Last updated: April 8th, 2024
Copy trading lets you invest automatically without direct knowledge of the markets. By leveraging the technology of online brokerages, casual traders can replicate (copy) the moves of professionals.
Think of it as being able to glance at the exam papers of a top student back at school – except without penalty.
The answer is nuanced. Let me unpack it for you while answering the big question – is copy trading right for you?
(Related: How To Invest In Index Funds In Australia?)
Why Is Copy Trading So Popular?
Online share trading platforms that offer copy trading give you convenient, automated access to professional, popular, or so-called ‘master’ traders that you can mimic, without lifting a finger.
If your other life commitments do not allow you to dedicate more than a few hours a week to trading, copy trading provides an alternative.
You’re not alone, by the way.
Social trading platforms are gaining popularity, with the market expected to grow by 7.8% CAGR between 2021 and 2028.
Start Copy Trading With Our Featured Partner.
Copy top-performing traders in Australia, trade Australian and international shares with eToro’s share trading platform..
eToro AUS Capital Limited ACN 612 791 803 AFSL 491139. Social trading. eToro does not approve or endorse any of the trading accounts customers may choose to copy. All instructions and actions related to copied trades will automatically be replicated in your account. When you select to copy a particular trading account you will copy all of their future trades, and you may select also to follow their existing trades. Past performance of an eToro Community Member is not a reliable indicator of their future performance. Your capital is at risk. Refer to the Product Disclosure Statement and Target Market Determination (PDS and TMD) before transacting. See full disclaimer.
1. Copy Trading Lets You ‘Set And Forget’.
Once you’ve set up a copy trade, every move the trader you’re following makes will be automatically reflected within your trading account, too — whether they buy, sell or adjust stop margins.
Important!
The amount of your trades is proportional. If the trader you follow invests 10% of their account funds in a certain stock or cryptocurrency, you’ll also invest 10% of the total funds you’ve allocated to your copy trade.
2. Easy Access To Successful Traders.
You can choose from a range of top traders to copy with varying investment approaches, across a variety of asset classes. These traders are often referred to as signal providers.
Who are these traders?
These popular traders may also earn money by being followed or by offering subscriptions.
Although you’ll usually be able to review the trader’s bio and stats, it may be difficult to get an in-depth picture of their experience, expertise or the rationale behind their trades.
3. Compromise Between Knowing And Acting.
Nobody becomes an effective trader overnight. It requires research, an intentional strategy, and continually monitoring and refining your approach.
But beginner traders quickly realise that keeping up with industry news, researching stocks, and learning to draw insights from technical indicators takes a lot of time.
(Related: How To Buy Apple [APPL] Stocks).
Copy trading is investing based on the skills others have taken the time to develop — which may be a great stop-gap as you develop your own experience; or a strategy in its own right.
Important!
Even experienced providers might prefer to defer to someone else’s expertise when they trade in unfamiliar assets as a means to diversify.
Is Copy Trading Good For Beginners?
Yes and no.
Yes because:
- You avoid analysis paralysis. Most amateur traders struggle with developing a sound trading strategy and never start trading. Copy trading offers a shortcut to getting started.
- You bypass emotions. Novice traders make mistakes because of emotions (FOMO!) instead of using calculated logic or a nuanced understanding of market trends.
- You can make a profit. Thoughtfully approaching copy trading can lead to returns on your investment, although its unlikely to make you rich overnight.
Important!
Follow the basic principles of safe investing: take a long-term view and diversify across different master traders and investing strategies to mitigate risk.
No because:
- Copy trading does not eliminate risk. Instead, it shifts the risk from your ability to pick stocks to your ability to pick traders to follow. That means you need to be able to understand the risks and costs of different strategies master traders may use. For instance, do they use leverage or CFDs? Are they trading on very small price movements or holding open positions for weeks/months?
- Learning opportunities are limited. Copy trading is often sold as a great way to learn from experienced traders. In reality, reverse-engineering traders’ decisions is very difficult or impossible. There’s an argument for learning to trade so you can retain control and have a better sense of how to mitigate losses or avoid repeating mistakes.
- Copy trading still requires your attention. To be successful at copy trading, you’ll still need to know enough about the market and investment strategies to evaluate traders to copy. You’ll also need track how the master traders you’re following are performing, so you can adjust your spending or choose new traders to follow.
Start Copy Trading With Our Featured Partner.
Copy top-performing traders with eToro’s easy-to-use share trading platform.
eToro AUS Capital Limited ACN 612 791 803 AFSL 491139. Social trading. eToro does not approve or endorse any of the trading accounts customers may choose to copy. All instructions and actions related to copied trades will automatically be replicated in your account. When you select to copy a particular trading account you will copy all of their future trades, and you may select also to follow their existing trades. Past performance of an eToro Community Member is not a reliable indicator of their future performance. Your capital is at risk. Refer to the Product Disclosure Statement and Target Market Determination (PDS and TMD) before transacting. See full disclaimer.
What Are The Advantages Of Copy Trading?
