The size of the crypto market is fluctuating yet remains staggeringly huge. Even with a significant reduction in the trading volume and prices, the evaluation continues hovering above $1.1 trillion. Over 190 million active users of BTC create a dynamic web of investors utilizing cryptographic tokens for speculation, retail purchases, and many other purposes.
Introduction to Trading
Trading is the practice of buying and selling assets in financial markets with the aim of generating a profit. Whether you’re dealing with stocks, cryptocurrencies, or commodities, trading offers the potential for significant rewards—but it also comes with significant risk. Market volatility can lead to rapid price swings, and without a solid trading strategy, traders can find themselves losing money rapidly.
To navigate these challenges, traders often turn to a variety of trading strategies, such as social trading, copy trading, and mirror trading. These approaches allow both new and experienced traders to leverage the expertise of seasoned professionals, make more informed investment decisions, and manage risk more effectively. In this guide, we’ll explore the landscape of trading, including the different types of trading, how market conditions affect your trades, and why risk management is essential for anyone looking to succeed in the world of trading.
Types of Trading
There are several types of trading, each offering unique ways to participate in financial markets and manage risk. Social trading is a collaborative environment where traders can exchange ideas, share trading strategies, and learn from each other on a social trading platform. This approach is ideal for those who want to benefit from the collective wisdom of other traders and industry experts, making investment decisions based on shared insights and community support.
Copy trading takes this a step further by allowing less experienced traders to automatically replicate the trades of experienced traders. By connecting your trading account to a copy trading platform, you can potentially profit from the expertise of successful traders without having to develop your own strategies from scratch. Mirror trading is another popular trading strategy, where automated algorithms are used to replicate the trades of professional traders in real time. This method removes much of the manual work and emotion from trading, enabling users to follow proven trading strategies with minimal effort.
Each of these trading strategies—social trading, copy trading, and mirror trading—has its own set of advantages and disadvantages. It’s important for traders to consider their own risk appetite, specific investment objectives, and preferred trading style before choosing the approach that best fits their needs.
What Is a Social Trading Platform?
Several important aspects allow us to define a certain brokerage service provider, a centralized crypto exchange, or an automation vendor as a social trading platform. Each of these aspects must be present in the product offered by any of the aforementioned online businesses.
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Always online. Socialization suggests a continuous connection to other individuals. A contemporary service provider wanting to deliver a strong copy trade app to its users must follow the principle of web 2.0 development.
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Interconnectedness. While some brokers and centralized exchanges may provide a sizeable catalogue of experts to follow, there should be other ways to utilize the abundance of retail traders performing extremely well. Community forums are a key feature, enabling traders to exchange insights, discuss strategies, and collaborate, further enhancing the interconnected experience. Multiple interconnected platforms make for a great experience for everyone!
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The multiplicity of choice. A client should be able to select a certain trader, gain access to their performance across various time spans, and communicate with them if necessary. Social trading platforms bring together various traders with different strategies, skills, and experience levels, allowing users to benefit from this diversity. While the latter is not absolute, the ability to talk to a trader or manager is a great way to build confidence in your investment plan or start doubting its feasibility.
The idea behind all social trading platforms is quite simple. Since many retail traders do not have any prior experience with the market (over 85% come to the crypto industry without any knowledge about it), companies should offer them guidance and education. New traders, in particular, benefit from the collaborative environment and support provided by the community, which helps them learn from more experienced participants. However, the vast majority of novice investors simply do not pay attention to any useful information until it’s too late.
Social trading is a great example of a web 2.0 concept bringing apparent value to a specific market. User-generated content is driving many media industries, but it also can be utilized in such niche sectors as financial markets. Retail traders who outperform the market due to their wisdom, analytical prowess, or sheer luck can generate investment strategies that may be used by others.
It creates a bridge between veterans and newcomers creating an environment where beginners can make expert-level market decisions without diving into the bottomless pit of knowledge required for a successful career as a retail trader.
Hallmarks of social trading must include communication and learning together with others. A good example would be an online celebrity trader with a solid track record sharing their knowledge and expertise with others for a fee. While it is not the best strategy to follow someone just because they exist on social media, it can be a better path to wealth for those who do not have any knowledge about crypto or finances in general.
What Is Copy Trading?
When we say “social trading platforms”, we often mean websites or apps that allow users to see what other traders are doing with their portfolios at any given moment. Users may choose to follow their actions and copy them manually or simply ignore them and wait for an opportunity that makes more sense to them.
Social copy trading is slightly different. You will need to focus more on preemptively selecting retail traders and managers who perform well and start following them automatically. Highly specialized bots will copy all the trades of any followed trader and place equivalent market orders in your name on the exchange of your choice.
