Investing in one of the largest financial systems in the world can no longer be categorized as an act confined within the “walls” of Wall Street. The past few decades have seen the birth and indeed, the rapid surge of retail investors and traders in the foreign exchange market —or Forex.
The Forex market is known for its seemingly lucrative opportunities, offering so many hopefuls the opportunity of making large profits in a market that trades more than $6.6 billion daily. However, due to its volatility, the forex market is also known for dashing the hopes of many more, liquidating the income of a host of investors due to ill-timed trades or poor trading strategies.
Many social trading platforms, such as Mtrading have brought the forex market closer to investors, further offering products and instruments that diversify and increase the portfolios of their clients.
One distinct feature of Mtrading is that it is a forex copy trading platform. However, various questions stream from the above: what is copy trading? When did traders begin to use copy trading as a strategy? How safe is copy trading as a strategy for trading?
This article seeks to highlight and discuss the above questions.
What is Copy Trading?
To put it simply, copy trading is the act of one trader copying —either manually or automatically— the trading actions of another trader. The latter usually is an investor with a wealth of experience under his belt, who trades devoid of sentiments, emotions, and fear which usually upsets the former, who are mostly new investors in the forex market.
This way, you —the newbie— not only invest in the approaches and strategies implemented by the established trader, but you also invest in the trader’s experience, while simultaneously minimizing risks on your end.
But copy trading wasn’t a financial product offered by retail investors from time immemorial, it evolved amongst the retail investors with the global revolution of the financial system —even though the strategies existed long ago— eventually becoming a trend amongst retail traders and investors. Therefore, we need to highlight the history of copy trading, to further aid in understanding the concept as a whole.
The History of Copy Trading
As earlier stated, the term “copy trading” only existed relatively recently, even though such a strategy has been in action for quite a while. Before the advent of the internet and copy trading software, seasoned investors were known for communicating their potential positions on the market through traditional newsletters —the methods of the old-school Wall Street.
With the turn of the late 90s and of course, the Internet, official trading rooms began to spring up. ‘Virtual rooms’ were created where a trader could recreate a particular transaction. This concept became quite popular and eventually, people began to pay a certain fee to use the service of these chat rooms.
With evolution came advancement, and automated replication soon became a possibility. The idea of automatically opening and closing positions sounded like a lucrative opportunity for traders, and in 2005, the concept of ‘automated trading’ or ‘algorithmic trading’ was formed. These strategies for trading paved the way for copy trading and other similar types of strategies such as mirror trading and social trading
By 2010, many financial brokers began to offer this product. Mtrading was established two years later and since then, has gone on to become one of the world’s foremost social trading platforms in the world. The space of retail investors is expanding rapidly as well, with the industry predicted to be valued at €70 billion by 2025.
How Safe Is Copy Trading As A Strategy?
There are various reasons why copy trading is a safe and effective means of trading in the forex market. These include:
1. More efficient trading and investing
One of the usefulness of copy trading is that it is efficient. After you —the copy trader— registers with a retail forex broker and begin to follow a particular trader’s position, your activities henceforth, are automated.
Insofar as you trust the track record of the particular trader you are following, you only have one thing to do —sit back and relax!
Although, it should be noted that risk is not totally eliminated from trading, and will never be, no matter the strategy. What copy trading does is that it enables you to take a safe, calculated-like risk by following such an experienced trader. Further, it enables you to garner enough time to amass a large database of knowledge in the forex market.
2. Copy Trading is a great strategy because it utilizes the knowledge of other investors:
As earlier aforementioned, there is a calculated risk that comes with employing copy trading. But it doesn’t stop there.
This technique safely eases you into the world of forex, allowing you to gain access to untapped market knowledge. Under certain market conditions, you can utilize the knowledge of other investors, either leaving the entire decision-making to them or imitating their moves on your own. With this, you are allowed to gain exposure to sectors you may not have known of before.
3. Diversity into various unknown markets
Finally, flowing from the above, your exposure to the forex market widens with copy trading in a safe and effective manner
Copy Trading allows you to lean on the strength and expertise of others to gain entry into known marketplaces. Using this strategy, you learn the unknown of the forex market.
In summary, there’s no position taken on the forex market that does not come with its own risk. As earlier stated, this strategy is safe because it minimizes your loss, leaning on the wealth of experience of other established investors.
However, you can still lose all or part of your capital. This is why Mtrading and other respectable trading platforms always advise their investors to only deal with the capital they can afford to part with. This should always be a vital factor in your risk management strategy, allowing you to trade responsibly and safely.