Copytrading

Asset Management on Trust

Copytrading is not a new concept in the realm of investing and trading; rather, it is a simplified system of trust-based asset management. Its mechanism aims to simplify and automate deal execution and closure for novice traders and investors. Copy trading is based on the principle of trust-based asset management, similar to how an investor hands over their assets to a fund or broker. However, when transferring assets to a broker or an investment fund, the following challenges often arise:

1. High minimum deposit requirements. Investment funds and brokers are typically interested in clients with significant financial capabilities. As a result, the minimum investment threshold can reach tens of thousands of dollars, or even hundreds of thousands in some cases.
2. Choosing a fund or broker. This involves researching reputation, analyzing performance, fees, and conditions. While a novice investor can navigate these tasks, it requires time and effort.
3. Bureaucracy. Signing contracts, studying their terms, and understanding rights and obligations can be time-consuming.
4. Risk assessment and income reporting. Companies managing assets may require income reports to ensure legal clarity for both parties. These reports also help assess risks and develop personalized investment strategies.
5. Income declaration. Additional steps may be necessary to properly declare earnings and pay taxes on investment profits.

The above points are not drawbacks but represent potential hurdles for a beginner investor.

Purpose of Copytrading

The goal of copy trading is to simplify the trust-based investment process and lower the entry barrier by reducing bureaucracy and allowing investments with smaller capital, thus making it more accessible. Copytrading services are offered by platforms like Bybit, Binance, RoboForex, eToro, AvaTrade, Pepperstone, and others. Today, copy trading is available for various financial instruments, including spot trading and derivatives. A wide range of assets is also available: commodities, currencies (Forex), stocks, cryptocurrencies, and stock indices (S&P 500, Dow Jones, Nasdaq, etc.).

Copy Trading as an Investment Method and Its Advantages

Most traditional, well-known investment methods, such as bank deposits, are rapidly losing popularity because, in some cases, deposit interest rates fail to outpace inflation.

Although copy trading is a relatively new phenomenon, it is poised to capture the market from bank deposits.

The average minimum investment amount for copy trading on exchanges is $50. Compared to investments in funds or transferring assets to a broker, this threshold is significantly lower, offering its own advantages and disadvantages.

Why Replicating Trades Is Profitable?

Flexibility

Investors can choose from thousands of traders to copy, each employing their own strategy. This could range from high-risk, high-return traders to those offering lower but more stable returns with minimal risk. In some cases, returns of 30% to ~100% annually can be achieved, which significantly outpaces global average bank deposit rates of 3%–5% (as of August 2024) and 10.5% in Ukraine (August 2024).

Early withdrawal and reinvestment

A copy trader can stop copying a particular master trader without losing the earned returns. In contrast, withdrawing funds from a bank deposit early often incurs penalties.

This flexibility allows for reinvesting funds or reserving them for future opportunities.

Efficient trading

The primary advantage of copy trading is the automation of position opening and closing processes, enabling the investor to rely entirely on the expertise of an experienced trader. Like any trading, copy trading involves risks, but there are many ways to mitigate them: diversifying capital across multiple traders or turning risks into calculated ones by analyzing trader statistics, their trading style, and the assets they trade.

This approach saves time, eliminating the need for the investor to study trading independently—a meticulous task. Instead, they delegate market monitoring, news analysis, and deal execution to an experienced professional.

Exploring New Markets

The rapid pace of development often leaves us lacking sufficient expertise in many areas, which is why we turn to professionals for help. In the case of copy trading, it provides an opportunity to explore new markets unfamiliar to the investor.

As always, it’s important to mention the risks: copy trading is not a simple solution for generating passive income. It requires time and a basic understanding of the fundamentals. Like any type of trading, investors face the risk of losing all or part of their capital.

The mission of our service – copytradingguide.com (Copytrading Guide) – is to mitigate the risks associated with copy trading investments. Gradually, we will expand our service by adding guides (on deposits, withdrawals, trader selection, etc.), a list of vetted exchanges, and a roster of effective master traders tested over time with our own capital.

How Copy Trading Works

Earning through copy trading is a form of work that demands attention and time. To begin investing, you must follow a series of steps, from choosing an exchange to realizing profits. The algorithm below outlines a purely technical sequence, though in practice, these stages may and should be reordered. Particularly, the steps related to capital allocation and distribution should serve as starting points.

Choosing an Exchange

The first task for an investor is to select an asset (or assets) for copying trades, which subsequently determines the choice of exchange. Platforms like Bybit or Binance specialize in cryptocurrency trading, while exchanges such as RoboForex offer access to traders dealing in currency pairs or commodities.

Selecting a Financial Instrument

Financial instruments include a subcategory of derivatives. Most copy trading on exchanges focuses on derivatives, though spot trading is increasingly gaining traction. An investor’s task is to decide which instrument suits them best, as this choice significantly influences their investment strategy.