Copy trading may not be as simple as it seems at first glance, but there are benefits. The major advantage, of course, is the opportunity to grow your wealth through investments without having to make all the tough calls yourself.
Additionally, people are drawn to copy trading for the following reasons.
1. Saves Time.
Once you set the parameters and choose traders to follow, the online share trading/brokerage platform you’re using will make trades on your behalf.
Additionally, copy trading can continue to happen even when you don’t have an internet connection, making it convenient for people who spend a lot of time flying or travelling through countries with patchy connectivity (e.g., executives, content creators).
2. Low Barrier To Entry.
Some platforms enable you to access copy trading with a small amount of funds ($200-500) added to your online brokerage account, as traded amounts are proportional.
While you’ll still pay brokerage fees on transactions, you typically wouldn’t be charged any extra fees for the right to copy trades.
(Related: Best CFD Trading Platforms Australia).
3. Highly Customisable.
Copy trading offers a high degree of flexibility, allowing you to customise settings to suit your risk tolerance and investment goals.
You can set a copy stop loss, which automatically closes your copy trade if the value goes down.
Important!
Let’s say you set the stop loss at 50% on a $1000 copy trade: if the value drops below 50% of $1000, the trade would close, and the remaining $500 would be returned to your account.
4. Diversified.
Spreading the risk reduces the risk. Copy trading platforms let you choose from a wide range of signal providers, which supports portfolio diversification.
You can pick and choose a stable of popular traders across a number of distinctly different investing strategies and asset types.
Important!
Don’t let that fool you into a false sense of security – like any form of investing, copy trading carries significant levels of risk.
What Are The Drawbacks Of Copy Trading?
One critical downside of copy trading is that even if you generate profits, you can’t truly put your finger on why.
That means you can’t duplicate this success, and you’ll always be beholden to other traders —which isn’t as straightforward as it seems, because you must continually review their approaches and performance.
1. No Control Over Trading Decisions.
By relying on signal providers’ trades, you relinquish a significant amount of control. You must accept that you may be unable to react quickly to market changes or news events.
That might be a good thing, depending on your experience or ability to spot a great opportunity. Investing on impulse or based on emotion is seldom effective.
(Related: How To Buy Tesla [TSLA] Stocks).
2. (Possible) Expenses.
Large trading platforms, (e.g., eToro and AvaTrade) won’t charge you for their copy trading features.
Meanwhile, low-cost brokerages treat copy trading as a bolt-on, and will charge you a monthly fee (e.g., SelfWealth gives you access to Refinitiv and charges you $9/month for this service).
3. Choosing Signal Providers Takes Time.
Don’t kiss on the first investment date. Take your time to choose the right trader to copy, because a lot of traders simply get lucky:
- Don’t evaluate potential signal providers by looking at their recent track record. Take your time to evaluate their long-term success (or lack thereof).
- Don’t put all your eggs in one basket, either. Choose a number of traders to follow, diversifying your assets across asset classes, industries and investing philosophies.
4. You Don’t Learn Much.
Copy trading can encourage you to become a lazy trader, and instil a false sense of confidence.
By blindly following experienced traders, you do not give yourself the opportunity to develop your trading strategies or gain a deep understanding of market dynamics.
5. All Usual Trading Risks Apply.
As with any form of trading, you’re exposed to a range of risks:
| Market Risk | Losses may arise from fluctuations in market prices – an inherent risk that is difficult to eliminate. In copy trading, market risk can arise if the signal provider’s trading strategy cannot adapt to changing market conditions. |
| Liquidity Risk | At times, you may not be able to sell an investment quickly enough or at a fair price. Liquidity risk can arise in copy trading if the signal provider trades in illiquid markets or assets or if a sudden increase in demand exists to exit the trade. |
| Systematic Risk | There are often risks in the entire market/asset class rather than specific individual investments. Systematic risk can arise in copy trading if the signal provider’s trading strategy is heavily correlated to a particular market or asset class. |
How To Get Started With Copy Trading?
Copy trading can be quite simple, but you must take the right steps to mitigate your risks.
1. Choose A Trading Platform.
Platforms vary in fees, available trading assets, and copy trading features. Be sure to weigh up those, plus the following:
- Are they regulated by the relevant body (ASIC)?
- Do they have a user-friendly interface?
- What’s the minimum investment amount?
- Are there numerous master/popular traders to choose from?
- Do they offer risk management tools?
- What are the fees and commissions?
- Is the customer support timely and thorough?
- What do other users say about it in reviews?
2. Open A Trading Account.
This step is usually fairly straightforward, but you will be asked to submit a couple of forms of identification, a tax file number and a document with your address on it.
Have those on hand in advance to speed up the process.
Important!
You’ll also need to deposit funds to use for trading. Only deposit the amount you want to invest (and only invest what you afford to lose).
3. Select Your Signal Provider (aka choose a trader to follow).
The final step is selecting an expert trader that fits your budgetary needs, short- and long-term goals, and trading strategy.
What should you look for?
- Performance: Look at the signal provider’s past performance to determine whether they have a consistent track record of generating profits. Look for a track record of at least six months or more and consider factors such as average monthly returns, maximum drawdown, and win rate.
