Risk Management in Forex Copy Trading
September 4, 2023
Choosing a perfect strategy to become a successful trader is vital. Copy trading is one of the best strategies you can use to multiply your profit. Forex trading can be a fruitful investment, but making money in foreign exchange is not as easy as it sounds. You need to practice different strategies to apply the one that suits your priorities. On the other hand, you’re supposed to learn complex concepts to understand the market better. Trading Forex needs knowledge and discipline, and you might not be in the best time to dedicate yourself to learning new criteria. As trading Forex is considered a business, you must spend enough time and effort to update yourself with market data. In order to speculate prices, you must monitor different factors that might move prices in Forex. One of the best ways to avoid loss in Forex is to use the trading ideas of expert traders. In Aron Groups, we are not only providing you with the best trading platform for copy trading, but we also provide you with a useful guide on how to manage your risk when using the strategy.
Table of Contents
What is Copy Trading?
When using copy trading as a strategy, you’re actually duplicating the training ideas placed by professional traders. In doing so, you will follow an experienced trader to open fruitful positions. This is a perfect strategy for amateurs and professionals who do not have enough time to study the market and find the perfect strategy; they can use the trading ideas of someone else who has been a successful trader. The most important thing is to find a trader with a proven track record and start copying his trading ideas.
Read more: What is Margin Trading in Forex?
Copy trading terminologies
When using copy trading as a strategy, you will encounter 3 terms, which we will explain in the following:
The provider is the trader whose trades are being duplicated. They might be referred to as a master trader or signal provider as well.
The copier is the person who copies the provider’s positions in their trading account.
The broker is the intermediary that provides a copy trading platform like Metal Trader 5 and allows the copier and provider to connect.
Why should you practice copying trading?
As mentioned, copy trading is a perfect strategy for beginners and even professionals, providing them with a risk-free investment strategy. When using copy trading, you are following a professional trader and minimizing your risks. In the following, we will discuss four advantages of copy trading:
In copy trading, you are supposed to copy the trades of a provider, but you are in control, and you can determine how much you are willing to risk on each trade. You might be following a provider with large positions, but you don’t have to know the provider’s position size to make a profitable trade. Consider your funds and adjust the trade size to work proportionally to your account balance.
Copy trading is similar to social trading in that, in both strategies, you can compare different providers and track their record. You can evaluate wins and losses as they are visible in public.
Becoming a profitable trader takes weeks, months, and years; it is a long journey that not every trader can fulfill. You are supposed to dedicate hours to Forex trading to become a consistently profitable Trader. On the other hand, when you are using copy trading, you will be making money, possibly because you don’t have to stir at charts and market and speculate prices. You just need to copy the trades of a professional trader.
Having a diversified portfolio is necessary when trading Forex because you need to hedge your funds against inflation and sudden price fluctuations. The Forex is full of opportunities like trading currencies, cryptocurrencies, and Commodities like crude oil and gold, and you might have enough experience trading international currencies, but you might not be completely familiar with cryptocurrencies. In this case, copying a professional trader’s crypto position would benefit you and help you create a diversified portfolio.
Read more: How To Become a Professional Forex Trader?
Think about risk management.
Copy trading in Forex is a profitable strategy, but it is important to understand that even copying a professional trader’s position carries inherent risks. You shouldn’t be blindly copying trades. You must consider proper risk management to avoid potential losses that can wipe out your account. In order to make a profitable trade using a copy trading strategy, you must think about risk management considerations.
Here, we will share some strategies that might help you reduce the possible risk of copy trading:
As you remember, we have talked about diversification as one of the advantages of using copy trading, but it is also one of the key principles of risk management in Forex copy trading as well. When you create a diversified portfolio using copy trading, you are supposed to follow multiple traders with different trading strategies and asset classes. By doing so, you will be copying trades of different professional traders in different markets, and you will reduce the risk of being heavily impacted by the poor performance of a single trader. When you follow different traders, you will balance potential profits and losses and ensure a more consistent return on investment. So, choose different instruments and traders to copy their positions and create a diversified portfolio.
Set risk limits
One of the best ways to manage training risks is to set a risk limit. When you define the risk, you’re willing to take for each trade, you will be ready for unexpected price movement. Setting a stop loss order that automatically closes your trade when it reaches a predefined level of loss is a perfect way to avoid further losses. By doing so, you’re not only limiting your potential losses, but you’re also protecting your capital from excessive drawdowns.
For some traders, using a copy-trading and Forex Trading platforms strategy equals leaving everything to the copy-trading platform and forgetting about the position. But that’s not a good strategy. You need to regularly monitor the performance of the experienced trader you are following because you might need to consider effective risk management, and you need to monitor the performance of your favorite trader to ensure you are on the right track. Remember that even a professional Trader might change their trading ideas and behaviors. You need to monitor their performance to make an informed decision about whether to continue copying them or not.
You need a strategy for withdrawals and reinvestment. To choose a reliable strategy, you need to set realistic goals for withdrawing profits and reinvesting them back into your trading account. By doing so, you will maintain a balance between preserving your profit and allowing your account to grow over time. When you have a clear plan for withdrawals and reinvestment, you will lock in your gains and prevent them from being wiped out by potential losses.
In the end
Risk management is a critical aspect, no matter what type of strategy you choose for Forex trading. Copy trading is a perfect strategy that can multiply your profit, but you need to understand and implement effective risk management strategies to protect your investment. Consider diversification and set risk limits to reduce further losses. You need to have a clear plan for withdrawals and reinvestment and always monitor the professional trader you are following in case he might change his trading Behavior.