If you’re a newcomer to the crypto space, you’re likely already feeling overwhelmed with everything. After all, the world of crypto trading can be really hard to navigate when there’s still so much to learn about it, and you’ve got no experience with it at all. Enter copy trading: a fascinating trading technique that has sparked everyone’s attention. Also known as mirror trading, this technique is quite literally what it sounds like: copying the trades of others in the market. But is it legal? Can you really make money with it? And what about the risks involved? These are all valid questions before you consider copy trading, and we’ll dive into them ( and more) in this guide, so keep reading!
How Does Copy Trading Work, and Is It Legit?
Copy trading means following the habits and behaviors of other traders, often by seeking out more experienced traders to copy, or by following the actions of trading bots. Copy trading is more social than other trading types because it involves interacting directly with other traders. While many individuals choose to follow the behaviors of well-known people, others copy trade among co-workers or friends because they are trusted within someone’s social circle.
If you’re wondering, “Is copy trading legal?”, you aren’t alone. Many have this concern when hearing that mimicking other traders’ moves is even an option. But to put it simply, it’s not illegal as long as it’s done through a regulated provider, which is already the case in many countries. Platforms providing copy trading generally need to adhere to financial laws and meet specific compliance standards to ensure transparency and safeguard users, so it’s crucial to check that the platform you’re considering for copy trading is licensed and operates within a set regulatory framework.
Is Copy Trading Profitable?
Copy trading can be a lucrative endeavor, but there are no guarantees, and it depends on which trader you choose to copy. And this task can be tough. You may, for example, feel tempted to choose very popular traders instinctively, such as Michael Burry or Michael J. Saylor. While they are good picks, you should bear in mind that traders handle finances in different ways, and you must absolutely do your research rather than blindly following. For example, a savvy trader may decide to deal primarily in futures, which are financial contracts in which two parties agree to buy or sell an asset at an agreed date or price in the future. Or they may prefer shorting, which involves borrowing an asset and selling it as they expect the price to drop. Then, you’d buy the same number of assets at a lower price, and return the shares to the lender, while profiting from the rest. If these two examples sound stressful, it’s because they are (at least if you are a beginner or lack a ton of cash to spare).
So, although a well-regarded trader does this, as a beginner, it may not be wise to follow them. Obviously, if these strategies are your cup of tea, then by all means you should follow a trader who uses them. The idea is to find someone who operates in a way you’re comfortable with and has similar trading beliefs, because this will make copy trading seamless. But how do you find out which trading styles you like, anyway? Well, it’s all a matter of trial, error, and research.
What Are the Risks Involved in Copy Trading?
Like any trading, copy trading involves real financial risk, so you need to be aware of it before diving in. First things first, even skilled traders can hit rough patches in their journey, and if the trader you’re copying is affected by market volatility or makes poor choices, your account will incur losses as well. Besides, even if a trader has an excellent track record, future results aren’t guaranteed. After all, markets change, and even consistent traders can see downturns.
In some instances, traders also take aggressive positions because they hope for high returns, so you need to keep in mind that if you’re copying someone who has this behavior, you will be exposed to a high degree of risk – maybe more than you’re comfortable with. This is why it’s crucial to check risk scores and spread your investments across various trades.
How Can You Copy Trade Cryptocurrency Effectively?
There would be no point in learning what copy trading is if you never learned how to do it effectively. This might sound strange, given that someone else is making most of the big decisions, but it’s half-truth that your success comes solely from another person (and this mindset can actually be damaging). Absolving yourself from your own trading is literally sleepwalking into disaster, and if you want to be efficient, you should learn how to copy trade crypto intuitively. It’s essential to learn when to follow a trader and when to sync with someone else, and for that, you want to understand the blind spots and limitations of the traders you’re interested in. In the end, no matter how skilled a trader is, they will have knowledge gaps and make their own mistakes, so remember this always, as it will help ensure you can back away from them when you foresee a situation they don’t really excel at.
In fact, this is precisely why some individuals decide to copy-trade crypto with those that they know personally, as having that connection with somebody means you already understand their limitations. Perhaps the best option would be to have a list of traders, made up of those who are globally revered as well as those you know intimately, either on a co-worker or friendship level. This will offer the best of both worlds. However, there’s also the possibility of not feeling comfortable copying anybody else, and in that case, what you have to do is disconnect from all the traders and take matters into your own hands.
The Bottom Line
Now you have a good overview of copy trading, which, as you can see, is a deeply rewarding activity. Syncing up your trades with someone else and watching the two of you succeed simultaneously makes trading a lot more intimate and connective. But of course, there are also a few risks to keep in mind before starting, and it’s essential to do your research and choose a reliable trader to follow.
