What is Copy Trading?
One of the common things in millennials is that they want to retire early.
With the power and advancement of technology, more and more people are becoming financially independent through the internet, but that’s not the point of this post, in this post, we’ll discuss how anyone can be financially independent and retire early through CopyTrading.
One of the reasons I love the concept of CopyTrading is because it provided the opportunity to grow wealth significantly faster to everyday people like you and me, a privilege which only wealthy people had access to before through HedgeFunds.
When asked to name the greatest invention in human history, Albert Einstein replied “compound interest.”
And this is what you need to utilize in order to become a successful CopyTrader.
But first, let me get a few FACTS straight up.
Copy Trading is NOT EASY
With the rise of promotional campaigns, press releases and advertisements, people are nowadays being lured into the CopyTrading industry just like any other GET-RICK-QUICK scheme. As a trader and fund manager, let me tell you that CopyTrading is not easy, yes, it’s easier than trading all by yourself, but it takes market research, knowledge and an investor mindset to find traders that match your investment expectations and investment size. Before you jump into copying a trader, a detailed analysis of their trading behavior, portfolio and money management is essential.
At the end of the day, this is an investment you’re making, and Financial Market always rewards informed, knowledgable, disciplined investors.
I’ll cover more on how to choose a trader that matches your investment criteria, but for now, let’s move on!
CopyTrading WON’T make you rich.
Well, if you’re already rich, then CopyTrading will make you richer. If you’re not, then CopyTrading won’t make you one. It can obviously help you retire quickly, and grow your wealth over a long period of time, just like any other investments. If you’re in this to make some quick bucks, I’d recommend you to go to a Casino instead. You’ll lose money, but at the same time, at least you’ll enjoy the experience.
So what can CopyTrading do for you, if done the right way?
CopyTrading will help you grow your wealth over time, slowly, at a random pace, but at a higher rate than traditional banks.
Let’s make a quick example calculation. If a trader has an average annual return of 20% (After all the loses, drawdowns and negative months), and you invest $10,000 in that fund and deposit $500 at the beginning of each month, here’s how much you’ll end up with if things go right for you:
After 2 years: $27,600.00
After 5 years: $69,532.80
After 10 years: $217,669.46
After 20 years: $1,503,504.00 (1.5 Million)
Now, most funds will not return 20% consistently over a period of 20 years. Some of the biggest HedgeFunds in the world though actually did make it happen. For example, BridgeWater Associates made an average annual return of 12% for over 30 years, with only 3 losing years in that period.
For you to make it happen, as an everyday investor, will require effort, in terms of money management and risk management to build a powerful portfolio of copy traders.
So, How To Make It Happpen?
1. Prepare the mindset: How much money do you want to invest? How much of them are you ready to lose? Are you just looking for short term return or long term investment goal? If you’re looking for just short term return, this article might not be very helpful for you. According to statistics, investors who enter the market for short term return ends up losing all their capital because they tend to take higher risk. I’d recommend an investment goal and mindset of at least 5 years for you to be successful in the financial market.
2. Choose the RIGHT Traders: You’ll have to choose the right traders to build a portfolio that matches your risk management goal. You also need to choose traders that have higher reward ratio over risk. For example, a trader that has a 1:2 risk-reward ratio might not be a good choice for you. This means if the trader has more losing trade and less winning trade, at the end of the year, the fund will report a loss.
However, if you choose a trader with 1:4 or 1:5 risk-reward ratio, even if the trader loses more trades and wins fewer trades, at the end of the year, the fund will report a good profit. Because in each winning trade, the trader is recovering 4-5 losing trades, and he needs very few winning trades to be profitable in the market, thus have a higher probability to report a profit at the end of the quarter or year.
3. Evaluate the source of a trader’s return: With the tech and crypto market booming, it’s now easier than ever to luckily build up a good trading history. For example, if you bought bitcoin back in 2016, and did nothing, you’d have 3 years of consistently profitable trading history. Without any strong trading or money management skills. At a quick glance, this trading history will look outstanding to any investor and they’ll jump into copying the person right away. But remember, you’re thinking about the long term here. The trader is simply using buy and hold, nothing else. If somehow the assets this trader holds depreciate significantly (this is mostly the case for cryptocurrencies), you will lose a significant portion of your investment.
4. Diversify: As Warren Buffet said, never put all the eggs in one basket. You should treat each trader you invest on as financial instrument, instead of thinking them as a person. Just like any financial instrument crashes, a trader, no matter how good they are at trading, or how amazing their track record is, can also report significant loses. Keep in mind that world’s biggest traders and biggest hedge funds, with billion-dollar resources and information, also reports loses in some years. That’s beauty of financial market, it giveths and takeths away, it tests your patience, resilience and rewards you only if you’re qualified.
So how to diversify your copy trading portfolio? It really depends on your goal, and the mindset you have. However, it’s always better to mix up your portfolio with low (Annual return less than 10% with less than 5% annual drawdown) and medium risk traders (Annual return more than 10% but less than 40%, with less than 20% annual drawdown).
Apart from risk, you should also diversify traders based on the market they trade on. It’s a good idea diversify with Stock, Currency, Commodity and Crypto Traders, but make sure you allocate lowest possible funds to crypto traders since it’s a highly unreliable and volatile market. Currency traders are so far more stable than stock traders because unlike stocks, currency market crashes rarely. Apple or Microsoft stocks can crash 20% on a bad day, but that will almost never happen for a currency without a devastating crisis.
5. Look for specialists rather than Jack of all trades: Every good trader specializes in a certain market. It’s better to copy traders who only traders certain markets instead of trading all the markets at the same time. If you copy a currency trader, make sure they only trade currencies. Since you’re already diversifying your portfolio with multiple traders from different markets, you don’t want someone who trades everything. Specialist traders know their specific market very well and usually identifies trade opportunities better than traders who trade all markets.
6. Be an informed investor: Just because you copy trade, doesn’t mean you don’t need to know anything about the market. I must tell you that Financial Market has the tendency to transfer funds to informed, knowledgable investors from uninformed investors.
Stay updated with the markets you have invested money on. If your copy trader is making good profit or reporting losses, know why it’s happening, is the market shooting up for a reason? Try to identify why your trader is losing money, is it because of an unfortunate market crash?
However, if you’re already busy, have a job and other responsibilities, it can be tricky and almost impossible for you to stay updated with the market since you don’t really have the time to do hours of Market Analysis.
This is where iTradely comes into the play. iTradely helps you complete hours of market analysis in a few minutes a day.