What is copy trading (mirror trading) and how does it work?
You’ve no doubt heard about people who made it big day trading in financial markets. But the learning curve for new traders can be steep — and potentially quite costly.
But what if beginners could trade like the top traders on the market?
A relatively new form of online trading, known as copy trading or mirror trading, promises to make doing so possible. But is it a good idea to take part in this new strategy?
What Is Copy Trading?
Copy trading, often called mirror trading, is the process of automatically copying the moves of other traders. This style of trading is possible with all assets, whether you’re trading on the stock market or you’re trading forex, contracts for difference (CFDs), or cryptocurrencies like Bitcoin.
The concept is simple. New traders, known as copiers, assess the performance of experienced traders, called signal providers. Once a new trader finds a signal provider they’re comfortable copying, they set parameters in their trading platform to copy trades that expert makes in real time.
How Copy Trading Works
This style of trading starts with successful traders who are interested in helping beginners by allowing their portfolio activities to be copied. In some cases, these traders allow their portfolios to be copied simply because they want to help others. In other cases, the pros are paid each time someone makes the decision to copy their moves.
These traders make their portfolios available, which are usually listed on mirror-trading platforms alongside statistics of the trader’s historical performance.
From there, beginners search these platforms for portfolios to copy and can mirror their preferred experts’ moves automatically.
Always remember each trader is unique and the one you choose to mirror will make the difference between profits and losses. Carefully choose the trader you’ll follow based on their performance compared to others on the platform.
Professional traders are likely to have a larger portfolio and make larger trades than those who are just getting involved. What if you don’t have enough money in your portfolio to make the same trades the pros are making?
Don’t worry — copy trading is proportional based on the amount of money in both the copy trader’s account and the professional’s account.
For example, if a professional trader with a $100,000 balance makes a $10,000 trade, a copy trader with $1,000 would make a $100 trade, keeping one profile proportionally equal to the other.
Forex Copy Trading
The foreign exchange market is highly volatile, making it a hotbed for traders. However, the high levels of volatility make trading forex highly risky. Success takes an intricate knowledge of technical analysis.
Luckily, copy trading is available in the forex market as well.
Like with any copy trading, it’s important to pay close attention to the expert you plan on copying. Only copy those with a proven record of success. This is especially important in the volatile forex market, where trades that go badly can go really badly.
Cryptocurrency Copy Trading
Cryptocurrencies like bitcoin are becoming popular among active traders. As with traditional currencies like the U.S. dollar (USD), cryptocurrency is known for experiencing high levels of volatility and creating opportunities for traders.
Although big swings in value may be exciting, they are also risky. The mix of high volatility and the speculative nature of the asset makes cryptocurrency trading one of the riskiest forms of trading in any financial market.
Even if you’re copying a pro with a compelling trading history in crypto, never risk too much of your portfolio on trading in this emerging industry. If you’re not comfortable losing it, you shouldn’t be using it for crypto trading.
Copy Trading Platforms
There are several trading platforms that offer copy trading functionality. However, like any other product, not all trading platforms are equal. Some of the best copy trading platforms online include:
Founded in 2007, eToro has more than a decade of history providing quality trading services to its customers. The platform’s claim to fame is the technology it uses, and it was one of the first platforms to make copy trading available to the masses.
eToro is known as one of the best brokers to work with when trading cryptocurrency. It incentivises professionals to share their portfolios by paying them each time their portfolio is copied. As a result, if you’re looking for a way to quickly gain exposure to digital currencies, you’ll find plenty of portfolios to copy with this broker.
ZuluTrade is another pioneer in the copy trading industry. The company supports trading in cryptocurrencies, stocks, commodities, index funds, and forex. It’s one of very few forex brokers that offers traders the ability to copy one another.
A unique feature of ZuluTrade is its profit-sharing capabilities. The professionals making the trades earn 20% of the profits copiers generate by using their signals. This incentivises smart moves in the market and the sharing of portfolios with other traders. As a result, there’s no shortage of quality traders to copy on the platform.
ZuluTrade also has a proprietary ranking system, ranking traders who make their portfolios available to copy based on their performance in the market. For beginners, this ranking system can be key to choosing which traders they’ll follow.
MetaTrader 4 is one of the most recommended trading platforms for the most active traders. Known as one of the best forex platforms online, MetaTrader 4 gives traders access to state-of-the-art technology, compelling charting capabilities, and other features that give them the upper hand in the market.
MetaTrader 4 gives traders the ability to build and automate strategies. For beginners, the copy trading capabilities this offers are appealing, to say the least.
Because it’s known as one of the best platforms online, especially in the forex space, there’s no shortage of traders to follow.
