Copy Trading & Social Trading for Beginners: How to Follow Expert Traders Safely

Copy and social trading help novice traders study the trading behavior of seasoned experts and, based on this information, do their own trades without starting from scratch. However, it remains essential to know whom to copy, how much to copy, and how to mitigate risk. This piece would help you understand copy trading, its difference from signal trading, the criteria to evaluate a trader’s skill, and some approaches to social trading processes.

What Is Copy Trading?

Copy trading is a method by which an investor can automatically copy trades performed by a given trader. Instead of researching each available trading opportunity on their own, the investor selects a trader to follow and invests money to copy his trades.

According to the Financial Conduct Authority (FCA), copy trading is the process of mirroring the trades of another trader through the use of CFDs among other means. Depending on the nature of the service and how much control the trader has over their finances, copy trading could fall under different regulations that pertain to portfolio management or investment.

•  You check out the available traders.
•  You check their previous performance and trading activity.
•  You choose a trader that works according to your risk levels.
•  You invest enough money into the trading account.
•  You let the site make other trades on your behalf.
•  You watch the performance and stop or modify your strategy if needed.

Importantly, it needs to be mentioned that copy trading does not involve passing your responsibilities over to another trader. Your account remains exposed to both the performance and risks of the strategy you choose.

What Is Social Trading?

Social trading encompasses more than just copy trading as it integrates social and analytical features that enable traders to study other traders’ activities and share insights. While copy trading is solely about executing the same trades as the trader copied, social trading focuses on passing information, communicating, observing. Depending on the platform, social trading may allow users to:

• Look at traders and analyze their performance
• Look for differences in trading techniques
• Follow experienced traders
• Estimate the level of the trading
• Share trade ideas
• Create a trading profile
• Automatically copy trades of other traders

On STP Trading’s Social Trading platform, users can review the trading history of successful traders, follow their activity, and replicate their trades. Traders can also create a dedicated panel, share their trading activity with other users, and potentially earn income as a provider.

Copy Trading vs. Social Trading: What Is the Difference?

Consider social trading as the setting and copy trading as a certain tool in the given setting. A beginner can use a social trading platform to explore traders, review their performance and strategies, and decide whether copying a particular trader fits their goals and risk tolerance.

How Does Copy Trading Work?

The process of copy trading differs depending on the platform. For example, if Trader A is trading EUR/USD, the system will replicate this transaction in the subscriber’s account as per the stipulated conditions of copying the trader’s orders. Various factors can influence the size of a copied position, including:

• Your capital
• The size of the provider’s position
• The copying ratio
• Any applicable rules regarding the platform used
• The margin available
• Your risk profile

This implies that the return of the copied strategy will not necessarily be the same as that of the provider’s previous returns. The performance variations are due to various factors such as account size, execution time, spreads, market conditions, and so forth.

What Should Beginners Look for When Choosing a Trader?

For example, a trader with a 200% return may appear more attractive than one with a 25% return. However, if the higher return was achieved through heavy use of leverage, it may also indicate significantly greater risk.

But if the former generates a large return due to heavy leverage leading to significant losses, their performance will be much riskier overall.  Before copying the trades of a trader, one should take into account many factors.

Historical Performance

Look at the trader’s past performance in detail. It is more useful to see if the trader has had consistent results for a certain period rather than just having one good month. The long history of trading helps to learn how their trading strategies operate during various market conditions.

Maximum Drawdown

Maximum drawdown is the biggest drop from a peak value of the account during a certain period. For instance, a trader having 30% profitability and maximum drawdown of 5% has a different risk profile than a trader having the same 30% profitability but maximum drawdown of 40%. For novice traders, focusing on drawdown can be more beneficial than focusing on profits.

Trading Frequency

Check the activity of traders. Some traders trade on a daily basis while some traders may operate with positions for some days or weeks. A nice strategy can still be wrong for you if the trader’s trading frequency does not match your goals.

Risk per Trade

Make sure that a trader is careful with position sizes. A trader that keeps on risking a big percentage of his/her account may generate good short-term profits but the method may be too risky.

