Editor’s note: This series of “ELI5” articles refers to the famous English acronym which means “Explain to me as if I were five years old”. The goal is not to infantilize the reader, but simply to give him keys to understanding concepts encountered in the cryptosphere and the world of trading.
If you are in the world of cryptocurrencies or the traditional stock market, then you have probably heard of the copy trading. However, this does not necessarily mean that you know what it is exactly. But don’t worry, we’ll explain everything to you.
In this article, we will see with you what copy trading really is. We will detail how it works and analyze whether it is a good method to earn money without too much effort or, on the contrary, something that must be avoided at all costs.
How copy trading works
As the name suggests, how copy trading works is pretty easy to guess. On some platforms, you have the option of following the trading operations of other investors. You can view their results and sometimes even chat with them. This is called social trading.
But copy trading takes things even further. When you like a trader, you have the ability to automatically follow what they are doing. With just a few clicks, you can tell the platform that you want to copy all the trades that the person you are following is going to make.
As you can see, it’s not rocket science to understand what copy trading is. It’s quite simple, but choosing the right traders to follow automatically is a little more complex to do.
Discover the copy trading option of the PrimeXBT platform
Is this a safe way to earn money?
When you invest, whether in the stock market, in cryptos or in other financial assets, there is always a risk. It is not possible to know with certainty what the future will hold for us. Because of this, even copy trading poses risks for investors.
Let’s take the case of a trader with good results over the last 5 years. So you naturally think that this is a person with good skills. It then makes perfect sense to choose to copy the trades he placed as this should earn you money in the future.
Unfortunately, there is no guarantee that its future results will always be as good. As the saying goes, “Past results are not indicative of future results”. Indeed, the trader may have been extremely lucky in previous years or the behavior of the market has changed drastically and the person concerned has failed to adapt to this new environment.
Diversification, the key to success
However, if you practice what is called diversification, you greatly reduce the risk of all traders starting to lose money. By placing your investments in different people with good results, you should in theory have several who will continue to earn money.
For example, if you decide to do copy trading on 20 different people by placing 5% of your capital on each of them, it is very unlikely that they will all end up losing money.
Similarly, on some platforms, you can do copy trading on cryptocurrencies, but also on traditional markets, commodities or even Forex. By choosing to follow traders with good results on these different markets, you drastically reduce the risk of your crypto trading portfolio.
Copy trading: what to remember
As we have seen, it is in fact a matter of automatically copying the trades of another person. However, you must carefully choose the individuals you will follow to ensure that they are competent, otherwise you risk losing money.
Similarly, it is advisable to diversify as much as possible in order to considerably limit the risk. Just because someone was good in the past doesn’t mean they will be good in the future. By spreading your capital over different traders, you therefore limit the risk of losing money.
If you want to try copy trading, know that PrimeXBT launched in 2020 Coveringits copy trading module which allows users of the site to literally copy the trading strategies of professional or very experienced traders.
Check out the full review here PrimeXBT as well as the review Prime XBT Covesting.
Crypto projects can be subject to volatility, don’t invest more than you can afford to lose.