Copy Trading Account Diversification – A Mix of the Best Traders!
As a Copy Trader it is important to diversify your account to minimize risk and increase your chances of success. Learn unique trading styles from different traders all at once!
Attention all of you copy traders, whether you’re the new kid on the block or are familiar with the concepts of this new social way of trading, I have some advice. In our big community of traders there are various types of investors trading different assets all in their own unique way. It’s not unlikely that you feel lost in this jungle of traders and it can indeed be difficult to figure out who to copy and what to trade. After all you will not only be copying but also learning so you are also choosing your future mentors! Account diversification is where it all begins, it is simply a mix of what works best for you! Learn the benefits of what diversification can do for your account and apply them to your own social trading strategy.
How to Diversify your Risk and Assets?
Different traders have different characteristics. One likes to trade short expires but another may only do long term trades and yet another may do both. It would be wise to reduce your risk by spreading your investment by following a short term and a long term trader. Perhaps you would risk less money on shorter trades but more on the long ones. This way you will get more signals to trade and a variety of assets too! Some assets pay higher returns so if you are choosing between two traders with an equivalent success rate it would be more reasonable to follow the one with the higher payout.
On the other hand, there is a risk with copying two or more traders that trade the same assets and even similar expiries. You don’t want to get a put signal on an asset at the same time as you receive a call signal with a similar expiry on the exact same asset. It will only confuse you and lead to losses because only one of the trades can win. It’s better if the traders you follow give very different signals. For example, copying weekly signals on an asset won’t interfere much with 10-30 minute or intraday signals on the same asset. Considering this it can in fact be a good idea to follow two traders that trade the same asset because you are capturing signals on more than one time frame.
Currency Correlation – Diversify in the Right Direction!
Have you ever noticed how some currency pairs seem to always go hand in hand? When one is rising the other rises too or when one is falling the other rises instead. We call this currency correlation. It is another fact to strongly consider when following different traders. You want to diversify your account in the most correct and beneficial way possible. Ignoring currency correlation could lead to r trades that cancel each other out as effectively as buying a call and a put on the same signal.
Here is a quote from Investopedia.com:
“For instance, by knowing that EUR/USD and USD/CHF move in opposite directions nearly 100% of time, you would see that having a portfolio of long EUR/USD and long USD/CHF is the same as having virtually no position – this is true because, as the correlation indicates, when the EUR/USD rallies, USD/CHF will undergo a selloff.”
What you must understand as well is that with binary options having two trades cancel each other is worse than having no position at all. This is because you need to win more than 54% to break even. One loss and one win is not enough to maintain this rate so in the end it would be a losing trade.
Social trading allows you diversify your learning as well. Having an expert mentor is good but no one is good at everything. Everyone has their drawbacks and their own expertise so learning from multiple sources is the best way of acquiring vast knowledge. From one mentor you might learn how to use support and resistance while you learn how to interpret candlesticks from another. Why not ask the traders you are interested in learning from what they are good at? Once you have a few mentors that are each good at something worth your while you know you are learning each method from the best! And once you’ve learned from the best you can put together your own powerful strategy that combines all you have learned. Then you’ll be the best.
Diversification is your Friend
Diversification is your friend. It helps guide you along your way and keeps you from making too many mistakes. In a sense it is a form of money management. You never put too much money on any one trade, you should also never trade any one asset, strategy or trader too much. You should take advantage of copy and social trading by following a mixture of different traders. While you’re at it you can learn different trading methods from each and every one of them. After following different traders for a while it gets easier to know what kind of trader you are and thus, you won’t have any problems choosing who to follow here on CommuniTraders 2.0.