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Increasing numbers of Australians are trading forex, and many are choosing a copy trading strategy.
Copy trading is more than just taking inspiration from your favourite traders in the market. It involves an automated process that can save you time and energy. If everything goes right, it could even boost your chances of profitability, though nothing is guaranteed.
Find out how this works in our guide.
Understanding Forex Trading
Forex trading means speculating on foreign exchange (forex) market movements. Usually, this involves opening contracts for difference (CFDs) based on a forex pair.
This pair represents the two currencies you will speculate on. On the left, there is the base currency, and on the right, the quote currency.
So in the EUR/USD pair, the Euro is the base currency, and the USD is the quote currency. If you think the price of the Euro will rise against the Dollar, you'd open a long or ‘buying’ position. If you think the Euro value will fall, you'd open a short or ‘selling’ position.
CompareForexBrokers co-founder Justin Grossbard explains more:
“You won't actually buy or sell any of either currency”, Justin says. “You're just speculating on the relative price differences between the two”.
“If you're correct in your speculation, you take a profit. If you're incorrect, you accept the loss”.
What is Copy Trading?
Copy trading is a specific strategy in forex trading. You will use digital tools to find and automatically copy expert traders in the provider's community. When these traders make a profit, you do too. And if they make a loss, so do you.
There are many reasons why you might choose a copy trading strategy.
It May Increase Your Chance of Success
Traders report varying success rates with copy trading, but these tend to be a little higher than the average success rate for independent retail traders.
It Removes Much of the Effort
As you’re just copying the actions of leading traders, copy trading is low-effort. This makes short-term trades far less time-consuming, as the copy trader will do all the market scanning for you.
It Can Help You Build Your Skills
It’s always good to learn from the best, and good copy trading candidates are among the top traders. But you’ll only learn if you pay attention to what your trader is up to, which many copy traders neglect to do.
As we’ve seen, copy trading could help you increase your chances of success. While nothing in the forex market is guaranteed, the following steps can help you optimise your copy trading.
Choose an Established, Well-regulated Copy Trading Broker
As an Australian trader, you must trade with an ASIC-regulated broker. Using an ASIC broker ensures ASIC can help you should you come across any issues.
Look for brokers with an extensive network of copy traders and powerful search and filtering tools to manage their database. This makes comparing and contrasting potential traders much simpler.
Analyse Each Copy Trading Candidate Carefully
While copy trading will save you a lot of effort, it does require a bit of work up front. You’ll need to analyse each copy trading candidate, looking at metrics like success rates, copier numbers, and the types of instruments they are trading. Make sure all this aligns with your strategy before you trade with the candidate.
Use a Fast Execution Setup
Markets change in an instant, so your trade needs to be executed as closely as possible to that of the trader you’re copying.
Work with the best brokers and platforms available in Australia, offering fast execution speeds. Rapid execution gives you the best chance of mirroring the expert’s trades precisely.
Review What Your Copy Trading Candidate is Doing
Copy trading allows you to save time and effort and also allows you to learn. This requires some diligence, as you’ll need to review what the trader is doing, so you can build your understanding.
Regular reviews also help you decide whether or not the trader is living up to expectations. If they are not, you may need to start following a new trader.
Win and Lose with Your Chosen Trader
One of the common misconceptions about copy trading is that it’s fully hands-off. While it’s true that you can save time and energy with copy trading, you’ll still need to take an active role. This means scanning potential copy trade candidates and keeping an eye on their performance.
“I always recommend that you regularly review your copy trader’s performance and activity, making changes if necessary”, Justin Grossbard says.
“You will win and lose with your chosen trader, so it’s in your interest to make sure you’re following the right expert.”