Utilizing Leverage and Exposure

Using leverage can enhance both your profits and losses. This is of great relevance in the case of CFDs. ESMA mentions that ultimately risk and protection issues arise when using excessive leverage in retail CFD trading. Do not presume that making a profit means that the trader is taking lesser risks.

Consistency Across Market Conditions

A trading plan that works well in a particular market regime may not perform well when market conditions are affected by various factors such as volatility, liquidity, and other macroeconomic factors.

It is better to analyze the performance over various periods of time rather than basing your decision on the last results.

Find Out Trading Style

Make sure that you understand what the trader does. Make sure that the trading strategy is based on one of the following:

• Scalping
• Day trading
• Swing trading
• Trend following
• Breakout trading
• Fundamental analysis
• Technical analysis

It would be better to understand the trading strategy before investing in it.

Why Should You Never Choose a Trader Based Only on Profit?

Besides, there is a striking difference between returns and those that are adjusted for the risk. As an example:

• Trader A: +30% returns with 8% drawdown
• Trader B: +50% returns with 35% drawdown

While Trader B achieved higher returns, he also took on more risks. That is why beginners must evaluate performance along with drawdown, exposure, consistency, and trading behavior.

What Is Signal Trading?

Signal trading is yet another way of obtaining information from experienced market players. The trading signal usually indicates an opportunity, which is outlined by elements of the signal, which can include the following:

• Buy or sell direction
• What instrument to trade
• Entry price
• Stop-loss
• Take-profit

CFD trading signals are especially relevant for traders when they trade such instruments as Forex market, indices, commodities, and other CFD markets. However, signal trading is fundamentally different from copy trading.

In signal trading, the trader receives a suggestion and then decides whether or not to execute it on their own terms. The benefits of copy trading are that eligible trades can be executed as per the platform’s mechanism and the parameters set by the trader.

Copy Trading vs. Signal Trading

The salient point to note about the two types of trading is that the decision-making process involved in them is different.

The Main Advantages of Copy Trading

In copy trading, the process of participating in any financial market becomes much easier for beginners, as they can just copy the trades of more experienced traders without having to control every trade on their own.

However, copy trading is not just about convenience because it also enables traders to learn a lot while getting to know various trading strategies and trading methods used by different traders.

Access to Experienced Trading Strategies

Through copy trading, novice traders get opportunities for using techniques that they may not have been able to implement by themselves yet. Whereas traders would usually have to familiarize themselves with numerous technical Forex indicators and nana-charting techniques, beginners could simply monitor the strategies of other successful traders.

Less Manual Work

With those who cannot spend all their time in front of the computer, the process of copy trading will help them save time on entering trades manually.

More Ways to Trade

Copying multiple traders can sometimes provide diversification on platforms that allow it. However, STP Trading’s current Social Trading terms allow followers to copy trades from only one provider at a time. This makes careful provider selection and position sizing particularly important.

What Are the Risks of Copy Trading?

While copy trading can ease the execution process, it does not get rid of the risks inherent to the market. Thus, to copy a trader’s actions properly, it is necessary to know about the risks involved, especially in case of leveraging and CFDs.

Past Performance is Not a Reliable Indicator

Past success does not guarantee success in trading in the future.

The Risk Can be Copy, Not Just the Profit

When copy trading is applied, all the consequences of the traders’ decisions are transferred as well. If the trader takes a hit, your account will also feel it based on the copying feature you have selected.

Changing Market Conditions

What has been lucrative in bullish trends may not work in a sideways market or in times of high volatility.

Execution Differences Matter

The results obtained from copy trading may not be the same as the results obtained by the trader. Timing of execution, spreads, liquidity, and market conditions may influence the obtained results.

Emotional Element Remains

Automated trading does not remove the factor of human emotions. Even when trade execution is automated, emotions can still influence the follower’s decisions. A trader may become overconfident after a winning streak and panic during a drawdown, potentially stopping the strategy at the wrong time. Because of this, it is very important to have a predefined risk management plan.

How to Follow Successful Traders More Safely

There is no way to make copy trading completely safe, but several practices can help beginners manage risk more effectively.

