What is copy trading in crypto?

What is copy trading in crypto?

Robert McDougall 

January 9, 2024

Cryptocurrency

Remember when new crypto traders had to spend weeks, and even months, getting familiar with the volatile crypto market? Guess what? Those days are long gone! It is now easier than ever to start trading with the help of up-to-date and easily accessible training and educational resources, coupled with demo trading accounts. 

If this wasn’t easy enough, new and amateur traders can now also copy the trading strategies of experienced traders through copy trading. But how do you opt for copy trading? How does it work and are there any risks involved when you’re copying other crypto traders? 

Join us as we dive deeper into copy trading in this detailed article.

Understanding Copy Trading in Crypto

Copy trading in cryptocurrencies is an automated trading system that allows novice investors to mimic the actions of more seasoned investors. This allows for the purchase and sale of crypto assets, making profits without extensive knowledge or practice in crypto trading.

How Does It Work?

For this trading approach to make more sense, let's say you find Trader A, a professional trader with a history of bagging huge profits with their investment decisions. To seek profits from his expertise with an investment of $1,000, you copy that trader's actions by creating an account on the same platform. Now when Trader A buys BTC at $50,000, your account instantly performs the same transaction. 

If Trader A decides to sell when the price of Bitcoin reaches $55,000, your account will automatically sell your BTC as well, giving you the same percentage returns as Trader A. While copy trading is as simple as clicking a 'copy' button on trading platforms, you will have to set your account according to some parameters to limit losses. After all, there's no guarantee all of Trader A's trades will lead to gains.

In this regard, some parameters that are worth considering include:

  • The amount of money you wish to spend on copied trades.
  • Whether you want to copy a trader or their trades in fixed or proportional sequence.
  • The stop loss order level on the copied trades.
  • The maximum drawdown limits, i.e., a percentage level you set to suspend all copied trades if your account equity falls below it.
  • What crypto/token pairs do you want to copy from the trader.

Benefits of Copy Trading in Cryptocurrency 

As per our research, some potential crypto copy trading benefits include the following: 

Invest with Limited Trading Knowledge 

This trading approach allows beginner traders to step into the world of crypto trading and benefit right away, without any experience. However, this doesn't exclude the need for traders to learn about the market and prepare risk management strategies on their copy trading accounts. Some of these strategies include:

  • Setting stop-loss orders to exit trades automatically when in loss
  • Following the risk-reward ratio to compare expected returns and potential losses
  • Using position sizing to limit how much capital is invested from your account in each trade. 

Save Time by Automating Trades

Once you choose a trader to copy, the crypto exchange will automatically take care of the rest based on the parameters you set on your profile. This approach is less time-consuming compared to manual trading.  

Learn How Professional Traders Operate

When beginners use copy trading platforms like eToro, they can copy the trading tactics of more experienced traders while being able to watch and learn from them. This training can be useful in the long run, especially for new traders planning a future in crypto trading.

Risks and Limitations of Copy Trading in Cryptocurrency

Some unavoidable risks and limitations that come along with copy trading in cryptocurrency include:

Reliance on Another Trader's Strategies 

Even though copy trading platforms have become increasingly transparent about a professional's trading strategies, how much can you rely on an expert? Just because a strategy works once, it doesn’t guarantee profitable returns every time. So, should you risk your hard-earned money for their experience and preferred trading approaches? Moreover, how can you tell if that professional is a successful trader or just a scam? 

Copy traders can face losses when copying the wrong professionals, either due to limited trading experience or struggles to keep up with the ever-evolving crypto market. This is why we suggest you carefully consider the details of the trader you choose, including their success ratio, experience, and trading history. 

The best way you can do that is by copy trading on trusted and popular platforms like eToro that are completely transparent about their professional traders’ details. 

Unexpected Trading Losses Amidst Crypto Volatility 

Sure, profits from trading are great, especially when you don’t have to do much work. But what happens when the trader you're copying faces a downturn in the market? 

Just as a successful trader's wins are copied to your account, so are their losses. This is where you should decide whether to keep copying the trader during his/her lows or step away and look for better traders to follow.

High Trader Commission 

From our experience, usually, a larger budget is required to start copy trading in crypto. Professional traders often invest $500 or more, aiming for larger returns. To achieve similar trading outcomes, we need to invest a decent amount when copying their trades.

