In 2016, a UK citizen became a short-lived media sensation. A news story covered his attempts to recover an old PC that he had thrown away. The hard drive of that computer contained hundreds of Bitcoins and was worth several million US dollars. It was a tragedy, but it also illustrated how many people did not take crypto seriously before it took off.
Contemporary retail traders with experience in finance understand the value of digital assets that do not have the limitations of stocks and provide plenty of room for speculation. As the main focus of investors who wanted to personally trade shifted from the Foreign Exchange market to crypto, the whole industry of financial products and services adapted to a new reality and started offering new exciting products to crypto retail traders.
The Brief Overview of Automation in Finance
The earliest attempts to use algorithmic trading systems in financial markets were made in the 1980s. Just a decade later, bankers and trust fund managers started hiring computer engineers to build advanced trading systems that completely changed the nature of many exchanges. For a long time, automation was available only to huge institutional investors.
Forex made it possible for brokerage service providers to expand the audience of automation by inviting small-time retail traders who wanted to use advanced trading tools. Companies that offered automatic trust management, copy trading, and other forms of automation started outperforming their competitors. Soon, specialized vendors started providing similar services to everyone.
The contemporary cryptocurrency market is focused on providing a large array of various financial products to different types of retail traders. Many companies solely focus on developing new technology and making it easier for people to get into trading.
There are various types of automation tools that you may want to explore:
- Customizable bots. Complex scripts that use signals from TradingView or other terminals to instantly place orders in your name on any exchange that has a functional API can be extremely useful to retail traders focused on technical analysis. Since you can customize every aspect of your automated trading system, opportunities for experimentation are endless.
- Preset bots like DCA and GRID. Some solutions work best when used as they are. For example, distributed cost average is a time-tested approach to buying assets at a reduced price. It can be a great way to slowly accumulate a strong portfolio. GRID bots are the latest advancement in the area of automation. They create a series of market positions with take-profit and stop-loss orders placed according to your risk tolerance.
- Copy trading is the focus of our guide. This method of automation is best suited for newcomers who do not have much experience in trading or dealing with cryptocurrencies. They will find it quite useful to use a tool that allows them to make money passively and offers a way to learn from the best in the market.
What is copy trading in crypto?
As the name suggests, copy trading is a method of trading digital crypto assets where an investor selects well-performing retail traders or managers and starts following them to repeat their actions in the market. This is a great solution for people who want to start using crypto and learning the market, but do not feel confident to just buy something.
It can be challenging to enter a new area of expertise. However, you should not miss out on an opportunity to make money in the most lucrative financial market of the decade. A copy trading strategy can help you overcome fear and doubt while giving you an excellent opportunity to watch how the best retail traders make their decisions.
Copy trading is an online service provided by companies like WunderTrading. The latter is one of many automation vendors offering advanced solutions to a big audience of retail traders. Among their products, copy trading is a service demanded by thousands of their loyal customers.
How does copy trading work?
Let’s use WunderTrading as an example of a platform where users can start copying the market decisions of experts. First of all, you will need several accounts:
- A centralized exchange with an API is required to start copy trading. Some of the biggest and most popular CEX platforms are Binance, Kraken, KuCoin, and Coinbase. These companies offer functional APIs and allow third-party providers to work with the market by bypassing the user interface.
- An account at TradingView. This advanced charting tool is used by many experts to create sophisticated technical analysis strategies. You don’t need to use the copy trading approach, but it should be connected to your WunderTrading account in case you want to run a trading bot to complement your other investment endeavors.
- An account at WunderTrading. This automation vendor has one of the cleanest interfaces for copy trading and provides you with a rich selection of managers and retail traders that consistently make profits and outperform the market.
If you have all the above, you will need to dedicate a certain portion of your portfolio to this particular strategy. It can be done in two ways:
- The first option is to have multiple accounts on an exchange. Simply deposit enough funds to an account that you want to use for copy trading.
- The second option is to limit the size of available capital in the bot menu at WunderTrading. This way, the bot that copies the actions of traders will never use more than it is allowed to.
A short copy trading guide
When everything is ready, you will need to follow these simple steps:
- Go to the WunderTrading official website and sign in.
- When prompted by the system, connect an exchange account.
- Choose the type of account that you want to use (spot or margin).
- Go to the marketplace in the side menu.