This is a very straightforward approach that excludes any fidgeting on your part while providing the whole range of control over a dedicated portion of your portfolio to another person. This method can be incredibly useful for newcomers who do not have enough knowledge and expertise to make money on the market without any external help.
We can describe a typical copy-trading operation as follows:
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An investor goes to the platform where they can browse through a catalogue of managers;
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An investor analyzes past performances of managers they like and selects one trader to follow and copy;
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A special bot or trading script will start monitoring the market actions of the chosen manager;
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When they place any orders or make changes to their portfolios, the system will automatically execute copy trades to mirror all the trades of the selected trader.
Several important factors determine the quality of the outcome. You should be aware of all of them.
Social Trading vs Copy Trading
While there is a singular distinct difference between these two trading concepts, they still share a lot of commonalities. Social trading and copy trading both offer interactive and automated features, allowing users to either engage with a community or automate their trading strategies. We will start from things that are similar and touch upon differences later on. It is important to understand their similarities to make sure that you can extract the maximum amount of value from either of them.
Selecting the right manager
Independent retail traders, institutional investors, and specialized analysts can all provide their services on various exchanges and automation services. It means that you will have a wide range of choices. Some choices are better than others. Making a correct decision at the very beginning of your journey is the singular most important action you will take.
Whenever you are presented with a list of traders to follow, you need to contemplate the following:
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The performance history. It is the most important aspect. Do not limit your analysis to only comparing recent gains. Take a look at a longer time span than a couple of months. The best approach is to look at profitability from a lifetime perspective. While a manager could be making over 100% per year right now, their three-year history could be riddled with huge dips and losses of capital.
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Their chosen platform. Different brokers and exchanges offer similar yet still quite important terms to their clients. Some platforms will collect fixed fees for any placed orders. Others will take a cut from your profits (spread fee). You should be working with traders that prefer platforms that you are familiar with.
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Transparency and honesty. Many retail traders will provide their social media pages and other means of communication to potential followers. You should know the retail traders you want to copy. It is a good idea to talk to them via private messaging systems on social media platforms or at least view some of their content and check out what other users think of them.
In both social trading and copy trading, trading works by allowing users to replicate the strategies and performance of experienced traders in real-time, making it easier for newcomers to participate. These platforms simplify how trading work for users by automating the process of following and executing trades, reducing the complexity and effort required to manage investments.
Market Conditions and Their Impact
Market conditions play a crucial role in the success of any trading strategy. Financial markets are constantly influenced by a range of factors, from economic indicators like GDP and inflation rates to geopolitical events and shifts in investor sentiment. Market volatility, in particular, can lead to unpredictable price movements, making it challenging for traders to anticipate market trends and make sound trading decisions.
To navigate these risks involved in trading, it’s essential to stay informed about current market trends and regularly monitor market analysis. By understanding how different market conditions impact price movements and trading opportunities, traders can adjust their strategies and make more informed investment decisions. Whether you’re trading manually or using automated tools, being aware of market volatility and other risks involved is key to protecting your capital and maximizing your chances of success in financial markets.
Past Successes Do Not Promise a Bright Future
Survivorship bias is something we all fall for. Among top managers, you will often find people who do not have a long history. These are often lucky guys who managed to hit a lucky streak and may not be able to repeat their glorious achievements in the future. It is important to remember that past performance is not a reliable indicator of future results. People who want to successfully copy crypto traders should strongly focus on choosing those who can deliver consistent results.
Another issue with social trading is that some managers are shady individuals who may simply run multiple accounts placing risky market orders and showing off their gains in percentage points. In reality, they can be using fractions of their overall portfolio. Some platforms may allow such behaviours. Others will not. It depends on the policies employed by the administration.
Finally, some retail traders may appear consistent yet still make blunders when stress or hesitation makes them nervous and irrational. The human factor is the reason why 90% of market decisions are doomed to fail. As mentioned before, check out the whole history to identify traders who are worthy of your attention. However, be aware that future performance cannot be guaranteed based on historical data.
A couple of valuable tips:
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Just like in the case of trust funds and managers, you should be paying attention to the long-term profitability of any retail trader on a social trading platform. Always review a trader's historical performance to evaluate their reliability, but remember that it does not guarantee future results. Do not look at advertised numbers with triple-digits profits. Pick out performers who managed to survive with their portfolios intact throughout several years.
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Erratic profitability graphs often indicate that a trader is using high-risk/high-reward strategies meaning that their results are inconsistent and may ruin your portfolio depending on the timing. You may lose all faith right before they turn things around or start following them right before their next dip.
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Convergence is a thing. If too many people start following the same trader, the market may react if the volume of orders starts swaying the price. Imagine that a popular trader places a sell order and a thousand of their followers do the same instantly. The market may be swayed to start selling diminishing your returns. Look for reliable yet relatively unknown traders to follow.