If you don't follow their strategy with a similar amount, it may not work as effectively for you. On the other hand, when you trade on your own, you can choose strategies that align with your budget and invest accordingly.

Another concern is the commission fee that you pay to copy a trader. Keep in mind that successful professionals with higher success rates often charge a higher commission. However, you need to calculate whether it is better to pay a higher commission to a top trader, or a lower commission to another trader, who might not have as good results.

Defects in Crypto Trading Bots 

No matter how well a crypto trading platform's software is, unexpected software errors and failures can occur anytime. Therefore, traders should monitor the trading process and stop all trading activities if any such error is leading to frequent losses.

How to Copy Trade Crypto

We’ve discussed how copy trading is a quick and convenient way to begin trading crypto.. Let’s now take a closer look at how you can set up your own account and get started with copy trading.

Choose a Platform 

With various crypto trading platforms supporting copy trading, it can be difficult to pick one. Here, you should pick a platform that supports your trading requirements through advanced features and accessibility to a wider range of crypto assets.

If you're a beginner, we suggest you go for eToro, a regulated platform that lets you automatically copy top-performing traders with one click. To make it easier for you, the platform also lets you choose how much to invest, which trader meets your trading goals, and whether to copy a trader’s entire profile or only new trades. 

This way, you can easily get started with copy trading even with basic knowledge about the different trading parameters, strategies, etc. Now, even though eToro does not offer standalone automated copy trading systems or bots, its CopyTrader feature comes with its own automated tools to improve copy trading efficiency.

If you’re looking for the best copy trading platform for professional traders, Bybit is a highly trusted option. This platform allows you to pick master traders with different risk profiles, trading styles, and performance metrics. Furthermore, Bybit features more options for professionals to adjust their profiles based on their own risk-taking preferences, including options like copy ratio, stop loss and take profits. 

In addition, Bybit’s automated copy trading also allows experts to execute trades more efficiently using APIs, bots, and advanced third party tools — enabling professionals to better implement their strategies.

Now, before you make your decision, here are some more of the best copy trading platforms we suggest you consider.

Find a Trader to Copy 

Now, find a successful professional trader on the platform you choose. When considering a trader, look into their trade statistics, profits, successful trade percentage, fees, and reviews. This will help you opt for a professional that meets your demands and expectations in crypto trading. 

Set Up Your Account and Invest 

Once you set up your account on the chosen platform, you can allocate some funds to copy trading. While you're at it, don't just go all in — Instead, the amount of money you invest should be proportional to your budget. You can also enhance your potential profit by dividing your investment and copying more than one professional trader.

Implement Risk Management Strategies 

Don't forget the possibility of losses and learn how to mitigate them in copy trading. The best way to do that is by adjusting your account settings using tools like stop-loss and position sizing. You can also adjust take-profit orders on your profile to close a trade when a cryptocurrency reaches a certain profit level. 

Start Copy Trading

Once your profile is set, you can start copying the trades of your chosen traders and monitor their activities. If there are any issues with the trader you are copying, you can always stop copying them and consider another professional.

Things to Consider When Selecting a Trader to Copy 

We’ve already discussed some key considerations when selecting a trader. However, the more careful you are, the better. In this regard, here are some more factors we found to be crucial when selecting a trader to copy:

  • Check out how well a trader has done in the last year or more. It's better if they have been trading longer, so you can see how they perform during good and bad market conditions. 
  • The best trader to follow is one whose results are consistent. You can evaluate this by looking at the trader's performance history graph. If there are frequent spikes indicating uncertain trading outcomes, look for someone else.
  • Check the trader's level of risk by seeing if they set stop-loss levels for each trade they open and how far in a trade they set these levels. When considering this, traders with no stop losses indicate the potential of maximum losses through their trades.
  • Lastly, you must check the trading style of your chosen crypto trader. This style includes the duration, timing, and frequency of trading. Only consider copying traders with a style that meets your availability and trading preferences, so it's easier to monitor their activities once you copy their trades.

Conclusion

Ultimately, copy trading is a convenient time-saving approach to trading crypto. However, it is important to remember that just like any other form of trading, this strategy comes with its risks.

So before diving into copy trading, we suggest you select the right platform and trader. Moreover, ensure that your account is tailored with effective risk management strategies, such as stop-loss orders, risk-reward ratios, and position sizing. 

We hope this comprehensive analysis answers all your queries regarding copy trading.


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