How does copy trading work?
When you sign up to a copy trading platform, you'll be able to scroll through various investors that you can copy.
You should try to pick a trader that matches your personal risk tolerance and time frame.
After finding the right person to copy, you will need to select an amount to initially invest and how much you want to add when the person you're copying takes out a new position. After that, most of the process happens automatically on the broker's side.
Most popular copy trading platforms are set up to automate your copy trades, which means they will be processed as soon as the copied trader executes their own trade.
When choosing a copy trading strategy, you'll need to choose from a variety of features, including the following:
- Trade entry. When the person you are copying takes up a new position, you can set your portfolio to automatically buy into the new position.
- Take profits. Some brokers will allow you to set your portfolio up to automatically sell should it grow by a certain percentage. This will allow you to guarantee profits.
- Stop loss. Should the portfolio fall, you can set it up to automatically sell, protecting yourself against losses. However, this will mean you're guaranteed to lose because you will sell when the price falls.
An alternative to copy trading through a broker is copy trading through a subscription or revenue-sharing model.
In this instance, you can sign up to a subscription and get share ideas sent to you, usually on a monthly basis. This again takes the guesswork out of investing. However, this process is a more manual one where you will need to physically buy and sell all the shares yourself.
You also have the option of manually tracking the strategy of a successful trader or investment company and trying to copy their approach through your own portfolio.
For example, say Warren Buffett's Berkshire Hathaway report that they have bought Apple shares. You could do the same with your portfolio and then readjust over time based on their announcements.