• Derivative Trading: Allows leverage for higher potential profits but comes with greater risks, as you do not own the underlying asset. This could mean losing the entire value of a position if it fails.
• Spot Trading: Involves asset ownership, enabling you to weather market downturns by holding onto the assets.

We recommend focusing on spot copy trading.

Funding Your Platform Balance

Before entrusting a portion of your capital to a trader on the chosen platform, you need to fund your account. Popular deposit methods for cryptocurrency exchanges include P2P transactions, fiat deposits, and cryptocurrency transfers.

It’s crucial to determine your capital and, if possible, split it into several parts. To reduce risks, it’s advisable to diversify by using multiple platforms and assigning capital to several master traders.

Selecting a Master Trader

The most critical step is choosing a master trader. Pay attention to a wide range of metrics. Exchanges offering copy trading services provide detailed statistics for each trader, enabling investors to make informed decisions based on comprehensive performance reports.

Key selection criteria include:

• The ratio of your deposit to the trader's deposit.
• The success rate of trades over a long period (90 days or more).
• How well the trader manages drawdowns.
• The types of assets traded and other factors.

Configuring Copy Settings

Before entrusting funds to a master trader, investors can configure the copy trading process. Typical settings include:

• Selecting assets (or contracts).
• Copying proportions.
• Leverage settings (for derivatives).
• Take-profit and stop-loss levels.

Some traders provide recommendations for specific settings to align with their strategies. In the absence of such guidance or sufficient experience, default settings are generally recommended.

Transferring Funds to the Master

After selecting a trader and configuring settings, the next step is to allocate funds. It’s important to note that the master trader does not gain direct access to the investor’s funds. Instead, a separate account or a specific limit is established for the master. Funds remain under the investor’s account but are locked to prevent errors. The term “transferring funds” is jargon used for convenience.

For first-time collaborations with a trader, it’s advisable to start with a modest investment to observe performance and validate your choice.

Monitoring the Trader’s Performance

It’s essential to track the performance of selected traders. Copy trading platforms allow you to monitor positions held by the trader, their success since the start of copying, and additional parameters.

Realizing Profits

The final step is the reason for the entire journey: generating income. Sometimes, strategic decisions must be made, such as discontinuing copying due to underperformance or reallocating funds to a more effective trader.

The key is to avoid emotional decisions and approach the process rationally. Remember, investments yield results over the long term, while immediate, high potential profits always carry significant risks.

The Mechanics of Trade Copying

On copy trading platforms, trades are executed automatically. Investors do not need to manually track the master’s positions or place orders themselves. Both opening and closing positions happen automatically, though the investor can close copied positions manually if needed.

The system calculates order sizes based on the proportional capital of the master and copying trader. For example, if the master trader has $10,000 and places a $1,000 order (1/10th of their capital), a copying trader with $1,000 will place a $100 order under standard settings.

Master traders earn commissions from the profits of copying traders. This percentage varies by platform and trader and is only paid for successful trades.

The History of CopyTrading

The term "copytrading" is relatively new but represents a concept that has existed for decades: asset management.

Before the internet, copying or replicating trades was done through newsletters, newspapers, and radio. Traders did not earn commissions from these signals but monetized them through:

1. Subscription and Publication Sales: Traders offered subscriptions to their informational newsletters or sold their signals for newspaper columns.
2. Reputation Building and Advertising: Publishing successful trading signals helped traders enhance their reputation and attract new investors willing to entrust their assets for management.
3. Market Influence: In cases of significant trader popularity, their signals, followed by a large audience, could impact market trends.
4. Promotion of Products and Services: Traders leveraged their signals to advertise and promote their offerings.

Around the 2000s, virtual trading rooms were established, embodying the essence of trade copying and process automation. Signals were regularly published in these rooms and could be reproduced for traders upon request. Traders didn't need to handle the execution themselves, as orders were placed manually by the room organizers. Additional benefits of these rooms included interaction with other participants, experience sharing, and the opportunity to ask questions. Over time, these rooms became paid services, operating through subscriptions, memberships, or commission fees for successful trades.

The service gained popularity, and the concept of replicating signals from experienced and successful traders proved to be a highly effective development, leading to rapid community growth. However, the growing popularity brought the challenge of automating the process of replicating trades. With the increasing number of participants, manually handling the sheer volume of similar positions became impractical.

Starting in 2005, with the advent of automated trading, the term copy trading and mirror trading emerged for the first time. At that time, mirror trading received more attention and widespread use. It allowed traders to copy a master trader's strategy, but opening and closing positions still had to be done manually.

The main surge in the popularity of copytrading began in 2010. Many platforms, exchanges, and brokers started adding the service to their offerings. Initially, copytrading was particularly popular in the currency markets (Forex).