If you’re looking to make money in the financial markets but don’t have the time, experience, or patience to trade on your own then you’ve probably come across two popular options: copy trading and managed accounts. Both allow you to put your capital in the hands of more experienced traders or professionals but they work in different ways and have distinct pros and cons. So, which one is right for you? Let’s discuss this in detail so you have a clear understanding of copy trading vs. managed accounts and which one aligns better with your goals.
What Is Copy Trading?
As the name shows, copy trading involves mechanically replicating the actions of another trader. Your account instantly replicates what they do when they open a transaction. This implies that your account purchases the same currency pair, stock, or cryptocurrency asset that they do. When do they sell? Yes, the same is true for your account.
You can choose from a list of experienced traders on the majority of copy trading sites. Before choosing who to follow, you can look at their trading style, risk tolerance, and historical performance. After you select a trader, your account will duplicate that trader’s transactions in proportion to the investment amount you have selected.
Pros of Copy Trading
- Simple to Begin: No deep knowledge of the market is required. Simply select a trader and automation will take care of the rest.
- Transparency: A lot of platforms display comprehensive information about each trader such as their risk score, average return, and success rate.
- Control Over Your Account: At any time you can modify your risk settings, switch traders, or cease copying.
- Diversification: By copying different traders with distinct approaches, you can distribute your risk over a range of markets and trends.
Cons of Copy Trading
- Not Flawless: Even experienced traders make errors. Even if someone has a great record, they may still experience difficulties.
- Limited Customization: The trader’s choices are final. You can’t change their approach if they make a transaction that makes you uneasy.
- Emotional Influence: Observing your account’s real-time fluctuations can encourage you to manually act which can damage your plan.
What Are Managed Accounts?
The case of a managed account is rather different. Instead of copying other people’s transactions, traders provide their money to businesses or other professional traders who trade on their behalf. Using it for active trading is similar to employing a financial adviser. These experts oversee different accounts and employ innovative strategies, risk-reduction tools, and years of expertise in the hopes of increasing your money.
Types of Managed Accounts
There are a few different types of managed accounts in forex trading for beginners:
- With PAMM (Percentage Allocation Management Module), your money is combined with that of other investors, and gains and losses are allocated according to your portion of the pool.
- A manager who manages several accounts separately yet trades them all together is known as a MAM (Multi-Account Manager).
- Individually Managed Accounts are a completely customized strategy in which your account is handled independently of others.
Pros of Managed Accounts
- Professional Management: Skilled specialists with a structured approach are in charge of your money.
- More Customized Strategies: Managed accounts can be adjusted to your risk tolerance and financial objectives as compared to copy trading which involves adopting someone else’s approach.
- Hands-Free Investing: You don’t have to worry about daily trading selections after selecting a manager.
- Possibility of Lower Risk: Compared to individual traders, managers frequently employ more sophisticated risk management strategies.
Cons of Managed Accounts
Increased Fees: Managed accounts mostly include either performance fees, management fees, or both.
Less Control: You are unable to influence certain trades since you are relying on the management to make judgments.
Minimum Investment Requirements: A lot of managed accounts have high upfront costs, which prevents beginners from using them.
Which One Should You Choose?
Now still our question that which one should you choose? That depends on your investment goals, risk tolerance, and how hands-on you want to be. Take a decision by considering different factors:
Choose Copy Trading If:
- You’re just starting out looking for an easy method to get started.
- You would rather be in charge of who you copy and be able to quit whenever you choose.
- You don’t want to make a big upfront financial commitment.
- The thought of gaining knowledge by observing experienced traders in action appeals to you.
Choose a Managed Account If:
- You want a more individualized strategy and have more money to invest.
- You would rather have experts manage your finances without having to keep an eye on trades.
- You want different approaches and better-organized risk management.
- The greater costs of hiring a professional money manager don’t bother you.
