Art of сopy trading: strategies ensuring stable profits
The growing popularity of copy trading is driven by the fact that newcomers increasingly choose to replicate the experience of seasoned traders. The essence of copy trading lies in the ability for traders to mimic the same trades as experts, paying a small commission for this service, typically ranging from 5% to 10% of the subscriber's profits. This form of trading also provides benefits to experienced traders, known as masters, as they can earn additional income beyond their regular trades. In this publication, we will explore three strategies that experienced traders should consider.
Who is a master in copy trading?
A Master is an experienced trader who allows others to copy their trades, in return for a share of the profits from the copied trades. To increase their share of profits from subscribers, a Master must:
- Increase the number of subscribers.
- Protect their trades from significant losses.
- Identify profitable trades.
All these goals are interconnected. Traders prefer to follow experts who can consistently generate profitable trades with the least possible risk. Therefore, traders will want to implement strategies that protect their accounts from significant losses while continuously securing profits.
Three strategies for experienced traders
Market Analysis and Risk Management are crucial components that experienced traders must master. Here are some strategies that can be employed.
Strategy #1: Adapting to Market Conditions
Have you ever experienced a situation where your strategy led to the closure of several successful trades in a row, followed by unprofitable ones? This is often due to changes in market conditions.
A trading strategy that is effective in ranging markets may prove ineffective in strong trends, and vice versa. For instance, range-bound strategies excel in sideways markets but can become distorted during strong trends. Breakout strategies, on the other hand, may be profitable in volatile market conditions but result in losses when volatility is minimal.
Strategies don't always yield profits due to the constant changes in market conditions. Therefore, it's crucial to be aware of in which market conditions your strategy will be most successful.
There are two main types of market conditions that are opposite to each other:
- Stable, calm, or range-bound.
In volatile or trending market conditions, it is advisable to employ trend-following strategies, such as breakout trading or buying on dips. In trending conditions, favorable prices are short-lived as market prices shift, attempting to find a new equilibrium.
During an upward market movement, it is recommended to buy on corrections or breakouts. In a market downturn, consider selling on rallies or breakouts.
Mean-reversion strategies perform best in range-bound market conditions. This means that in a rising market, it typically won't strive for further growth but will return to its mean value.
Additionally, it can be observed that prices spend more time changing little compared to rising or falling. Buying at support levels and selling at resistance levels also usually yield good results. Conversely, breakout trades in such an environment may be unprofitable since prices won't undergo significant changes due to the balanced supply and demand.
Evaluate your strategy and conduct manual testing in various market conditions. If you encounter market conditions that are not optimal for your strategy, it is recommended to take a break to minimize losses. It's often best to switch to another strategy optimized for the specific market environment.
Strategy #2: Risk and Return Assessment
You'll never know for sure whether the next trade will be profitable until it's closed. As a result, many traders tend to think that the market is random, and having more than a 50% win rate is a profitable strategy.
It's not quite accurate. Would you believe that a trader could have a strategy that wins 80% of the time but still loses in the long run? How is that possible?
This happens because the trader is taking on a significant risk to earn a small amount. Experienced traders are aware of their metrics, considering trade consistency and a high win rate. Are you risking a lot for a small profit? Change your approach: risk less to gain more.
Trend-following strategies allow for a high reward with low risk, making them popular among experienced traders.
Strategy #3: Rational Risk Management and Potential Losses
Losses pose a constant challenge for traders. A significant level of loss creates complexities. When a trader finds themselves in such a situation, the temptation of risky behavior becomes too strong, forcing them to take perilous steps to escape the predicament. This, in turn, leads to even greater losses, compelling the trader to make even riskier decisions in the hope of quickly offsetting the losses.
This cycle creates a negative spiral that gradually depletes the capital in the trading account. This process begins with the use of leverage in any position. Even if a trader loses 2% on one trade, they can manage as several consecutive losing trades keep loss levels relatively low.
However, adding more leverage to trades increases the likelihood of catastrophic losses. As losses grow, purchasing power diminishes, reducing the ability to recover.
For successful trading and maximizing earnings from copy trading, it is crucial to effectively manage drawdown levels and reduce risks by minimizing the use of borrowed funds.
Effective Steps to Success in Copy Trading: Mastery, Resilience, and Subscriber Growth
Increasing the number of subscribers in the world of copy trading involves achieving consistent results while reducing credit risk. Consequently, potential drawdowns are minimized, and the trading master can enjoy the profits generated by their followers. A deep understanding of various market conditions and their alignment with your strategy is a key factor in achieving more stable outcomes. Effective management of the risk-reward ratio, aimed at ensuring the sustainability of your strategy, not only validates your success but also attracts the attention of new subscribers.