Advanced Social Trading Strategies
Any contemporary investor knows about diversification and risk reduction. These concepts apply to social trading very well. Employing various strategies is crucial to diversify risk and avoid over-reliance on any single approach. Imagine the cohort of managers as a pool of financial assets. Some of them are risky yet promise huge returns while others stick to conservative trading tactics and deliver steady yet unimpressive gains.
Try to balance your portfolio around different managers, including seasoned traders with proven track records, and search for a good equilibrium between risk and profit.
How to Do Social Trading Smartly
First and foremost, focus on following multiple traders at once, but always remember to conduct your own analysis in addition to observing others. There are several reasons to lean toward this particular approach:
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You will be able to see the actual performance of any given trader by keeping track of your portfolio and practical results. It is a much better way to gauge the quality of the expertise that attracted you in the first place.
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Diversifying the list of followed traders can be a great way to offset higher risks with safe consistency. The rule is to not put all your eggs in one basket and ensure that your overall portfolio is protected from unforeseen circumstances. Following multiple traders also provides valuable insights into different strategies and market perspectives.
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Some platforms allow you to control the level of risk by automatically placing specific stop-loss and take-profit limits whenever you copy a trade. Use this feature to further improve the resilience of your portfolio to market volatility and unexpected risks.
By observing and interacting with other traders, you can learn trading over time and develop a deeper understanding of the markets.
Controlling Results and Reducing Inconsistency
The final technique that an aspiring investor needs to learn is how to split a portfolio between multiple followed traders. Most platforms have this feature, allowing you to select the appropriate investment amount for each trader's positions. However, some outdated brokerage service providers still require clients to create separate accounts for each followed trader.
You may adjust the percentage of your portfolio that will be dedicated to following a particular trader. For example, automation vendors like WunderTrading offer you total control over how much of your assets will be allowed for copy trading, letting you decide exactly how much to allocate to each trader's positions.
Calculating potential risks can be a tedious task and requires some advanced knowledge of statistics. However, you don’t need to spend countless hours to come up with a perfect ratio. The golden rule is simple: to reduce risks, dedicate a smaller portion of your portfolio to risky traders with huge returns. Always consider your overall financial situation before allocating funds, as your capital, risk tolerance, and financial health should guide your decisions.
A good approach to forming consistent copy trading strategies is to combine the idea of using the services of multiple retail traders with the ability to change the proportions of portfolios regarding distribution among followed managers and the investment amount for each.
Choose Whose Advice to Use
Unlike direct copy trading, social trading is a little bit less involved from an investor’s point of view. The data for future decisions is gathered by analyzing the performances of other retail traders and other investors, browsing internet forums for tips, and consuming content produced by influential analysts. Since many exchanges and brokers allow their users to communicate and share experiences, novices may enjoy access to a potentially unlimited ocean of useful information.
While this approach is less efficient in the sense that it does not automate any decision-making, it is still a good way for novices to dive into the world of financial markets and cryptocurrencies. The selection of the right people to learn from is crucial.
Use Other Tools to Make Better Decisions
Using charting tools like TradingView or MetaTrader can be an excellent method of distinction between alphas and omegas. These platforms provide access to a wide range of technical indicators, which are essential for analyzing price movements and making informed trading decisions. There are two approaches that you can use to identify whether advice from people you decide to follow is legit:
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Verify the information. Take a look at the post history of an influencer or a respected analyst and identify some of their tips and when they were made. Go to the price chart and simply scroll back to find that moment in time. See how many of their predictions turned out to be true. Are they consistent or simply have a community that forgets about their blunders?
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Back-test their strategies. Many analysts and retail traders who offer their services to investors have trading systems that they share. Some of them are “constructed” on specific price charts or use approaches that deliver average yet consistent results (swing strategy using RSI is a good example). Use their proposed strategies and test them against the historical data to evaluate performance. Do they work at all on multiple price charts? Do these systems fall in line with the performance history of a retail trader you follow?
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Automated trading tools and social trading platforms often provide buy and sell suggestions based on technical analysis, historical data, or AI algorithms. These sell suggestions based signals can help traders make more informed decisions and manage risk effectively.
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Social trading requires more dedication and effort on the part of an investor meaning that it also has a slightly higher skill ceiling and entry barrier. It may not work for people who either want to create a fully automated investment strategy or do not have the necessary expertise to identify managers that won’t deliver the desired outcome.
Before trading with real money, consider using a demo account to practice and test strategies. A demo account allows you to simulate trading conditions, backtest strategies, and build confidence without any financial risk.
Access to Global Markets
One of the major advantages of modern trading is the ability to access global markets from virtually anywhere. Online trading platforms have opened the door for traders to diversify their portfolios by investing in assets from various countries, including Forex, stocks, and commodities. This global reach allows traders to potentially profit from opportunities that may not be available in their local market.