- Trading Style: Consider the signal provider’s trading style and whether it aligns with your investment goals and risk tolerance. Some signal providers may use high-risk strategies that generate high returns but have a higher risk of loss.
- Fees: Look at the fees charged by the signal provider and the copy trading platform. Some signal providers may charge a percentage of profits or require a monthly fee, so it’s essential to factor these costs into your decision.
- Transparency: Look for a transparent signal provider about their strategy, trading history, and performance. Most platforms provide at least a few years of information on a signal provider’s trading history, which can help you make an informed decision.
- Communication: Look for a signal provider who communicates regularly and provides updates on their trading activities. Some signal providers may offer educational resources or training, which can benefit new traders.
4. Follow And Monitor The Trader.
Measure your success against your investment goals and use different tools and skills throughout your copy trading journey.
Ways to do this include:
- Tracking Your Performance: Regularly review your trading activity and monitor your account balance to identify trends and patterns in your trading; make adjustments as necessary.
- Analysing Trades: Quickly identify areas for improvement by looking at your trading history and identifying any trades that resulted in losses or missed opportunities.
- Learning from Signal Providers: Many signal providers offer educational resources and training, which can help you learn more about their strategy and the markets.
- Using Analytics Tools: Some copy trading platforms offer analytics tools that can help you track your performance. Data-driven decisions are vital whilst learning.
- Staying Up-to-Date on Market News: Read financial news articles, podcasts, and social accounts to stay ahead of market changes.
- Joining Trading Communities: Join trading communities or forums to connect with other traders and learn from their experiences.
Start Copy Trading With Our Featured Partner.
Copy top-performing traders in Australia and trade Australian shares with eToro.
eToro AUS Capital Limited ACN 612 791 803 AFSL 491139. Social trading. eToro does not approve or endorse any of the trading accounts customers may choose to copy. All instructions and actions related to copied trades will automatically be replicated in your account. When you select to copy a particular trading account you will copy all of their future trades, and you may select also to follow their existing trades. Past performance of an eToro Community Member is not a reliable indicator of their future performance. Your capital is at risk. Refer to the Product Disclosure Statement and Target Market Determination (PDS and TMD) before transacting. See full disclaimer.
Social Trading vs Copy Trading vs Mirror Trading.
Experts may use these terms interchangeably, but some differences are worth understanding to determine whether copy trading is right for you.
Social Trading:
- An umbrella term used to talk about trading activity driven by peers sharing ideas and insights through online communities.
- Involves traders interacting to get tips and adopt other’s strategies, without necessarily copying other’s trades precisely.
- Encourages collaboration and learning from others.
- Provides the opportunity to network with other traders in a social setting through chat rooms or message boards.
Mirror Trading:
- Allows investors to replicate the trades of multiple traders and is primarily used in Forex (foreign currency) markets.
- Differs from copy trading through its use of algorithms to identify successful trading strategies.
- Provides you with the benefit of creating a diversified portfolio of trading strategies.
- Automatically executes the trades into your account.
Copy Trading:
- Considered the more hands-off version of social trading.
- Focuses on automatically copying the trades of a signal provider.
- Allows you to benefit from the expertise of the signal provider without necessarily having to learn or understand their trading strategy.
- Conventionally involves your signal provider’s position automatically reflected on your account (identical profits and losses).
What Markets Are Most Suited To Copy Trading?
You can copy trade across all markets, including Australian and international stocks, forex, indices, crypto and commodities.
As with any investment, consider the underlying risk of different assets.
Liquidity risk is another reason to have a firm grasp on which markets and assets signal a providers play in.
Important!
Exotic currencies, obscure crypto with low trading volumes, and low-cap stocks may be harder to buy and sell quickly.
Copy Trading: Million Dollar Hack Or A Gimmick?
Copy trading has grown in popularity because it automates trading decisions so you can quickly invest in stocks, cryptocurrencies, and many other assets without in-depth market knowledge.
- Copy trading has drawbacks, including less control over trades and additional expenses.
- On the upside, you can make money from following the moves of a signal provider without significant effort.
However, your risk of losses is tied directly to the traders you choose to copy.
It pays to have enough awareness to feel confident in the strategies and markets different master traders may expose your investment to.
Ultimately, you’ll need to carefully research and evaluate signal providers and copy trading platforms before you begin. With the right tools and knowledge, you can automate your investment process and be well on the way to reaching your financial goals with copy trading.
Jody
Nelson says:
I attempted to use the “hack” to dodge conversion fees, but sadly after converting AUD to USD on a Wise account, there doesn’t seem to be a way to deposit that money into eToro; i.e. eToro recently disabled Wire transfers and Wise doesn’t support SWIFT transfers for sending USD to a bank in the US?
John Keys says:
CMC Invest are an abysmal in turning around new accounts.
Over 1 month to setup up an account with an investment trust, and still waiting. I was promised 5 business days.
Reg Watson says:
Given that China’s economy is going down the toilet how the heck do we expect an appreciation of the Aussie in 2024 ? We are tied to China.