Copy trading, also known as social trading or mirror trading, is a form of trading where individuals replicate the trades of others. This copy trading allows less-experienced traders to follow and automatically copy the trades of more experienced traders.
Trading platforms that offer copy trading will usually provide its users with several things. Ranging from a list of traders where users can copy trade from to the past performances of those traders. Furthermore, the historical trades and the general risk associated with the trades can also be viewed.
After this, a novice trader can decide (based on his own preferences) if he wants to follow a trader or in some cases even multiple traders. Ones the trader is selected, the allocation of funds is needed. This can either be a fixed amount or a percentage of your portfolio that you want to copy trade with. Once this is finished the trades will be executed similarly to the trades conducted by the trader you copied. Meaning that in real time it will open and close positions for you. And any changes made by the trader that you copied, will also be applied to you. Which includes things like trade size, partial exits and risk management.
But whats in it for the one I copy?
The trader that you copy gets a return over the money you invest. He (or she) gets a percentile return offer the positive return that he makes over other peoples money, usually around 15% of the profit. This 15% can be calculated in 2 ways, depending on the platform you use. Either 15% of the profit per trade or 15% of the profit over a certain time period. In the example below i will explain how both systems can have an impact on your portfolio.
When using a platform that gives 15% of the profit back to the trader, the system is as follows. 1 Bitcoin was bought at 10.000 and sold at 11.000. This would result in a total of 1000 profit, before the profit share of the copy trader. He takes 15% ( and thus 150) of the 1000 so you are left with 1000. In case the trade makes a loss, the one you copy doesn’t get it’s 15%, as the return is 0 or lower. (no, sadly he doesn’t usually share in the losses)
In case a platform utilizes a 15% profit share over a certain time period it works as follows. Lets say the platform uses a time period of 24 hours. In this 24 hours a trader you copy makes 3 traders. The first trade results in a 1000 profit, second in a 500 loss and the third a 500 profit. In this case, the total 24 hour profit is 1000, meaning that after the 15% deduction from profit share, you get 850. If the platform had used a 15% per trade model, a total of 225 would have been deducted. This due to the fact that 15% gets taken from the first trade (1000 profit so 15% is 150) and the third trade (500 profit, of which 15% results in 75). The second trade gets no deduction as there was no profit.
Potential risks
As with everything related to investing and trading, even copy trading carries risk. One example being that historical returns are never a guarantee for future results. Meaning that even though a trader performed well before, this might not be the case anymore when you start copy trading him. This risk however, can be limited by picking traders with a positive multi year record of there performance.
A risk that can’t be avoided however is that of the profit sharing model. As illustrated in the example above, different ways of calculating the profit share from the one you copy can have a serious impact on your portfolio’s performance. So please make sure that you understand what the profit share percentage is of the platform that you use as well as how it is calculated.
platforms
When talking about copy trading, specifically related to crypto, there are a few platforms that offer the service. Down below we have listed the most well-known and reputable platforms.
eToro: eToro is a platform that has been around since 2007 and originates from Tel aviv in Israel. It was one of the first platforms to offer copy trading to its users. Assets on the platform include: stocks, forex, commodities and crypto.
NAGA: NAGA is a lesser known platform that offers copy trading specifically for the crypto industry.
ZuluTrade: ZuluTrade is one of the leading platforms when it comes to copy trading. And just like eToro, it was also founded in 2007.
3Commas: This is a little bit of a weird one, as it isn’t exactly a dedicated copy trading platform. The platform however allows traders to use trading bots. Users can make there own bots or go to the marketplace where users can subscribe to the strategies of other crypto traders.
KuCoin Social Trading: KuCoin introduced a social trading feature that allows users to follow and copy the trades of successful cryptocurrency traders on the platform.