How Does Copy Trading Work?

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Copy Trading

A copy trade works by allowing other people to invest in your investment strategy for a fee. It’s called “copy” trading because the idea is that you are copying other traders’ trading styles, capitalizing on their market expertise.

Copy trades are becoming increasingly popular as more and more traders are looking to take advantage of algorithmic trading strategies without having any knowledge or experience of how to build these strategies themselves.

However, it is essential investors understand the risks involved when using this type of service before jumping into the world of copy trade investing.

Free-to-use vs. Subscription-Based

There are two types of copy trade services available. Subscription-based services whereby you pay an annual/monthly fee for using their copy trading platform. With free-to-use services, they make their money from the spread on the currency you are trading.

On the one hand, subscription-based copy trade services have a lot to offer investors. They allow them access to otherwise exclusive or highly expensive algorithmic trading strategies that yield very high returns. On the other hand, this type of service is only beneficial for traders who understand how markets work and know what kind of strategy will yield the best results.

If not, using these platforms could be very costly as most traders don’t have any idea which algorithm will give them the highest return on investment. It means there’s no safety net in place should trades go wrong. With something so risky involved, it’s clear why there are high fees in the area to mitigate this risk.

A Unique Algorithm for Every Platform

Every trading platform has a unique algorithm that it claims will give you the best return on investment when using its copy trading service. However, there’s no way to verify which algorithm works best until you’ve paid out your subscription/setup fee and started trading. In other words, investors are taking a gamble with their money by paying up-front for a trading service they haven’t tried yet and where there’s no history of success or failure from previous traders.

In addition to this, not all trade signals result in a win. It means some subscription-based services lose traders money over time because of the high fees they charge every time a trader loses a trade (e.g. a 20% fee every time a trader loses a trade). The result is that in the long run, traders will lose money.

What are the Fees?

Copy-trading services which charge fees based on spreads are likely to be less costly than subscription-based services because there’s no risk of losing money in the forex market to high prices when using this model. However, investors need to realize these types of services still require an initial investment, and there’s always going to be spread costs every time you trade (unless you’re dealing with a trustworthy ECN broker), so it’s not free.

Then again, one benefit of this type of trading service is that you don’t have any affiliation with other traders on the platform. If their algorithm isn’t profitable, you don’t need to worry about copying your trades and losing money. So, there’s no requirement for copy trading services that charge fees based on spreads to disclose algorithms publicly. It might be hard for investors to verify the algorithm is any good unless they have a lot of knowledge in algorithmic trading themselves.

Subscription-based copy trade services have a lot more to offer investors who understand how markets work and can choose an algorithm that will yield a profit over time. These types of services are only beneficial if traders pay close attention while using them.

Otherwise, you’ll probably lose your shirt. On the other hand, spread-charged copy trading services won’t cost as much but don’t expect them to be completely free either. Because of this, investors need to conduct thorough research on any trading service before committing any money.

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