Binary options copy trading has grown rapidly since the idea first surfaced. The basic idea is that a trader finds another trader with a good success rate and then automatically copies that trader’s buy and sell orders. It can be seen as a form of automated trading, but based on decisions made by a human with a known track record, not a “bot”.
Best Binary Brokers with Copy Trading
Copy Trading Explained
Copy trading can also be seen as a form of social trading, where other traders share their ideas and trades for anyone to follow or copy manually. The idea gained traction quickly as novice investors could watch, learn from – and copy – experienced traders. The difference between social and copy trading is that with copy trading it’s automatic – traders can piggy-back on another trader’s success and place exactly the same trades, at exactly the same prices.
The instant nature of these trades meant followers were not missing out on price movements – they are able to configure their account to place exactly the same trades – at exactly the same time – as the traders they follow.
Copy trading is hugely attractive for those traders making their first steps in the investing world. It is often sold as a method for those new to investing to get involved without a huge amount of research or prior trading experience.
How Does Copy Trading Work?
Once a trader has decided they wish to use a copy trading platform to follow others, they need to search for the right traders to follow. This can be done using a variety of methods. Traders can be filtered by performance, trade frequency, the assets they trade – any element of their trading style.
Some might look for those with long term results – others might prefer the people making big profits in the last few days.
Once a user has found someone to follow, in one-click, they can ensure they open each and every trade made by that individual. The actual sums involved can be tailored to suit – so a person can follow a millionaire forex trader, making huge trades – for maybe just $1 per position.
Once configured, each time a new trade is opened (or closed), the follower will also have their trade opened or closed at the same price. Apart from the size of the investment, everything else is identical.
Traders can copy (or follow) as many different people as they like, and mirror all of their trades. Of course, they still have the flexibility to stay out of particular trades, or end the copying altogether. There is no commitment and the follower is in complete control.
Copy Trading Benefits
Copy Trading can be loosely described as trading in a social way, sharing information, trades and performance with others. More specifically, it allows traders without the time or knowledge to trade full time themselves, to follow the trades opened by more experienced traders.
Those experienced traders also benefit as their broker might give them preferential commission or cashback on the trading volume they generate via their followers.
Become An Expert And Get Copied
Of course, the description given so far is very one-sided. Following other traders is what has attracted the vast majority of people to copy trading.
There is however, another side to the coin – those traders who are followed themselves. Being the followed/lead trader can be quite lucrative.
Without those talented, profitable traders, there would be no-one to follow, and the model would break down very quickly. So what is the motivation for traders to try and attract followers?
Firstly, traders are initially just looking to be profitable for their own benefit – obviously. They are opening and closing positions with a view to getting a good return on their investments for themselves. Assuming they are successful however, why trade with a copy trading platform? Well, the broker will generally reward traders who are followed in significant numbers, with a share of their trade volume generated.
If a trader places a single trade, which makes the broker $1 in commission or via the spread, that is all well and good. What if the same trader makes the same trade, but is then followed by 1,000 users, who all place exactly the same trade, generating the broker $1,000?
The broker can then reward the trader with a cut of that commission. The brokerages know they need to attract good traders to ensure there is actually people to follow – so a good trader can quickly ramp up their own profits by trading well, attracting users and generating greater trade volume.
Who Should Use Copy Trading?
Binary options copy trading should appeal to a broad range of investors. Below are three different descriptions of ‘traders’ and how they might make best use of a copy trading platform. Most people will fall into one of these categories;
- Traders looking to follow others – The most obvious and most common group of traders. People who may not have the experience, knowledge or even time, to analyse markets or assets and place trades at the best prices. Why not simply follows other profitable traders?
- Aspiring Traders, looking to learn – Many traders want to learn more, and are quick to acknowledge they are not highly profitable traders – yet. Long term however, they might want to be making all their own decisions and placing their own trades. For now though, they can mix their trades, whilst learning from more experienced traders – and profiting from them.
- Profitable traders, increasing returns – Established traders, perhaps profitable elsewhere, who can see the appeal of additional income purely for being followed. In terms of risk management, knowing that any trade will generate a certain amount of income is pretty rare. At worst it might cover trading costs, at best it might increase profits significantly.
So it is clear that most people will fall into one of these groups – and copy trading suits all of them. It is perhaps the middle group – aspiring traders – who might be reticent about copycat trading. They do not particularly want to follow, they want to make their own choices – but why not get the best of both worlds? There is no reason why a trader could not be both copied – and still copy others.
Some Tips For Copy Trading Success
Despite all the potential benefits, copy trading is also potentially one of the riskiest things you can do with binary options. Especially if you approach it with the wrong frame of mind. Believe it or not, it is not as easy as it sounds and it does take some strategy. Assuming of course you have chosen a good platform. It can be a good idea to use a demo account with play money first, to see how things work out.
Risk Management When Copy Trading
Copy trading is just like any other kind of trading; you have to spread your risk around. Blindly copying is not the way to go. Just because a trader you like has a great record doesn’t mean that will continue, or even if that trader will be trading when you want them to.
For this reason alone it is a smart idea to follow more than one trader but there is still risk in that. You don’t want to use more than one trader if they are trading the same asset, you need to pick 3 to 5 assets and find traders you like for each. This way you are diversified in two ways;
- First, you are not relying on any one trader
- Second, you are not locked into only one asset.
This way if one trader or one asset starts to lose money you still have four that are doing OK.
When looking for a trader to follow build a list of possibilities for each asset. If you were the coach of a football team you would want to have a first string and second string right? The same idea applies here.
Obviously you want to pick the best one of the group, the one with the most logged trades and highest win rate would be my suggestion (over a long time frame), but you will want to have a back up for “just in case”. It’s possible that the trader you like best isn’t trading enough, hits a losing streak or simply falls behind in the rankings. When this happens its time to rotate them out of your portfolio and rotate in a fresh trader.
When choosing assets try to avoid unwanted correlations. Correlations are when two assets are affected by the same catalysts. They are primarily found in forex pairs like EUR/USD and USD/JPY which, in this case, move opposite of each other. It is impossible to avoid all correlations, the market is intricately entwined, but you can avoid obvious ones.
The reason is simple; it defeats the purpose of diversification. My suggestion is for a copy portfolio to look something like this;
- An Index
- A Stock
- Two non-related Currency Pairs.
The final tip and perhaps the most important is to manage your trades and your traders. Use the risk controls provided by the platform, they are there for a reason. Simply put, this means don’t just follow a trader and sit back and forget it. Keep your trades small, I suggest using only 1-3% of your account per trade, and follow for short durations only. If not, even with a great platform and a good trader, you could come back to find your account wiped out.
Copy Trading with Robots
Copy trading via a robot increases risk. Automated trading means you lose complete control of your trading. There are risk management tools that can be put in place – for example limiting total losses, or the number of losses in a row. It is vital these tools are used. If the service does not offer them, look elsewhere.