However, trading in global markets also comes with its own set of risks involved. Differences in local law, regulations, and market practices can impact your trading activities and the safety of your funds. To navigate these complexities, many platforms offer tools such as trading signals, automated algorithms, and advanced tools for market analysis. By leveraging these resources and staying informed about the specific risks of each market, traders can make smarter investment decisions and increase their chances of success when trading across borders.
Should You Use Copy Trading Strategies?
It depends on your current knowledge about the crypto industry and financial markets in general. For newer traders, copy trading is an excellent way to start trading with minimal experience, as it allows them to learn from and follow more experienced investors. Copy trading with risk control is the best way to get acquainted with the basic principles of crypto trading while not compromising the process of building a portfolio. Choosing the right platform to use is essential. There are many interesting companies to choose from. Among copy trading platforms offering their services to crypto traders, one stands out thanks to its approach to copy trading in particular. WunderTrading has a neat feature that allows you to pick retail traders working on different exchanges and even using different types of accounts. Some traders specialize in spot markets while others prefer relying on leverage. The list of available traders features people who will charge as little as $10 to allow users to follow them. Some managers have much higher fees. However, the fixed monthly payment is a good choice for someone new to the cryptocurrency world. You can find several managers who perform well and pay a small fee while enjoying much higher returns by benefiting from their successful trades. On the contrary, paying a fixed fee is a good way to reduce the consequences of market activities that cause losses. With a relatively small capital, you can still create a profitable portfolio with copy trading techniques while paying fixed amounts per month. It is a fine choice for someone who is not comfortable with using their expertise and knowledge to enter the market with confidence.
Is Copy Trading Profitable?
The profitability heavily depends on a multitude of factors. If a 100% reliable investment strategy existed, everyone would’ve been using it and the world would run out of money to pay out to these smart investors. For someone to earn money, someone must lose it. It is the law of the financial world.
Copying a smart crypto trader can lead to impressive results, but it can be detrimental to your portfolio if risks are not reduced with diversification and portfolio distribution. There is always the potential for financial losses, especially if market volatility is not properly managed.
Here are some factors determining the potential profitability of either social or copy trading:
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The average expertise, knowledge, and luck of followed managers. If you trust someone blindly or use copy-trading techniques, you will have very little control over your own portfolio. Using custom stop-loss and take-profit orders can be a solution, but you need to learn how to adjust them according to the individual performances of traders you follow.
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The size of your portfolio. A large portfolio that does not require using any leverage will be generating consistent results with sufficient diversification. However, someone with a grand total of $100 will not enjoy the benefits of any risk aversion methods. The bigger your capital, the safer you are.
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Market volatility. Some events in the financial world and the crypto industry are simply unpredictable. Sudden market movements can have a significant impact on outcomes, leading to unexpected financial losses. The FTX fiasco was a great example of a house of cards falling down unexpectedly and crashing the whole market. The cryptocurrency community recovered yet shockwaves remained noticeable for months. Everyone lost money and it was impossible to predict a year in advance.
Automated strategies and copy trading can help reduce the need to trade manually, saving time and allowing traders to respond more efficiently to market movements.
Where Should You Start Copy Trading?
The choice of the main platform is just as important as finding the right people to follow. WunderTrading is a good destination for people who are interested in social trading and automation in general. Many platforms utilize an automated algorithm to replicate trades and manage portfolios efficiently, allowing users to benefit from sophisticated, hands-off strategies. The marketplace for managers is quite diverse and features all sorts of interesting retail traders that you can start copying with a couple of clicks.
You can also try limiting yourself to just a couple of bots that will copy the actions of other traders. However, this approach will significantly diminish your ability to diversify properly while narrowing down your field for experimentation and exploration to the bare minimum.
Selecting a reliable, both technologically and in terms of trustworthiness, platform is the foundation for your future copy trading endeavours. Working with independent automation vendors is a good idea since you won’t be limiting yourself to a single crypto exchange or a brokerage service provider.
Conclusion
In summary, trading is a complex and inherently risky endeavor that requires a thoughtful approach to trading strategies, market conditions, and risk management. By understanding the distinct differences between social trading, copy trading, and mirror trading, traders can make more informed investment decisions and potentially profit from the vast opportunities available in financial markets. Access to global markets further expands these opportunities, but also demands a solid understanding of local laws, regulations, and market trends.
Whether you’re a seasoned trader or just beginning your trading journey, it’s essential to stay up-to-date with the latest market analysis, use advanced tools, and continually refine your trading strategies. Effective risk management is crucial to navigating the ups and downs of trading and achieving your specific investment objectives. By approaching trading with a clear understanding of the risks and opportunities involved, you can better position yourself to succeed in the dynamic world of financial markets.
