Copy trading in cryptocurrencies refers to a distinct application provided by many trading platforms that allow traders to replicate the trades of other users. This is helpful to newbies who can gain profit by trading on the well-known path.
Successful traders can share their portfolios and investment patterns to influence other traders and make a fan following for them. This method saves time and energy for the followers, who do not have to invest in market analysis and research.
How Does Crypto Copy Trading Work?
Successful traders on a platform who wish to publicize their reading patterns for others to learn from should first submit their accounts for verification.
If their account meets the criteria for being accepted as eligible for their works to be emulated, they will be given official approval. On approval, their trades will have visibility in the public. Their followers can now copy and use their trades.
The traders who want to copy trade can compare and contrast the trading patterns of different investors and follow the pattern that best matches their investment goals and is less risky.
After selecting a particular trader for copying, the trading pattern of that person and their portfolio will reflect on the follower’s account too. Whatever transaction is made on the original account will automatically be done on the follower’s account too.
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How to Find a Suitable Crypto Trader for Copying?
If you are a novice in crypto trading and would like to copy-trade another investor, you must take absolute care about who you are trying to emulate.
You should take note of the major metrics such as total return, risk-adjusted return, volatility, maximum drawdown, trading frequency, and length of trading history before selecting a crypto trader to copy their trade.
Moreover, reading the trading description of the particular trader that you are planning to follow will give you an idea about their goal and objectives and whether they align with your trading objectives.
You can also compare and contrast the trading patterns of multiple traders and imbibe the qualities of these different traders to customize your trading.
It is of prime importance that you keep monitoring the performance of the trader you have copied so that you can easily call off your copy trading activity if a worse scenario occurs.
Advantages and Disadvantages of Crypto Copy Trading
Crypto copy trading is an activity with many advantages and disadvantages. The major advantages of copy trading are discussed here.
- Copy trading helps less experienced traders gain big by emulating other successful traders.
- Copy trading offers a passive investment option for traders where they do not have to engage in active research or market analysis.
- For investors using copy trading, it is easy to diversify their investment portfolio by copying the trading patterns of different traders.
- Copy trading is an educational opportunity for novice crypto investors.
- Copy trading is less stressful compared to active trading as you are copying an already successful formula.
Crypto copy trading also has several disadvantages.
- Copy trading is susceptible to the inherent risks and volatility of the general cryptocurrency market.
- You may encounter losses if the trader you copied comes across any loss.
- Another disadvantage is that you may have to pay fees or share a percentage of your profit with the trader you copied.
- You do not have unlimited control over your activities. A major portion of the trade is controlled by the decisions of the original trader.
- Sudden shifts in the market conditions can affect copy trading too.
Risks of Crypto Copy Trading
As you have already read, crypto copy trading is highly beneficial. However, the process has some risk elements too, which you should be careful about. As mentioned before, the general market volatility can affect the performance of your copy trading.
The success or failure of your trading process is linked to the success or failure of the trader you have copied. Moreover, the risk management process is unfavourable to the copy trader because they cannot act promptly even in the face of an imminent risk. You need to take a balanced approach to navigate these risk elements and the general volatility of the market.
Read More: Wrapped Coins In Crypto: A Comprehensive Guide
The Bottom Line: Is it Profitable to Invest in Crypto Copy Trading
At the outset, crypto copy trading is highly beneficial to beginner investors in the field of cryptocurrency. However, the profitability of a copy trading activity depends on various factors as discussed above.
You must do thorough research and strategic alignment, and select traders wisely on a reputable copy trading platform to reduce the associated risk elements. In short, all your decisions should be well-informed of the market conditions.
