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Why invest in copy trading?
Today anyone can start a trading account and experiment trading forex, stocks or commodities. Sometimes investors who originally wanted to build passive income stream, get mislead by the variety and affordability of options and end up actively trading on financial markets themselves. Although this approach can be profitable, it requires deep knowledge of the markets and understanding of both fundamental and technical analysis. Not to mention that monitoring market rates and doing market research takes time, therefore trading can barely be considered a passive income. Copy trading is a more suitable alternative for busy people building a passive income portfolio.
Quite often novice investors don’t think of copy trading initially, because this concept is still relatively new. But the idea of copying other investors, especially the most successful and famous ones, such as Warren Buffet or Carl Icahn, have been around for years. This method is called Copycat Investing and is widely used by the market participants. Unfortunately, following the greatest investors has a lot of downsides. First problem is the lack of information—not every trade of Warren Buffet is disclosed publicly. The second problem is the difference in portfolio size. Most copycats have far less money on hand than Buffet’s Berkshire Hathaway Fund and therefore simply can’t afford taking same risk levels. Another difficulty is a time lag, a trader needs to get the information about the original trade first, then manually copy it into his/her own portfolio. This time lag can be crucial, especially because a lot of people all over the world are doing the same.
Disadvantages of Copy Trading
As it always happens with money, you need to learn how to invest in copy trading the right way in order to be successful. The growing popularity of trading platforms leaves us in a situation where we have too many choices. Some services allow anyone to become a forex strategy provider, no matter whether they have trading experience or not. Others, including MyDigiTrade, prescreen everyone by analysing stability of their trading method, reliability and potential risks, to ensure they meet certain safety requirements. Having a wide selection of strategies available for investing is good in general, but you need to be careful to select the ones that fit. Best way to do it is to have a thorough look at the stats provided by copy trading platform. It’s very easy to get attracted to the high profitability, but don’t let yourself to be blindfolded by it. Always check the volatility and maximum drawdown data. Make sure you have enough money in your portfolio to afford and even exceed that, otherwise your trades might be stopped out by the broker. Another important step is to look at current open trades of the strategy provider, this is the only way to ensure the strategy is still profitable.
Steps to creating strong passive income stream from copy trading
Once you learn the basics, making money online with copy trading becomes as easy as it sounds.
Choose a copy trading platform – There are a lot of copy trading platforms and services available over the internet. Important things to look at are the commission structure (whether the service is free or paid), eligible brokers and their commissions, quality of strategies offered and your availability to set custom parameters such as stop-loss or maximum slippage.
Register an account – If you are not sure whether you have chosen a reliable platform you may opt to test it with a demo account at first. Once you gain confidence in a service connect a real money account. Start small and gradually increase your investment when you start getting profits.
Carefully pre-screen strategy providers -Following an experienced trader is the easy way to create strong passive income stream. But how do you find one? Of course, strategy providers on copy trading platforms are not nearly as famous as Carl Icahn, but many of them are able to bring you amazing returns on investment. Now your job is to determine which strategies are trustable and which are not. Again, when selecting a strategy to follow compare complex of stats and different performance characteristics including execution time, average number of trades and most importantly make sure you have enough money to tolerate the drawdowns.
Don’t put all eggs in one basket – You have most likely heard that when it comes to trading past results don’t guarantee same performance in the future. To minimise risk and diversify your investment portfolio, don’t invest all your money into a single strategy. Choose several reliable strategy providers with low to moderate risks and test them with a minimum recommended amount first.
Track your results regularly – Even experienced traders sometimes make mistakes. “In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten”, — said Peter Lynch, one of the greatest investment fund managers of all times. Track your results and adjust the portfolio as you go. Don’t rush to exit the strategy if it experiences a temporary drawdown. Try to get the whole picture before making any decision.
One of the biggest mistakes novice investors make is letting the fear of making a wrong decision stop them from investing. Accept that financial market doesn’t offer 100% protection to your capital, but it opens up so many great opportunities to building a passive income and finding freedom from day-to-day routines and the necessity to work. Learning how to invest in copy trading is a lot easier than learning how to trade independently, but you still need to be patient and give yourself plenty of time to learn.
