What is copy trading? (2024)

What is copy trading?

Copy trading is a branch of social trading, where one trader’s positions are copied by another trader’s account when they are opened or closed. This can be either automatic or manual – and it’s up to an individual to decide how they would like to approach copy trading.

Before you start copy trading, it’s important that you have carried out your own analysis on a position or particular market before you commit real capital to it. Remember that even if you are following the methods of an experienced trader, your capital is still at risk.

How does copy trading work?

Copy trading works by relying on social networks and social trading systems. When one trader opens a position, they can broadcast this information to other traders on the network, who can then decide whether they want to open the same position – or their automated trading systems can do it without additional input from the trader.

Often, the primary trader who broadcasts their positions has experience in the underlying market – and the copy traders might lack experience in this specific market, or they might be entirely new to the financial markets as a whole.

Example of copy trading

For an example of copy trading, let’s suppose that there was a domestic market crash in Brazil and you wanted to get exposure to the Brazilian real. If you felt that you didn’t know enough about Brazilian economics, politics or central banking policies to be able to make an informed decision, you could turn to copy trading and the expertise of another trader who is familiar with these matters.

At the same time, you would hope to get some experience and expertise in a market that you wouldn’t normally get exposure to.

However, as previously mentioned, before committing real capital to the advice of another market participant, you should carry out some analysis of your own – even if you are unfamiliar with the underlying market.

Pros and cons of copy trading

Pros of copy trading

Copy trading enables you to diversify your portfolio into markets that you are unfamiliar with but want exposure to.

Through copy trading, you can access another trader’s expertise or make the most of seasonal trends that you wouldn’t usually consider as a potential opportunity.

With copy trading, you can make the most of your time by basing your decisions on those of traders with proven track records.

Cons of copy trading

Copy trading can provide little incentive for traders to do their own research and learn about the markets.

Copy trading does not eliminate risk – and sometimes the copy trading notice boards could be used by traders that are seeking to influence a market’s price for their own financial gain.

While copy trading can help you when you first get started, it is not the only trading strategy available – but the allure of potential profits with little work might be enough for some people.

What to know before copy trading

Before you start copy trading, you should do your own market research – especially if you are unfamiliar with the way that a particular asset works. IG Academy can help you here, with resources and message boards to bring you up to speed with anything that you feel you could know more about.

We also offer in-platform trading signals, alerts and technical chart indicators. These enable you to receive notifications about how a market is behaving. Our technical indicators will help you to analyse historical price action and make predictions about what might happen to an asset’s price in the future.

To start copy trading today, follow the steps below:

Create or log in to your IG account
Do some preliminary market research
Find a social trading board
Copy the trades within the IG trading platform and open a position, making sure to set stops and limits to manage risk
Monitor and close your position