Copy-trading is a feature offered by some online brokerages and trading platforms that allows users to automatically replicate the trades of other users or expert traders. It is also known as “social trading”. It is a form of automated trading that is based on the idea of following the trades of successful traders in order to potentially profit from their expertise and/or automated strategies.
While copy-trading can seem attractive, at least for its convenience, it’s extremely important to note that just about anyone can become a copy-trading ‘provider’. As such, investors need to be extremely careful as to who they follow; paying particular attention to how survivorship bias applies in this context.
Here’s how copy-trading works:
- Users who want to use copy-trading select a trader or group of traders to follow. These traders are often referred to as “signal providers.”
- The user sets up their account to automatically copy the trades of the selected signal providers. The user can typically choose the level of risk they are comfortable with and set limits on the amount of capital they want to allocate to copy-trading.
- When the signal provider places a trade, the user’s account automatically replicates the trade. If the signal provider buys a particular stock, for example, the user’s account will also buy that stock at the same price and in the same quantity.
- The user’s account will continue to replicate the trades of the signal provider until the user decides to stop copy-trading or to switch to a different signal provider.
It’s always important to thoroughly research and evaluate any signal provider before following their trades, and to be aware that past performance is not necessarily indicative of future results.