Should you add Copy Trading in your investment strategy?
Dealing with crypto trading on a daily base, I get some people asking me for opinions on copy trading.
Copy trading allows you to choose a specific trader whose trades you want to copy. You can choose to follow different traders at different times, follow multiple traders, or follow the same trader all the time. By following sophisticated traders, you can understand their trading strategies and begin to understand the rationale behind their trades.
In copy trading,* the process of opening and closing trades is automated*, precisely by copying the trader you have decided to link your account.
Copy trading can be integrated into an investment strategy as a form of diversification, not forgetting, that trading is always a high-risk activity and in copy-trading the risk is of the money's owner but the risk undertaking is delegated to another person.
So, we must always be careful not to overexpose our portfolio too much, doing calculations well, based also on the risk tolerance, and then setting a fair percentage of the portfolio to this business.
What are the three key factors that I always take into consideration when evaluating a trading strategy (and then a copy-trading strategy as well)?
The first one is that I want my money to be withdrawable and to be placed into an account I really own. I do not like sending money to third parties platform that has some restrictions to withdrawal, where I may have to wait some time to withdraw my money or I may need to perform other commercial action to get my money back.
The second one, is the stability of this platform to see who are the backers, and for crypto-copy-trading I am using Zignaly since some time because it's directly backed by Binance and the funds are into Binance. That is a satisfying protection level for my parameters. I am not trusting other platforms where they created their own wallet and deposit ecosystem.
The third one of course is the choice of the trading strategy and of the trader. Depending of my risk profile and risk attitude I will go for the Spot Market or the Derivatives market and then I will evaluate the Trader I will start copying.
How much draw down? How much Risk-Reward ratio? How many profit positions if compared to the losses?
Image source: https://profitpress.com/7-additional-income-streams-for-freelancers-to-diversify-earnings-grow-revenue/
Let's see why diversification is important:
- Reducing losses: Putting all your eggs in one basket can have disastrous results.
- New investments: If a trader is interested by an investment opportunity, but is reluctant to commit all their capital, portfolio diversification gives them the chance to limit their exposure.
- Long-term growth: Asset diversification means investors have less chance of missing explosive growth in one particular asset class. While equities may offer the greatest returns one year, fixed-income instruments may dominate the next. A well-diversified portfolio can help cover all the bases.
Bear in mind, however, that there are also some disadvantages of diversification, such as:
- It can limit gains: In the short-term, it is possible that investors will miss out on high returns because their money is tied up in low-risk assets.
- It's more complicated: Finding a perfectly balanced portfolio isn't easy, and it can be incredibly time-consuming. Ending up with investments that are too low-risk or too high-risk can have equally disappointing consequences.
Do you have an original strategy to protect your portfolio?
When I talk about copy trading, Zignaly comes in.
Yay! 🤗
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