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Copy Trade: Risks and Tips

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2022-09-08
Copy Trade: Risks and Tips

To clear up some beginner’s confusion about the easy-to-jump-on-board Bitget One-Click Copy Trade, we have compiled a risk handbook that should be of great use to any trader.

Read this ​​ultimate guide for more tutorials and tactics on how to build your own winning strategy when trading with Bitget's One-Click Copy Trade.

What Is Copy Trade?

Bitget One-Click Copy Trade is a special trading program that allows anyone new to trading and crypto begins to start trading right away. Users without the experience and/or time to practice active trading will let the system copy the orders placed by expert traders for them, hence the name Copiers. Also, a verifiable list of orders can very well reveal the professional trading strategy that can be followed and adjusted to an individual's risk appetite, therefore Copiers are usually called Followers.

Followers/Copiers are given the opportunity to trade without prior knowledge and expertise and create their own strategy by tracking the verified performance record of Expert Traders on our Copy Trade Portal, while still being able to manage their trades deliberately.

On the other hand, seasoned traders can generate new streams of passive income, which can be equivalent to as much as 10% of their followers’ revenue, together with exclusive programs and bonuses. Moreover, this is an excellent chance for trading experts to increase their public exposure by becoming an influential voice of the crypto community. Not yet registered to be an Expert Trader? Join our Star Trader Recruitment Program!

What To Keep In Mind Regarding Margin for Copy Trade?

In Copy Trading, the default margin mode is Cross Margin. To learn more about margin and different modes of margin, please check out our article on Margin Trading.

In Cross Margin mode, all equity in the Futures account will be used as margin for all trades and any realised Profit/Loss will be summed directly to the Futures account. We recommend Followers to manage their positions, the corresponding margin levels, and margin modes consciously and proactively to avoid unwanted or uninformed results.

One common case is, when exposure to one trading pair is increased, the margin for that trading pair is auto compounded. As a result, the total margin for that pair will be the sum of the margin for the first position plus the margin for the second position and so on.

Follow Mode (Fixed Amount/Multiplier)

Followers will have to choose between two Follow Modes every time they follow a new Trader:

  • Fixed Amount: The amount of equity used for each trade placed in accordance with the Trader. No matter how many orders (including identical trades) the Trader places, no matter what the Trader’s margin level for each different trade is, the Follower can be assured that his/her preset margin for every trade remains at a constant, controllable level.

Example: Fixed Amount of 2 USDT → All orders of the Follower will have a margin of 2 USDT → The total margin for 100 trades copied is equal to 200 USDT, which is also the maximum loss.

  • Multiplier: This one can be more tricky. Preset margin levels are not constant, but emerge proportionately to the Trader’s margin for each order.

Example: Multiplier of 0.01 → If Trader places an order with a 200 USDT margin, Follower’s margin requirement for that copied order is 200*0.01=2 USDT → Margin for each trade will vary.

Understanding the difference between the two following modes will contribute greatly to the construction of your own trading as well as the risk management strategy.

Following More Than One Trader At The Same Time

The system automatically places a trade for the Follower whenever one Trader places a new trade. If the Follower follows more than one Trader, the system will copy all the trades of all Traders for the Follower. That can lead to overlapping positions (increased exposure to one asset) and put more stress on the Futures margin account (assuming no orders are manually switched to the Isolated Margin mode). Switching to Isolated Margin mode appears to be the best answer to this potential issue.

Increasing Exposure

New trade on the same trading pair means the system will sum the added exposure to the existing exposure and re-calculate the average entry price. Take this as an example: A user opens any position on BTCUSDT at US$10,000, thus is exposed to BTCUSDT. When this user follows an Expert on Bitget Copy Trade and that Expert later a new position on BTCUSDT at US$10,112, the user’s exposure to BTCUSDT is increased, and his/her current exposure to BTCUSDT is equal to the value of the existing position plus the new position’s value.

The average entry price will change whenever a new trade on the same trading pair is added and lead to the probability that the settlement price can be lower than the average entry price. In the case above, the original average entry price is US$10,000 and the re-calculated average entry price is: (US$10,000 + US$10,112)/2=US$10,056.

Adding more trades on one trading pair also means that the initial margin for that particular trading pair will increase (summing up the initial margin of each trade). There is high potential here that the settlement price (the price to realise ProfitLoss) will be lower to the average entry price, leading to losses. That can be mitigated either by setting stop loss (to minimise losses) and by managing positions daily.

Forced Liquidation and Auto-Deleveraging

Forced Liquidation

Forced Liquidation takes place in the following cases:

  • The account balance is lower than the maintenance margin and Owner of that account chooses not to deposit more equity into the account;

  • The account balance changes so quickly due to volatility and there is no time for the Owner of that account to deposit more equity into the account.