Step 1: Understand the Product First

It is very important to comprehend the instruments that you are trading. For instance, if you are trading CFDs, you should learn how margin and leverage work and what spreads, overnight costs, and liquidation are.

Step 2: Research the Trader

Never go for a trader with a great number of fans in social media without checking their profile first.  Review the trader’s track record, drawdown, leverage, trading frequency and overall risk profile before deciding to copy their strategy.

Step 3: Start with Limited Investments

Never invest all your funds into one trader.  Begin with a reasonable amount and find out the effectiveness of the strategy.

Step 4: Set Your Risk Limits

Step four introduces the need to set risk limits. Learn how the risk-control features work before getting started with copy trading. Based on the platform where you operate, you can come across allocation caps, stop-loss risk controls and disconnecting from a trader.

Step 5: Monitor the Strategy

Monitoring of the strategy follows. Copy trading is certainly not “setup and forget.” It is crucial to make periodical checks to see if the trading strategy, risk profile, and performance still match your needs.

Step 6: Avoid Performance Chasing

The next step warns against the danger of performance chasing. You should refrain from constantly switching to the trader that has achieved the highest return.

Step 7: Diversify Carefully

Finally, lesson number seven states that you should be careful about choosing several traders. Compare the traders’ approach to verify that they are really pursuing different strategies.

Common Copy Trading Mistakes Beginners Should Avoid

Picking out the top performer without checking things out. The top performer with the best returns might also have the biggest risk.

Excessive Leverage Usage

Leverage is capable of multiplying losses just the same way it multiplies gains. Don’t increase your exposure just because someone seems to be okay with it.

Investing More After a Winning Streak

Winning the past can create an effect of overconfidence. Being successful in the last trades does not mean that you will keep on being successful.

Treating Social Trading as Passive Income

Copy trading can take away some of the manual efforts needed, however, it remains a high-risk trading method.

Is Copy Trading Suitable for Beginners?

Copy trading can be suitable for beginners who understand the risks and have realistic expectations. But being inexperienced does not imply the absence of risk management.

A person who has below conditions is willing to keep track of the trading activity in question can use copy trading:

• A basic understanding of leveraged trading
• Realistic expectations
• The ability to accept losses
• Carefully assesses traders’ results
• Employs controlled capital
• Understands the concept of copying

A person who believes that profits are guaranteed, wants to recover previous losses as soon as possible or cannot afford to lose the invested money is unlikely to succeed with copy trading.

Instead of asking, “What trader makes the most profit?” one should rather ask, “What trading strategy and risk profile can I comprehend, tolerate, and manage?”

How to Start Copy Trading With STP Trading

Getting started with copy trading does not mean giving up control over your account. The correct approach should be researching and comparing trading results, finding out the way of working of a trader you want to copy before actually copying them. The logical initial procedure is as follows:

• Open an eligible STP Trading account
• Start by checking the Social Trading Platform.
• Look into the trader profiles available.
• Compare the past results and the risk profiles.
• Pick the strategy that fits your risk profile.
• Put a limited amount of money.
• Set the copy parameters and manage the risks with the help of the controls.
• Observe the results of the strategy you have copied.
• Change or stop the copying if you see that the trader has changed the risk profile.

It’s unnecessary to rely on promises or just follow the latest popular strategy blindly. Check the previous trading records, compare strategies, and then make your informed decision.

Using the STP Trading Social Trading platform, you can keep track of professional traders’ activities, learn from their trading behavior, and execute identical trades by means of the system.

Once you develop your own approach, you will also be able to create a special dashboard to make your trades visible to others and share your trading activity with other users and earn commissions as a provider.

How to Copy Trade Safely and Manage Your Trading Risk

Get to know the strategy and limit your risks, then decide what to copy! Even if you begin copying someone’s trades, you have to continue following this strategy.

When looking for information about signal trading or CFD trading signals, you have to remember that the success of your trading will depend not only on the trader you copy but also on the risk you bear.

Social Trading provided by STP Trading allows users to review provider performance, follow their activity, and copy trades through the platform’s system.

Frequently Asked Questions about Signal Trading and CFD Trading Signals