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Nicholas Kitonyi
Nicholas Kitonyi
Articles (183)  | Author's Website |

Why Copy Trading Is Becoming Popular With Investors

Some traders prefer to copy the ideas of experts

May 31, 2017 | About:

Copy trading is now one of the most popular ways of trading stocks, currencies, commodities and indices in various markets. This form of trading has been restricted in the U.S. alongside other forms of currency trading common in Europe since the introduction of the Dodd-Frank Act following the global financial crises of 2008 and 2009.

Copy trading sometimes referred to as social trading  involves copying trading activities of other expert traders. When a certain trader whose trades and investing philosophy you follow closely makes a trade, you are alerted on the trading platform.

Some platforms allow traders to choose whether to act on the expert trader’s activity while others are completely autonomous. The ability to copy another trader is what has earned this modern form of trading the term “copy trading” while the ability to follow/copy multiple traders at a time makes it social.

Right now, there are dozens of online-based copy trading platforms that provide access to global traders except for U.S. residents. But some are still trying to work around the rules and gain access to the lucrative North American market.

Due to hedging and scalping restrictions in the U.S., this type of trading has found it difficult to gain traction in the world’s largest financial market, but this does not mean that traders are completely locked out of the aspect of copy trading.

In fact, contrary to expectations, regulation is what has created this opportunity in the U.S. How? you may ask. Well, if an investor makes purchases or sales of stocks in which he owns more than a 5% stake, SEC regulations require him to report that trade within 10 days.

Now, as you may notice, most investors that own more than 5% in a company are usually hedge fund managers, or executives, popularly known as gurus in the investment community. And as GuruFocus notes, “some gurus report their purchases or sales within two days.” The platform’s Real Time Guru Picks feature keeps investors more closely informed on the activity of such gurus.

What does this mean? It simply suggests that, as an independent retail investor, you could easily participate in copy trading legally without breaking any rules set forth by the Dodd-Frank Act. By using platforms such as GuruFocus, all you have to do is wait for the alerts. And once they hit your mailbox, then it’s time to give your broker a call.

You do not have to buy the same number of shares, but if the guru bought the shares of a given company and then you buy based on that alert, then you are basically copy trading. It’s not the ultimate solution to successful stock market investing, but it’s a sound strategy given the level of success achieved by some of these gurus.

In this case, we are talking about legendary investors like Warren Buffett (Trades, Portfolio), the chairman of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), as well as the vice chair of the company, Charlie Munger (Trades, Portfolio), who have demonstrated unquestionable success over the years with their stock picks.

Alternatively, you can also follow the likes of Whitney Tilson (Trades, Portfolio), who’s well known for accurately betting on some of the most promising stocks in the market including Netflix (NASDAQ:NFLX) and Elon Musk’s Tesla (NASDAQ:TSLA) among others. The list is long and varied.

Nonetheless, unlike in other copy trading platforms especially those restricted to conducting business in the U.S., you can easily miss out on an opportunity if you do not act immediately following the trade alert. As noted, most gurus report their trading activity when it’s on a company they own more than 5% within one week.

Some news channels report this activity a day or two later while others tend to do it even a week later. By this time, the stock price is likely to have moved significantly thereby almost nullifying the opportunity that existed. Therefore, being able to receive these alerts instantly once they are filed with the SEC is crucial. This can help you in becoming the perfect copycat investor.

For those trading from other parts of the world, the choice is wide for platforms that allow copy trading. Some of the most popular platforms include eToro, ZuluTrade, Tradeo and Ayondo. On these platforms, non-U.S. residents can easily follow the trades of several expert traders covering all market segments including currencies, stocks, commodities, indices and even CFDs.

However, the downside to these platforms is that traders must be very careful when choosing who and whose trades to follow. Some expert traders might appear to be very successful, but maybe their portfolios have just a couple of stocks. Others might have dozens of stocks in their portfolios and appear moderately successful, but their extensive portfolios suggest their success has nothing to do with luck.

Time frames are also key when investing via these copy trading platforms because a person whose success can be tracked back a few years is better than a trader whose success only tracks back a couple of months.

Conclusion

Copy trading is becoming one of the most popular ways of investing – and while it may appear to be completely locked out of the U.S. market, this may not be so given platforms like GuruFocus that track the activities of guru investors. On the other hand, for traders from the rest of the world, there are a few copy/social trading options out there to sample.

Disclosure: I have no position in any stock mentioned in this article.

About the author:

Nicholas Kitonyi
Nicholas is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on research sites like Seeking Alpha and Benzinga.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. As a trader, Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website


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