Forex trading is the act of buying and selling currencies in the forex market with the aim of making a profit. With the influx of new forex traders and busy lifestyles, more and more forex traders are turning to using third-party plugins and social trading options to trade hands-free. One of these options is copy trading, which allows traders to replicate the trades of more experienced traders for a small fee.

In this article, we will look at what copy trading is, and how copy trading works in the context of the forex market. We will also look at how beginner traders who want to give it a go can evaluate a signal provider, and we will review some risks that traders should look out for when participating in social trading. If you are eager to get started right away, you can open a live account with Saxo Capital Markets PTE to trade forex. If you would prefer learning more about the subject first, read on.

What is copy trading?

Copy trading is a form of social trading. It allows traders to automatically replicate the trading strategies and the trades of more experienced traders, which are also known as signal providers. These signal providers sign up to allow their trades to be copied, and they earn a small amount of money for their services, paid for by those who copy their trades. This can come in the form of a one-off fee or a subscription.

Copy trading allows novice traders to benefit from the experience and expertise of these signal providers, who generally have spent years in the markets to master trading and have high success rates. Signal providers provide their performance history and risk profile, as well as data on their win/loss ratios to allow copy traders to determine whether they want to subscribe to their services.

How copy trading works in the context of forex

If you are eager to start copy trading forex trades, you can follow these steps outlined to help you get started:

Choose a copy trading platform

The first thing you should do is choose a copy trading platform that suits your needs and your trading style. It should also provide you with the option to copy forex trades. There are many copy trading platforms available, so you should do your due diligence and research their features and fees structures.

Select a signal provider

Next, you need to select a signal provider. This is the person whose trades you will copy. You should make sure you choose one that fits your risk appetite and have a good track record of trading successfully. You should evaluate their performance history, trading style, risk profile, and other criteria. Read on for some insight on how you can evaluate a signal provider.

Set your parameters based on your risk appetite

Many copy trading platforms allow you to set your own parameters instead of copying a forex trader completely. This means you will have to set your own risk parameters, including the amount of capital you would like to trade, the leverage you would like to use, and other risk management approaches. This is the time for you to make sure you are comfortable with the risk you are taking and the trades you will be making.

Start copying trades

When you have selected your signal provider and set your risk parameters based on your preferences, you can start copying trades. The copy trading platform you use will automatically replicate trades based on your preferences, and you can monitor the performance through accessing your account and portfolio. You can adjust your risk parameters based on how your trades are doing, so it is a good idea to keep a close eye on the markets even when you are replicating someone else’s strategy.

Pay subscription or one-off fees

Finally, copy trading platforms and signal providers charge a small fee for their services which you will have to pay one-off or as a subscription. You may also be charged a small fee that is based on the percentage of profits you have earned from the copied trades.

How to evaluate a forex signal provider

When looking for a forex signal provider, you will need to do your due diligence and evaluate their performance seriously to protect your funds. You should consider the below factors:

Performance history

This is the most important factor to evaluate. You should look for a signal provider who has a consistently good track record of trading successes in terms of profit. You should make sure this profitability takes place over a significant period, instead of just short-term. However, you should also remember that signal providers are human who can make mistakes, and you should not equate past performance with guarantee of future results.

Trading style

Next, consider the approach they take when they trade and make sure the signal provider’s style matches your own. This means if you prefer long-term trading strategies, you may want to look for one that employs these strategies, instead of a scalper. If you are someone who likes to trade currency pairs involving the USD, you should find one that does too.

Communication and responsiveness

Some copy trading platforms allow signal providers to communicate with trade copiers. If you are using one of those, you should make sure you choose a signal provider who communicates effectively and clearly. You should make sure they provide regular updates on their activities and explain their decisions, if you are looking to gain insight into trading strategies and hone your skills.

Market knowledge

You should also consider the market the signal provider is trading in and how much they know about the market. In forex trading, this means looking at how much the signal provider knows about the currency pair they are trading. You should make sure they understand what drives the currency’s price movements, so that they can make informed decisions when trading.

Fees

Consider the fees charged by the copy trading platform and the signal provider. Usually, this fee is a portion or small percentage of the profitable trades copied. These percentages vary, so you should ensure you find one that is reasonable and transparent, with no hidden charges that can surprise you along the way.

Some risks to keep in mind

Despite the many benefits of copy trading, there are also risks to keep in mind. One of the most obvious risks is that the forex market is volatile, and there is the potential for loss. You should therefore never trade with more money than you can afford to lose.

You should also look out for the risk of dodgy or unreliable signal providers who may end up doing more harm than good. Always vet the trading platform and performance history of the signal provider, and if something feels off, do not hesitate to close your trades and stop following a provider.

The bottom line

Copy trading can be a great way for inexperienced traders to hone their skills and learn from more experienced traders. They are relatively inexpensive, and traders can learn a lot when they select the appropriate signal provider. However, it is not an activity without risks. Traders should ensure they do sufficient research and find a copy trading platform and provider that works for them.