- Browse through the list of retail traders and managers partnered with WunderTrading.
- Filter them by exchange and account type to match your preferences.
- Choose retail traders that you like and click “follow” next to their name.
- A bot will be created immediately and it will start copying selected traders as soon as you launch it.
The whole process takes less than a couple of minutes. However, it does not mean that you should spend so little time choosing the right person to follow. There are several important factors that you should consider before committing to any manager.
Nevertheless, it is easy to become a crypto investor and start making money passively. Many experts featured in the WunderTrading marketplace have years of experience in financial markets and, particularly, in the crypto market which is a unique place in many ways. The domain is known for its volatility and complexity making it hard to use a fundamental approach to analyze assets.
Advantages of copy trading for beginners
The copy trading service is a great way for newcomers to get accustomed to the harsh reality of the crypto market. It is a large place where people can make millions in a single week. However, it is also a very dangerous domain that does not tolerate indecisiveness, doubt, and slow reaction. It is hard to become one of the best. Some believe that it is unnecessary.
Copy trading eliminates many entry barriers faced by new retail traders who do not have any experience in the crypto market. Let’s take a closer look at these advantages.
- You don’t need technical expertise. Working with centralized exchanges can be quite hard for newcomers. While it looks simple, there are some complexities and features of the cryptocurrency market that are unique to this particular industry. Swapping between various tokens, stablecoins, and other digital assets is a big challenge for newbies. With copy trading software, you can start investing without learning the intricacies of the industry.
- Copy trading crypto on Binance or any other large exchange is inexpensive. On top of mandatory commissions and fees, you will only need to pay a small monthly fee to a retail trader of your choice. If you want to expand your copy trading strategy and involve more managers, you may need to pay more. However, many experienced traders that are partnered with WunderTrading offer their services for free and can be followed without any additional payment.
- You can start right away. One of the best things about this particular approach to trading is that you can easily focus on diversifying your portfolio and making long-term investments while having a passive income stream. Of course, this system will work only if you make a good choice and start following well-performing retail traders.
- You are free to learn how experts make money. To understand a single tech blockchain startup and its potential, one must read lengthy white papers, go to public forums, and gather information from multiple trustworthy sources. When you are new to the industry, finding these sources will be a problem of its own. Instead, you can keep an eye out for crypto news and look at which of them are considered significant by experienced traders who you follow.
Copy trading tips for novices
This financial service works excellently for many financial instruments. You can choose the area where you feel comfortable. Let’s look at several examples:
- Copy trading futures and perpetual futures. These derivatives are traded with leverage and require a margin account to be used efficiently. It is a great choice for experts who can identify good deals and make informed investment decisions. However, leverage increases risks and can be quite dangerous if you do not set limits. It is a risky strategy that can pay off.
- Following traders with long-term market positions. Some retail traders who work on the spot market have profitable long market positions. They make decisions based on a plethora of factors and often have diverse portfolios. You can follow them and adjust your risk tolerance according to your preferences.
- Focus on specific exchanges. Binance is a good destination for people who want to work with derivatives and like when they have large leverage when they need it. KuCoin and Coinbase are excellent choices for people who are interested in trading on the spot market. Depending on your investment style, you can pick great managers.
This flexibility allows you to make informed decisions and diversify any portfolio by adding copy trading to the mix.
Don’t put all eggs into one basket
Diversification is a very important topic for people who want to use automation. You may start following a very successful trader or find a good way to utilize bots for a reliable technical analysis strategy. However, this early success may get into your head and entice you to dedicate all your assets to these promising strategies.
The issue with this approach is that the retail traders that you copy are humans. People make mistakes and have periods of poor judgments. They can make a misstep due to emotional distress or a bad case of hungover. Experts will endure one-time losses and recover, but you may not be able to survive a bad order on a margin account.
Copy trading is just another form of investment and should be treated as such. Do not dedicate more than 20% of your portfolio to this strategy and consider exploring other types of investments like holding appreciating assets, using arbitrage, or adding a couple of bots to the overall trading system. It is a good idea to have investments in other areas unrelated to crypto.
Choose good retail traders to follow
Selecting top performers is imperative to any copy-trading strategy. When it comes to picking the best of the best, it is important to follow some simple rules:
Do not make rushed judgments based on recent history. By default, the marketplace filter is set to just the last 6 months of market history. Every once in a while, even an unloaded gun may fire. It means that some traders may have a good streak right now, but they never performed better than average before this big streak. Expand the history to “all time” and make your decision based on this information.
