What Is Copy Trading and How Does It Work?

Copy trading allows users to benefit from the expertise of other traders without having to learn market analysis. Here’s how to get started.

Key Takeaways:

• Copy trading allows users to replicate the trades of other traders.
• Traders share their portfolio weights and order flows so their followers can automatically copy their trades.
• Followers benefit from the expertise of the trader without having to learn market analysis or develop their own strategies.
• Users can research a trader’s past performance to identify profitable strategies to copy.
• Other options like Dollar Cost Averaging (DCA), trading bots, and timing the market each have pros and cons, as well as similarities and differences to copy trading.

What Is Copy Trading?

Copy trading is a feature available on several trading platforms that allows users to replicate the trades of other, more experienced traders on the platform. Traders who choose to share their portfolio weights and order flows can have their strategies automatically copied by followers. 

This gives cryptocurrency novices an insight into the expertise of potentially more proven traders without necessarily having to analyse markets or develop their own strategies from scratch. Copy trading has grown in popularity, as it offers a hands-off way for people new to the world of cryptocurrency to benefit from potentially successful trading strategies.

How Does Copy Trading Work?

On platforms that support copy trading, traders who want others to copy their portfolio typically need to opt-in and have their account approved. Their trades are then visible to potential followers, along with performance metrics like returns over various time periods. 

Users can browse different traders’ strategies to find ones that match their risk tolerance and investment goals. Once a trader is selected to copy, their portfolio weights and subsequent trades are replicated in the follower’s account. 

From there, the follower’s portfolio moves in tandem with the trader they copied, automatically executing the same buys and sells. This potentially allows profits from prebuilt strategies without the follower needing trading experience of their own, though properly researching the market and engaging in their own analyses is likely to improve chances of success.

How to Find a Trader to Copy

When researching traders to copy, pay close attention to metrics like total return, risk-adjusted return, volatility, maximum drawdown, trading frequency, and length of trading history. 

Beyond numbers, followers should consider reading trader descriptions to understand their approach and whether it aligns with their objectives. Consider diversity by choosing traders specialising in different tokens or sectors, strategies, holding periods, and risk profiles. 

Users might also be able to copy subsets of multiple traders’ portfolios to build their own personalised blend. Whichever trader a user selects, make sure to monitor their ongoing performance and be prepared to disconnect if returns deteriorate. 

Maintaining a diversified basket of several copied traders could be a lower risk approach than following any single trader.

Alternatives to Copy Trading

Copy trading isn’t the only option for novice traders to gain exposure in the cryptocurrency market. Below are three of the most popular trading strategies in the cryptocurrency space.

Dollar Cost Averaging (DCA)

Dollar Cost Averaging (DCA) involves regularly investing set amounts of money at fixed intervals, such as $100 every week or $500 every month. This strategy aims to reduce risk by averaging the price paid over many trades as opposed to lump-sum investing. 

DCA helps take emotion out of the process and avoids trying to time the market. Users implement DCA by setting up recurring buys that automatically deposit funds on their schedule. The steady investments are designed to accumulate more tokens when prices are lower (and fewer tokens when prices are higher) and average out costs over the long term.

Read more about DCA in How Does Dollar Cost Averaging Work?

Trading Bots

Trading bots are automated software programmes that execute buy and sell orders according to predefined trading strategies and rules. Bots can implement strategies like trend following, arbitrage, or mean reversion using indicators or signals. They scan the markets, analyse price data, and autonomously make trades based on the parameters. This allows the strategies to be traded around the clock without constant monitoring and management from humans. 

However, while bots automate strategy execution, those who design them still need trading experience and technical skills to research, design, backtest, and optimise the bot’s code. Issues like slippage and strategy effectiveness also need monitoring over time.

Learn how to use trading bots on the Crypto.com Exchange.

Read more in Boost Crypto Trading With Telegram Trading Bots: Everything to Know.

Timing the Market

Timing the market is the practise of trying to predict future price movements in order to buy low and sell high. Investors timing the market typically analyse market trends, fundamentals, economic reports, and technical indicators to forecast entry and exit points. Fundamental analysis examines factors like token utility, platform usage, and industry developments. 

Technical analysis involves studying charts and patterns in price and volume changes. While successful market timing can yield high rewards, it is notoriously difficult even for experts and requires correctly judging often unpredictable market fluctuations. Trying to precisely buy bottoms and sell tops can frequently backfire, so market timing requires discipline, risk management, and an acceptance of inevitable missed opportunities.

Read more in What Influences the Price of Crypto?

Also check out the latest macro trends in Crypto.com’s monthly Alpha Navigator reports.

Which Trading Strategy Is the Best?

Each of these strategies has its pros and cons, and possesses similarities and differences compared to copy trading. For instance, DCA also involves autonomous execution but is limited to one type of strategy. 

Trading bots offer diverse types of strategies (although limited to systematic) in addition to being automated, but they could sometimes require discretionary setting of parameters and may also be subject to hacks and bugs in the code. 

Timing the market gives more control over entry and exit points, though market timing is difficult to consistently get right, even for experts. 

Copy trading provides diverse pre-made strategies, autonomous execution, as well as tracks records for comparison. However, it is prudent to still monitor copied strategies in case they change or returns deteriorate. 

Traders should consider their experience, interests, skills, and available time to determine the best fit.

Conclusion

Copy trading is one way for cryptocurrency novices to leverage the experience of other knowledgeable traders. With the automatic replication of strategies, followers can potentially benefit from positive returns without developing trading skills of their own. 

Properly researching and selecting traders to copy can enhance the copy trading experience, as can combining it with other strategies like DCA, trading bots, and market timing.

Due Diligence and Do Your Own Research

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