The pros and cons of copy trading



min read

Falling glass dominoes leading to a trading screen with a chart, symbolising the ripple effects in copy trading decisions.

During the COVID-19 pandemic, retail investors changed the way they traded stocks. Many followed the crowd, mimicking the moves of others-a behavior known as herd mentality. And that’s exactly where copy trading comes in!

How does copy trading work?

Copy trading allows traders-whether beginners or experienced-to replicate the trades of successful traders. The idea is simple: if they profit, you profit. But, like all trading strategies, copy trading comes with its own set of advantages and disadvantages.

‍

Advantages and disadvantages of copy trading

To make things easier, here’s a quick breakdown:

Pros	Cons
Learning Opportunity - Beginners can watch and learn from seasoned traders.	Risk of Loss - If the trader you copy makes a bad move, you could lose money.
Portfolio Diversification - Copying multiple traders spreads risk across assets and strategies.	External Dependencies - Relying on others can slow your development of independent trading skills.
Convenience - Trades are executed automatically, saving you time.	Volume Fees - Some strategy providers charge performance and management fees, which may impact your overall returns.
Passive Income Potential - Strategy providers earn commissions when people copy them.	Market Volatility - Unpredictable market movements can impact even the best traders.

‍

Things to consider before copy trading

If you’re thinking about copy trading, it’s essential to consider your risk tolerance, investment goals, and trading knowledge. Here are a few smart steps to take before diving in:

Research traders before copying them – Look at their past performance, risk management style, and trading strategies.
‍
Start small – Don’t go all in. Test the waters with a demo account first.
‍
Diversify – Copying multiple traders can help balance risks and potential rewards.
‍
Stay informed – Even if you’re copying, keeping an eye on market trends is always a good idea.

Want to try copy trading risk-free? Open a Deriv Trader demo account and practice with $10,000 in virtual funds!