Whenever the account balance falls below the maintenance threshold (‘margin call’), Owner of the account must deposit more equity into the account so that the account balance is equal to the initial margin.

To avoid margin calls, Bitget has adopted the risk margin mechanism. Risk margin measures the actual delivery obligations of one Trader and changes in tandem with changes in the number/value of each order.

Maintenance Margin < Risk Margin < Initial Margin

Users will receive two notifications from Bitget: one when the account balance is lower than Risk Margin, and another in case of a margin call.

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In the forced liquidation process, the system will try to close the position at the best price possible, but in most cases, the Trader’s realised loss is equal to the initial margin. There are always two sides of the trade: this one’s losses are the counterparty’s profits. The Trader’s realised loss will be paid for the Counterparty.

That is to say: Always check the notifications (mail and app) from Bitget!

Auto-Deleveraging

What if the Trader’s realised loss is even higher than the initial margin? Bitget will tap into the Insurance Fund to pay the Counterparty the difference.

If and only if the Insurance Fund is empty or insufficient to cover the whole difference or a part of the difference, the Auto-Deleveraging process (ADL) will be triggered. The system will then begin to reduce positions of the riskiest Counterparty, the second riskiest Counterparty,... until there is no more difference between the Trader’s realised loss (plus Cover from Insurance Fund) and payment to the Counterparty.

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Note: Traders will be ranked by the unrealised PnL and the leverage effectiveness. A higher ranking means the Trader’s positions are riskier.

Case Studies

Case Study 1: Users saw a positive PnL value but it turned out to be losses after he/she closed the position.

Check Following More Than One Trader and Increasing Exposure. Two things to keep in mind:

  1. Unrealised PnL is just an estimation and is subject to changes as prices of the underlying asset change

  2. Increased exposure as the result of:

  • Follower is already holding a position on a trading pair. He/She follows one Trader, who later places a new trade on the same trading pair

→ Follower’s exposure to that trading pair = Existing exposure + New exposure via Trader + New exposure via Trader +...

  • Follower is not holding a position on the particular trading pair, but he/she follows more than one Trader

→ Follower’s exposure to that trading pair = Exposure via Trader 1 + Exposure via Trader 2 + … + Exposure via Trader n + New exposure via Trader 1 +...

  • Follower is holding a position via Copy Trade and manually adds more trades on the same trading pair

→ Follower’s exposure to that trading pair = Exposure via Trader(s) + New exposure via personal trading activity

Case Study 2: Transactions settled without authorisation

User had multiple highly leveraged positions, which puts him/her on the higher places of the ADL list. As a result, User was one of the first to be auto-deleveraged to protect the system. Check Forced Liquidation and Auto-Deleveraging.

Case Study 3: User had set the max limit of 150 USDT for one Trader, but still lost all 300 USDT in his/her Futures account.

Check What To Keep In Mind and Follow Mode.

User didn’t understand how Fixed Amount works and thought the Fixed Amount described the total equity that he/she allowed the system to make trades copying the Trader. In reality, the first trade of User had an initial margin of 150 USDT, and the second one also 150 USDT. And User still kept (without knowing) the default Cross Margin mode for two trades, therefore his/her maximum loss (check Forced Liquidation) was the total initial margin, i.e. 150 + 150 = 300 USDT.

Case Study 4: Maximum follow

Regardless of how many Traders one User may follow, there’s an upper limit of exposure to each trading pair. That is to protect users from losing more than they can afford, and also protect the system from any relevant issues. The (aggregated) initial margin for one position of each trading pair is currently limited at 5,000 USDT (check Increasing Exposure).

Responsibility

Bitget One-Click Copy Trade is contingent upon User’s decisions to Copy a specific Trader/Traders and/or follow a particular strategy. Bitget tries the best to protect users from the possible risks, but trading, and especially crypto trading involves volatility and high levels of risk, which in turn requires responsible and proactive actions from users (i.e. setting Stop Loss, changing Margin Mode, setting Fixed Amount, reading guidelines for Copy Trade, etc.).

Past performance and other parameters of Traders on Bitget Copy Trade should only be considered as hypothetical performance results. Therefore, no representation or guarantee is being made that Followers will or is likely to achieve PnL similar to the past performance of any Trader.

Market Risk

Being the emerging asset class, cryptocurrencies are subject to volatility and extreme price changes in uncertain times. Bitget’s sole financial advices for Traders are:

  • Keep an eye on the market

  • Adjust and manage your trades frequently

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More on the topic of Margin Trading and Risk Management can be found here:

What is Margin Trading?

Understanding Risk Management

… and register your Bitget account to enjoy your new user rewards!

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