A Comprehensive Guide to Risk Management in Copy Trading: Tools, Strategies, and Control



Copy trading is one of the most popular forms of investment in the crypto industry as many newcomers do not have any prior experience with the crypto industry or even financial markets. Contemporary crypto copy trading platforms provide many efficient financial products to their clients and offer advanced risk management solutions so that investors can control their risk tolerance according to their preferences and investment style.

Understanding the Importance of Risk Management in Copy Trading

Some experts believe that social trading is the best way for a beginner to start their journey in the world of crypto. You can start making money while learning from experienced managers by following their trades and copying their actions in the market. Those who are still learning will find analyzing different market positions taken by veterans and understanding their intentions quite valuable.

Risk management in copy trading can be done in many ways. Here are some approaches used by investors in this sector of the cryptocurrency economy:

  • Adjusting stop loss and take profit orders. This method is quite straightforward as it limits the amount of assets you are willing to lose in a single trade and sets certain profitability goals which may dramatically differ from what your manager anticipates. It is one of the most important risk management tools that an investor can use to reduce level of exposure of their portfolios to the dangers of the crypto market.
  • Limiting the amount of funds available to managers. You can simply isolate a portion of your portfolio that can be managed by copy trading systems. Some platforms like WunderTrading allow you to directly tell your copy trading bots how much capital they can use in a single market position. You can also have a separate account with an exchange of your choice and control the amount of funds available to automated trading systems.
  • Doing your due diligence. It is hugely important to research managers who caught your attention and communicate them on social media platforms of forums, or even directly if the automation platform has such social features. Remember that past performance does not guarantee future results and can be a very deceptive metric to base your judgment on. Look beyond the numbers you see in the marketplace.

Copy trading risk control is a crucial skill to master for any crypto investor regardless of their investment goals and aspirations. You must be able to find equilibrium between rewards and risks on top of what your chosen traders do on their own. The importance of risk management is hard to overestimate.

Risk Management Tools for Copy Traders: Enhancing Control and Minimizing Risks

Some crypto investors limit themselves to just one of many risk management tools available to all retail traders in the crypto industry. We strongly recommend using multiple risk minimization methods in an effort to build a balanced portfolio that won’t be susceptible to various dangers of trading crypto in general.

On top of tools outlined previously, we also want to mention other tips for people who are interested in copy trading:

  • Choose the right copy trading software provider. With hundreds of platforms to choose from, many retail traders simply feel overwhelmed and helpless when trying to pick where to invest. We encourage you to use only companies with proven records like Cryptohopper, 3Commas, and WunderTrading.
  • Carefully look at what risk management instruments a vendor offers. It is a good idea to look for a copy trading platform with risk management features such as automated stop loss and take profit orders, position size limiter, and more.
  • Work with automation providers that conduct background checks for managers featured in their social trading services. For example, WunderTrading does its due diligence and works only with verified traders. You won’t see any personal information, but all featured traders have been individually approved.
  • Use all available risk analysis tools provided by an automation platform. When comparing managers to each other, do not just look at the most recent data. Check the performance across several months or years to evaluate the risk level of each individual trader that you can follow.

Copy Trading Risk Management Strategies: Minimizing Exposure and Protecting Investments

We strongly encourage all investors interested in putting their capital to good use to use a variety of copy trading risk management strategies which overlap with standard risk control methods employed by fund managers and experienced traders.

Here are some examples of techniques that you can use to minimize losses and maximize gains:

  • Picking the right ratio. Depending on the lifetime of a market position, it is a good idea to adjust SL/TP orders accordingly. Many investors use standard ratios for stop loss and take profit. For example, a long-term market position should be compensated for the amount of time your assets spend idling. Setting a 1:3 ratio for such positions is a common practice (for a 30% TP order, use a 10% SL order). For short-term positions, a 1:1 ratio is a better choice. Setting stop-loss orders in copy trades is hugely important.
  • Pick traders working on the same exchange as you. Trading volumes, price action, and many other metrics differ depending on which trading platform you are looking at. Sometimes, differences can be large enough to cause significant disparities between the performances of your portfolio and the one managed by a followed trader if they work on a different platform.
  • Diversification in copy trading portfolios. Make sure that you do not follow only one trader. Try to pick several managers with different risk styles. Usually, traders who have big profitability spikes employ dangerous strategies. They may be a risky bet for an investor. Copy actions of less aggressive traders to balance the risk.

The Role of Stop Loss Orders in Copy Trading: Limiting Losses and Managing Risk

As mentioned multiple times before, delayed orders play a huge role in the level of risk that your portfolio is exposed to. We have already outlined some basic stop loss recommendations, but there are many more nuances that you should be aware of when dealing with delayed orders to minimize risks.

  • Stop loss orders in copy trading should be different from what your manager uses. Many experienced traders have larger portfolios and can tolerate bigger losses than you. It is a good idea to never set an SL order at a level higher than 15%.
  • Setting stop loss levels for copied trades can be done automatically according to your overall risk tolerance, but you may also want to adjust the values depending on the position held at any given moment. For example, you may notice that a strong trend is forming and the likelihood of a trade going south is diminishing. Increase the SL value and move up your TP order.
  • Automatic trade execution based on stop loss triggers may not work in some scenarios. If an exchange has a slippage and misses the correct timing to execute an order or if the speed of price action is too high, you may experience an issue with stop loss not working as intended. It is a good idea to monitor your market positions frequently to ensure that everything is going smoothly.