Remember that past performance does not guarantee future returns. Someone who is an excellent technical analyst and makes money consistently may have a bad year or simply lose their grip on the market situation and start underperforming. The prior history is hugely important, but it does not give you a guarantee that a good performer will continue generating profits.
Consider switching exchanges if you find a really good manager. Do not limit your scope to only one exchange that you are currently using. Check out retail traders that show excellent results on other platforms. If they are really good and work on a specific exchange, you may create an account there too, and move some of your assets.
Which are good assets to copy trade?
Since this particular approach to investment is suited well for novices, it is a good idea to start with a digital asset that you understand. To ensure that you not only diversify your portfolio but also learn more about the crypto market, you need to be able to understand why experienced traders make their decisions. It will significantly improve the rate at which you study this area of the modern financial world.
On the other hand, you may find it more appealing to work with derivatives. These instruments require a lot of experience and decisiveness. Newcomers to the market may not have these crucial qualities and fear the volatility and riskiness of working with standard and perpetual futures that have a learning curve, unlike many other straightforward financial instruments like coins and tokens.
Choosing which asset to trade using the copy trading method is not the most critical issue, but it should be on your mind whenever you think about investing in any form of trust management. While copy trading is not exactly handing a portfolio to a third party, you do rely on decision-making done by other people. Be careful and only resort to this style of investing only when you do not have enough expertise to buy and sell assets without any external assistance.
Is copy trading expensive?
There are several costs that you should account for when contemplating the potential profit of using copy trading as your main form of investing:
- Commissions are collected by exchanges where you trade. Note that you can choose traders that work on your platform where you are familiar with fees.
- The price of the intermediary service. When it comes to working with WunderTrading, you only need to pay for the number of bots that you will run. Following traders is free.
- Commissions and flat payments are collected by expert traders. Some people allow others to follow them free of charge. On the other hand, some traders take commissions.
If the total price is something that you can afford, you should consider using copy trading as a way to diversify your investments. However, you should remember to never risk more than you can afford to lose if something goes wrong.
How much can you earn with copy trading?
Profitability depends on a variety of factors. The final profit equals total income, minus expenses like commissions and payments to the automation service. Some traders can earn upward of 500% annually meaning that monthly expenses will look meager compared to potential gains. On the other hand, a couple of slow months can create a visible gap in your portfolio.
Predicting the exact profitability is close to impossible since future performance is not something that can be estimated based on history. The human factor plays a big role.
Your ability to control risks is the only factor that affects the bottom line. There are several tips to reduce risks when using copy trading:
- Set take profit and stop loss markers according to your risk tolerance. It is important to reduce the risks of losing everything due to a bad decision by someone playing a completely different game.
- Make sure to choose multiple traders to follow. Pick experts that demonstrate steady results across a long period to work with people who make calculated actions without risking too much.
- Dedicate only a portion of your portfolio to copy trading and make sure that you do not risk your capital. A good idea is to use just 15% — 20% of your assets to engage in copy trading.
- Work with companies that have experience in this market. Companies that do not have a good marketplace, partnered managers, and additional features will not provide a good experience.
How much money do you need to start?
Thanks to the flexibility of contemporary financial markets, you can start investing with just a couple hundred US dollars. The initial cost of investment for copy trading still comes to your starting capital since many services are free of charge:
- You can use a basic plan at WunderTrading to run up to five bots simultaneously.
- Many traders allow other users to follow them for free.
- Exchanges like Binance provide sizeable leverage at low prices.
However, having a small portfolio means that you will be exposed to a much larger number of risks including being margin called, running an insufficient number of bots, not being able to meet certain criteria for opening a market position, etc. It is important to have a big portfolio to diversify properly. However, it should not be more than you can afford to lose.
A good idea is to have an emergency fund that covers at least three months of expenses and a small day-to-day fund that will cover your daily expenses. Everything that you make on top of that should be invested.
The main takeaway
Copy trading is a very simple investment method that can be used by professionals, novices, and even conservative investors. It is a great way to diversify your portfolio while adding more financial instruments to your arsenal. However, you should note that focusing on copy trading alone is not a good idea for people who want to create a balanced portfolio.