Copy trading strategies
Although copy trading seems to consist of handing over trading decisions to other traders, it still leaves ample room for making strategic choices when it comes to choosing the traders you want to copy, determining the amount of capital to be allocated to each copied trader, making stops, knowing when one should stop copying the merchant, and so on and so forth. It is therefore wise to enter the copy trading arena armed with several copy trading strategies in your arsenal, to hire her if and when certain situations arise.
Hit when the iron is hot
As with any other type of trading, the key to a successful copy trading strategy is to know when to enter and out of a copy relationship. As in various financial markets, traders experience ups and downs, and you want to copy them at the beginning of the former, not the latter.
How can you know at what stage the trader is? It cannot be known with full confidence because traders are as unpredictable as the markets in which they trade, but there are a few warning signs. A good place to start looking for these signs is on the list of open retailer stores. Many times, the statistics in a trader’s profile will only reflect their performance based on the work done, but does not take into account the positions they currently occupy.
If a trader has a lot of such positions, especially if many of them are in the red and have been doing so for some time, banning a sudden market turnaround, this trader is heading for a downturn. There is no point in copying them now. But you might want to keep an eye on them in the future, because, once jobs are finally lost, the trader may be ready for a new upturn.
In contrast, a trader who has recently suffered several draws but has a good overall performance record and few open stores has matured with the potential to do well now that his list has been deleted. Remember, a good copy trading strategy includes not only previous performance but also the current situation of the trader, with a focus on the future.
Know when you need to let go
It is just as important as knowing when to start copying a retailer, and knowing when to stop. This can be more difficult than you think, due to the various psychological factors involved. With the misguided misconception that plagues every financial trader (the more money you invest in an investment, the harder it is to abandon it), by trading copies people tend to become emotionally attached to the traders they copy. And with good reason: most will have at least some kind of interaction with these traders, maybe even meet them on a personal level.
Regardless, constantly copying a trader that makes you lose money just doesn’t make sense as a copy trading strategy. Therefore, the only logical move, after the trader goes downhill, is to let him go. A good way to check yourself and make sure that your loyalty to the trader does not diminish your investment is to use the Copy Stop Loss tool that some social trading platforms provide. This way you define in advance how much money you are willing to lose on a given copy ratio, and your emotional interruptions will not prevent solid investment management.
Diversity is key
Copy trading can be significantly different from traditional market trading, but some things remain true for any financial trading strategy, namely the fact that portfolio diversification is the surest way to reduce risk and ensure long-term profitability. However, when trading copies, achieving diversity may require a little more research and careful strategic planning than traditional market trading, where diversity is quite self-evident.
To demonstrate, let’s look at an example of how easy it can be to end up with an unbalanced copy trading portfolio. Let’s say you started trading a new social trading platform, and when it comes to copy trading strategies, you couldn’t have come up with anything more original than copying the five online traders who showed the highest profit percentage last year. However, once your copying relationship is established, it turns out that all five traders trade exclusively in the EUR / USD market. Therefore, even though you supposedly invested in five different traders, you ended up with a very unbalanced portfolio, or to use colloquialism, with all your eggs in one basket.
To avoid such a nightmarish scenario, your copy trading strategy must consist of carefully checking the portfolio of traders you are considering copying. The safest way is to choose traders whose investments cover various classes of instruments – ie. Stocks, indices, currencies, commodities, etc ..
Keep in mind of course that traders can change their trading strategies as you copy them. Finally, they are not required to remain consistent in their investment choices and may choose to branch into markets they have not previously considered. It is therefore recommended that you carefully monitor your portfolio of copies as a whole to make sure that no previously “compatible” merchants – ie. A trader whose investments create a balanced portfolio – do not start to conflict or do not become too strong invested in any instrument. In such a case, it is advisable to stop copying one of the traders who are throwing out the balance of your portfolio and find a trader who fits better into your copy trading strategy.