You should never forget about using SL orders to prevent undesired losses and protect your portfolio from various dangers of using a third-party financial advice. Remember that the responsibility for losses is on you even if you are using social trading products and services from experienced investment managers. A delayed stop loss order is the simplest and most effective way to avoid many problems.

Copying Top Traders: Evaluating Performance Metrics and Risk Profiles before Following

When experiencing losses, coping with trading risks can be a challenge even for experienced veterans. For the sake of your mental health, avoiding large losses is quite important. One of the most impactful choices that you will make when engaging with social trading products is the choice of traders to follow.

There are several important factors that must be considered when picking a trader to follow:

  • Past performance. Usually, you will look at the most recent period in the history of a trader that may include market positions that have not yet expired and lucky guesses made on a whim. Look at the whole available history to see if a manager actually shows good numbers consistently.
  • Credibility. Regardless of which copy trading risk management strategies you plan to use, following traders with reputation is a good idea. Unfortunately, some managers simply close their failed accounts and open new ones with better statistics to attract more followers. They are incentivized to do so as they receive commission for each investor who follows them. Look up these traders online and talk to them on social media before committing.
  • Overall risk level. Many companies provide additional information to their clients and display the risk style next to the name of a trader offering their managerial services. To exercise effective risk mitigation, try to follow different retail traders who have opposing approaches to trading.

Monitoring and Adjusting Positions: Active Copy Trading Risk Control for Better Results

Despite what many people think, tinkering with market positions already placed by bots copying actions of other traders is a not only possible but necessary! Monitoring copied trades regularly and adjusting various parameters or opening multiple copies of a trade are all good ways to reduce risks and increase profits.

Here are some interesting approaches that an investor can use when adjusting trade sizes based on account balance and market conditions:

  • You may simply set up your automated trading system to send you signals when a followed trader makes a move. While it is much better to just allow bots to copy trades, you may not have sufficient funds or risk tolerance to execute them. Use signals from social trading platforms to create market positions appropriate for your portfolio.
  • Fix stop loss and take profit orders. When you have a copied trade in your portfolio, consider adjusting its SL/TP ratio according to the current market trends and the potential of a trade to bring in profits. If there is a strong bullish trend and you hold a copied long position with a very low take profit level, adjust or even remove it to pilot your order manually.
  • Liquidate positions when necessary. If a position feels sketchy and does not sit right with you, simply liquidate it before losses start piling up. The feeling of guilt and disappointment can be a very strong demotivating factor that will affect your judgment later on. It is better to cut losses instead of hoping that a followed trader made a miraculous prediction that seems to be based on guesswork. Remember that some traders may experiment with their market position and are willing to lose money while testing their ideas.
  • Abstain from trading during periods of high volatility. Even the best retail traders struggle to pilot their portfolios during chaotic moments when prices jump up and down due to some unforeseen events in the cryptocurrency industry. You don’t have to follow them into the storm. Simply turn off your bots when the market is going through a rough patch.

The Psychological Aspect of Risk Management in Copy Trading: Overcoming Emotions and Staying Disciplined

One of the biggest problems that any investor faces when trying to earn money in the crypto market is emotionality. Managing emotions while copying trades is very important. An investor must detach themselves from actions taken by other people. Despite following certain traders, you should never allow them to take responsibility for your financial decisions.

It is easy to stray from your plan when seeing a market position gaining more than you expected and start forgetting about placing stop loss and take profit orders. It can lead to a one-time scenario where a profit is not achieved and stop loss is not there to prevent a massive loss of capital. Staying disciplined with risk management rules at all times is the best path to consistency which is the biggest goal of any investor.

Here are some tips to control emotions when copying trades:

  • Do not believe that a followed trader is an omnipotent being that knows better. They are just humans who make mistakes and have lapses of judgment. Give the benefit of the doubt when possible if you see a weird market position, but never follow them to the end if you have legitimate concerns over its potential outcome.
  • Remember that your risk management strategy is above everything else. Even if you think that there is a big chance of a certain market position making a huge profit, never forget about stop loss orders and heavily contemplate whether you should increase take profit level.
  • Don’t be too hard on yourself or a trader for a big loss. Any financial market is a chaotic environment where people lose and earn money all the time. It is doubly so for speculative markets like the cryptocurrency one. If you experience a loss, analyze mistakes and admit defeat. You will have another opportunity to make money later on.
  • There are no secure copy trading methods. Despite what some marketing people will tell you, a social trading service is not a panacea to all your issues with investing in the crypto market. Experienced traders are more confident and decisive, but they are not necessarily smarter than a newcomer. They may have periods of poor performance. You cannot win all the time!

Implementing Effective Risks Management Practices to Succeed in Copy Trading

Let’s say that you decided to use Binance copy trading services and focus on following several top performers who also work on this exchange and usually deliver great results. If you do not use valid risk management tools and just follow them blindly, chances are you will suffer losses somewhere along the way.

We strongly believe that using all available effective risk mitigation techniques is the only way to build a consistent investment strategy involving copy trading and automation in general. Remember that these financial products can work autonomously and many investors forget that they still must provide directions and set limitations even if everything goes well without any risk management measures in place.


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