend?


You may not have received a dividend for a number of reasons:


- You entered your position after the ex-dividend date

- You are trading an index without dividend payments

- You are short an index


If you believe the reasons above do not apply to your position, please reach out to our support team at [email protected] and we’ll investigate further for you.




Forex Trading
CFD
Dividends
23.09.2024
Trading and Brokerage
post image main
The Real Cost of Forex Trading

Read time: 14 minutes.


Understanding the characteristics of the forex market is crucial for success. The concept is simple; forex trading involves buying and selling currencies with the aim of making a profit. However, many new traders dive into this market without fully grasping the real costs involved. In this guide, we'll explore the hidden expenses that can impact your trading profitability and provide tips to incorporate into your trading and avoid any unnecessary costs.

 




Understanding the Hidden Costs



Spread and Commissions


When trading forex, you'll encounter bid and ask prices. The bid price is what buyers are willing to pay, while the ask price is what sellers are asking for. The difference between these two prices is known as the spread. This spread represents the cost of trading and can vary depending on market conditions and the broker you're using. Additionally, account types such as Fusion Markets’ Zero account, don’t have a spread, but rather commissions on each trade. This can be beneficial to traders who are looking for a regular-cost solution.


Understanding the impact of spread on trading costs is essential. Even seemingly small spreads can add up over time, affecting your profitability. Different brokers offer various commission structures, including fixed or variable spreads and commission-based pricing. It's crucial to compare these structures and choose the one that aligns with your trading strategy.


Overnight Financing Fees


When holding positions overnight, you may incur overnight financing fees, also known as swap rates. These fees are charged for the privilege of keeping a position open beyond the trading day. Calculated based on the interest rate differential between the two currencies being traded, overnight financing fees can eat into your profits over time. Long-term traders should carefully consider these fees as they can significantly impact overall profitability if you’re holding a position with a negative swap for multiple days or weeks.


Slippage


Slippage occurs when the execution of a trade differs from the expected price. It can be caused by market volatility, liquidity issues, or delays in order execution. Slippage can lead to unexpected losses or reduced profits, especially during fast-moving markets or when trading large positions.


To minimise slippage, traders can use limit orders, advanced trading algorithms, or avoid trading during periods of high volatility, such as major news releases or the day rollover.




Tools for Transparent Financial Analysis


Fusion Markets Spreads Tool


Trading Journal


Keeping a detailed trading journal is essential for tracking your performance and identifying areas for improvement. Your journal should include details such as entry and exit points, trade duration, position size, and reasons for entering the trade. Analysing this data can help you identify patterns in your performance, enabling you to refine your strategy, and optimise your trading approach.


Performance Metrics


Key performance metrics such as win rate, risk-reward ratio, and drawdown are valuable tools for evaluating your trading performance. A high win rate alone does not necessarily indicate success if the risk-reward ratio is unfavourable or if drawdowns are excessive. By calculating and interpreting these metrics, you can gain insights into the effectiveness of your trading strategy and make adjustments accordingly.


For example, a trader might have a win rate of 70% but still not be profitable. By analysing their performance metrics, the trader can identify that they have an inadequate risk-reward ratio; meaning that their losing trades are, on average, larger in value than their winning trades.


Historical Data Analysis


By leveraging past market movements and trends, traders gain valuable insights for informed decision-making. Whether assessing the viability of a trading strategy or gauging potential risks, historical data provides a rich tapestry of information.


Using historical data, traders can back-test strategies. Back-testing involves testing a trading strategy using historical data to see how it would have performed under past market conditions.


By incorporating historical data into risk management practices, a trader can better anticipate potential risks and adjust their strategies accordingly.


In the ever-changing world of trading, historical data becomes like a guiding light, preparing us for what could happen, based on previous events. In turn, this knowledge allows traders to make more informed decisions. You can view Fusion’s Live and Historical spreads to stay informed.



Tips for Transparent Financial Analysis


undefined



Set Realistic Profit Expectations


It's essential to set realistic profit expectations based on your trading strategy and risk tolerance. Avoid overestimating potential profits and understand the relationship between risk and reward. Remember that trading involves inherent risks, and losses are inevitable.


Practice Risk Management


Implementing proper risk management techniques is crucial for preserving your capital and long-term success. This includes setting stop-loss orders to limit potential losses and employing position sizing strategies to manage risk exposure effectively.


Managing open trades by tightening your stop as the derivative moves in your intended direction can also boost your R-multiple and improve your return over the long-run.


Continuously Educate Yourself


The forex market is dynamic and constantly evolving, so staying up to date on market trends and developments is essential. Continuously educate yourself through books, online courses, and seminars to refine your skills and stay ahead of the curve.


Choosing Reputable Brokers with Transparent Fee Structures


Selecting a reputable broker with transparent fee structures is paramount. Before committing to a broker, thoroughly research their reputation, regulatory compliance, and fee structures. Don't hesitate to ask questions and seek clarification on costs to ensure transparency and avoid unexpected expenses. 



Conclusion


Navigating the hidden costs of forex trading requires a combination of knowledge, skill, and diligence. By understanding the various expenses involved, utilising tools for transparent financial analysis, and practising sound risk management, new traders can increase their chances of success in the forex market. Continuously educate yourself, choose reputable brokers, and always prioritise transparency in your trading endeavours.


If you want to know more about Fusion Markets, our products, fee structures and services, please contact a member of our friendly team or visit our live chat on our site. 

Forex
Trading
Tips
08.08.2024
Ready to Start Trading?
Get started live or get a free demo