What if you could shadow a professional trader for a day, get to see how and why they trade, and the exact moments they choose to react to the ever-moving market? In the not-so-distant past, trading was a solo, closed-door activity, but these days, the forex platforms often provide a copy trading service. 

Copy trading is often viewed as a bridge for beginner traders. It’s not about letting a robot trade on your behalf, but instead about choosing a human expert to follow. That way you can learn how the market works whilst also actively trading in it yourself. This article will look at how copy trading works, how you should choose who to copy, and both the risks and advanced strategies so that you can be as briefed as possible before you get started yourself.

So, how does copy trading actually work?

When you sign up for a forex platform that offers copy trading as a key feature, you are presented with a list of signal providers. These are the experts that you can follow and copy, almost like a live-streaming service for financial expertise. When you select to copy a specific provider, you essentially tell the broker that you want it to do whatever your chosen person does with their money using a portion of your own.

So in practice, if your chosen pro buys $100 of gold, your account would automatically buy a proportionate share of gold based on the percentage of your total balance that you assigned to that trader in your copy transaction. It is very important to remember that you are still the boss. You can choose to stop copying at any moment, and your positions will either close or stay open under your own management. You’re not trapped forever in a cycle of copying that pro trader.

Choosing who to copy: the signal provider dilemma

The problem, of course, with this type of feature is that anyone can be a signal provider, so you have to do your due diligence to filter the noise out from the leading pros. There are a few ways that you can identify who to copy: those who have consistent, low-percentage gains over the last 12 months; those who are active in their community and explaining their trades; and by watching any trader you’re interested in for a few weeks before allocating any of your capital to copying them.

When assessing any gains that a trader has made, you should be very careful if you’re looking at someone who appears to have had a single “lucky” one-off month of 50% gains. This is what many would regard as a high-risk copy strategy because you have no evidence that they know what they’re doing over the long term. It is far less risky to copy trade someone who makes smaller gains each month, but you can see from their trading history that over a year of trading, they make good profits. 

If a trader isn’t open and transparent about exactly why they have chosen to buy or sell a specific instrument with their community, you will be copying someone blind without having access to any of the rationale behind their moves. This is not an optimal learning opportunity, and most experienced traders will happily explain why they chose to buy or sell; if someone is not clear about their decision-making process, it is much harder to trust them in the long term.

When filtering through provider profiles, you should always use the robust search tools offered by top brokers to cross-reference the performance history of a trader with defined risk metrics. This will best identify those traders who run a less risky strategy, and you can watch a few of your chosen shortlisted traders over a month or so to see exactly how they operate before you decide to allocate some of your deposited funds to their strategy. 

And in terms of managing my risk when copy trading?

At the end of the day, copying another trader is just mirroring their every move. If the person you are copying makes a mistake, your account will mirror that exact mistake too. Essentially, setting up a copy order means you are outsourcing the decision-making process to someone else, but the risk remains entirely yours. 

No matter what copy order you set up on your trading account, your money is always the one that’s on the line. So it is vital to treat the copy positions you hold with the same seriousness as a trading strategy you would execute yourself.

Advanced strategies for smarter copy trading

Simply copying an experienced or professional trader is just the beginning for copy trading strategies, but managing a variety of copy orders like a professional portfolio is the real strategy work that can take it to another level.

Moving from a beginner mindset to an advanced stage means implementing some structured safeguards and transitioning your trading account from a passive observer enjoying the success of others to an active and disciplined portfolio manager who is ready to drop a trader if their results begin to turn.

Diversify your copied traders

Step one is to never rely on one individual trader. Mirroring multiple across different markets, diversifying your portfolio with currency pairs, commodities, or even tech stocks, spreads your risk. If one provider has a disaster of a week, the others may well balance it back out. This can protect your account from the heavy losses that can be suffered from putting all your eggs in one basket.

Use copy stop-loss

Every copy trading order should have a stop-loss applied to it. This is the emergency brake that protects you in case the professional you are copying continues to hold a losing trade. The platform will automatically disconnect you once the loss hits your pre-set amount. For you, it is the ultimate protection against a rogue trader who ignores their own risk rules and ensures that you remain in full control of your own risk.

Conduct regular reviews

Finally, you should treat all your copy order providers as if they were a professional business relationship. Check their performance on a monthly basis to ensure that their strategy still aligns with your own goals and targets. If their style changes, or you spot their results dipping significantly, be ready to disconnect and end the order. A successful portfolio is only built by pruning your underperformers and retaining the winners.

Finding the right platform and tools

The last element to keep in mind is that you aren’t just looking for a broker, but rather a social network of traders. This is something that you can check for when testing a demo account before deciding whether to deposit your funds. An additional factor to look for is a platform that clearly shows the risk score of each trader. 

The top brokers make it impossible to hide a trader’s previous poor performance. If you find that the platform you’re testing hides the hard numbers, find a different platform to use instead, as this is a real red flag.

Create your own strategy by, first, learning from the best

So long as you consider that copy trading is, at its heart, just a training wheels phase of forex trading, you can make the most of learning from pro traders and hooking into their strategy to get you off the ground.

Never stop building your own knowledge about your chosen currency pairs, commodities, or stocks. Using copy trading as a learning tool means that you can take the stats you’ve seen pro traders achieve to formulate your own, independent strategy in the future. It is one thing to absent-mindedly select a top trader to follow for six months, but another to turn these learnings into your own winning strategy. Maybe one day, you’ll be the pro trader others choose to follow for their first year of trading.