Find out how copy trading works

Editor’s note: This series of “ELI5” articles refers to the famous English acronym, which means “Explain to me as if I were five years old”. The goal is not to infantilize the reader, but simply to give him keys to understanding concepts encountered in the cryptosphere and trading world.

If you are in the world of cryptocurrencies or the traditional stock market, then you have probably heard of copy trade. However, that doesn’t necessarily mean you know exactly what it is. But don’t worry, we will explain everything to you.

In this article we will see with you what copy trading really is. We will elaborate on how it works and analyze whether it is a good method to earn money without much effort or, on the contrary, something to be avoided at all costs.

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How copy trading works

As the name suggests, it is quite easy to guess how copy trading works. On some platforms, you have the possibility to follow the trading operations of other investors. You can see their results and sometimes even chat with them. This is called social commerce.

But copycat trading takes things even further. When you like a trader, you have the option to automatically follow what they are doing. With just a few clicks, you can tell the platform that you want to copy all the trades that the person you follow has to make.

As you can see, understanding what copy trading is is not rocket science. It’s pretty simple, but choosing the right dealers to follow automatically is a bit more complex.

Experience the opportunity of copy trading on the PrimeXBT platform

Is this a surefire way to make money?

When investing, whether in the stock market, in cryptos or in other financial assets, there is always a risk. It is not possible to know with certainty what the future will bring us. Because of this, even copy trading poses risks to investors.

Let’s take the case of a trader with good results over the last 5 years. So you naturally think that this is a person with good skills. It then makes perfect sense to choose to copy the trades he placed as this should make you money in the future.

Unfortunately, there is no guarantee that its future results will always be as good. As the saying goes, “Past performance is no guide to future performance”. In fact, the trader may have been extremely lucky in previous years, or the behavior of the market has changed drastically and the person in question has failed to adapt to this new environment.

PrimeXBT is one of the platforms that offers copy trading functionality

Diversification, the key to success

However, if you practice what is called diversification, you greatly reduce the risk of all traders starting to lose money. By placing your investments in different people with good results, in theory you should have more that will continue to make money.

For example, if you decide to copy trade 20 different people by placing 5% of your capital on each of them, it is very unlikely that they will all end up losing money.

Similarly, on some platforms you can do copy trading on cryptocurrencies, but also on traditional markets, commodities or even Forex. By choosing to follow traders with good results in these different markets, you drastically reduce the risk of your crypto trading portfolio.

Copy trading: what to remember

As we have seen, it is actually a matter of automatically copying another person’s trades. However, you must carefully select the people you want to follow to ensure they are competent, otherwise you risk losing money.

Similarly, it is advisable to diversify as much as possible to significantly limit the risk. Just because someone was good in the past doesn’t mean they will be good in the future. By spreading your capital over different dealers, you therefore limit the risk of losing money.

If you want to try copy trading, you should know that PrimeXBT was launched in 2020 Coverits copy trading module that allows users of the site to literally copy the trading strategies of professional or highly experienced traders.

See the full review here PrimeXBT as well as the review Prime XBT Covesting.

Crypto projects can be subject to volatility, don’t invest more than you can afford to lose.

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