Coinmatics is a platform dedicated to cryptocurrency trading, and more specifically, copy trading in the crypto market. The platform was founded in 2018 by the same experts behind Crunchbase, a popular business investment and funding platform.
The platform features diversification and risk management capabilities that help ensure you don’t take too much of a hit in the volatile crypto market. The platform is also lightning fast, copying trades in less than two seconds on average — an important factor in a volatile market.
The best part is that the platform is free. However, if you want prioritized copying, you’ll pay fees of $20 monthly or $180 annually.
Copy Trading (Mirror Trading) vs. Social Trading
Copy trading and social trading are two ideas often lumped together. Although copy trading is a form of social trading, not all social trading strategies are centered around copying others.
Essentially, social trading is the use of social media to find and learn about opportunities, whereas copy trading is the use of social tools to mirror the exact trades of another trader.
In other words, copy trading is the process of directly copying the moves made in the market by other traders. There’s no research, expertise, or analysis required to do so, but copy traders take on the same level of risk as those they copy, which may prove to be uncomfortable in some situations.
Social trading simply refers to using social media to find solid trading opportunities. Once these opportunities are found, social traders typically do their own research and technical analysis to make sure the trade fits in with their strategy and risk management parameters before making the trade.
Pros and Cons of a Copy Trading Strategy
Any trading strategy you come across will come with its own list of pros and cons. After all, trading is making an attempt to predict the future, and nobody has a crystal ball. Any trading strategy comes with risk. Here are the benefits and drawbacks of the copy trading strategy.
Pros of Copy Trading
Copy trading has become a popular method of making money in the market because there are several benefits to using it. Some of the biggest perks include:
Trade Like a Pro Today
Trading is a fast-paced process that requires a detailed understanding of markets and the practical use of technical analysis. This form of analysis can take years to perfect, but once mastered, it has the potential to result in significant gains.
With copy trading, you don’t have to be a pro with years of experience under your belt to trade like one. All you need to do is find a portfolio that’s performing well and set your platform to duplicate its trades.
Significant Profit Potential
Whether you’re in stocks, cryptocurrency, or forex, trading has the potential to generate significant returns far above what you would expect to see in the average long-term investor’s portfolio. Countless people trade for a living, earning annual returns that would make the average salaried employee’s jaw drop.
Copying the trades made by these experts means you have the potential to earn similar returns from your activities in the market.
Learning how to trade is often time consuming and expensive, whether you learn through an online day trading course or through trial-and-error. However, copy trading makes learning how to trade in financial markets free and easy.
All you need to do is watch and learn from the trades that are being made in your portfolio while it’s copying an expert. Over time, you’ll find patterns in the winning trades being made. Looking for these patterns in the open market for yourself has the potential to result in even more winning trades.
Cons of Copy Trading
Yes, there are plenty of benefits to getting involved in the copy trading process, but every rose has its thorns. Here are some of the biggest drawbacks to this style of trading:
Even Expert Traders Get It Wrong Sometimes
Trading is inherently high risk. Traders make their money by exploiting high levels of volatility in the market, but that comes with higher levels of unpredictability. Even the best traders in the world make losing trades from time to time.
Before getting involved in trading — whether you do it on your own or copy an expert — it’s important that you understand the risks associated with short-term trading strategies.
When copy trading, you’ll be blindly following the leader. If the leader was to walk off a figurative cliff, leading to a portfolio freefall, you’ll be jumping off the cliff too.
It’s generally suggested that investors and traders do their own research so they enter trades with a complete understanding of the potential risks and rewards the trades represent. Copy trading offers no such option.
In many cases, copy trading services can quickly become costly. Take ZuluTrade for example. Copy traders using the platform pay the expert trader who generated the signal a 20% cut of their profits, and ZuluTrade itself gets another 5% of the profits. In the end, the copy trader only retains 75% of the profits generated through the platform.
These high costs aren’t a big concern if your portfolio is significantly outpacing the market, but if you’re just barely keeping up with market performance, your returns would be better simply investing in index funds.
Should You Be a Copy Trader?
Copy trading, as with any form of trading, comes with significant levels of risk. Even if the professionals are pulling the strings for you, that risk is present. As such, this method of accessing the market isn’t for everyone. You may want to consider copy trading if you have the following characteristics:
- You’re Young. Due to the high level of risk associated with trading in general, it’s best for younger traders. Those nearing retirement or with short time horizons should avoid high-risk moves, but young investors with long time horizons have time to recover should something go wrong.
- You Have a High Risk Tolerance. Trading is not for the faint of heart. People with a low or moderate risk tolerance should avoid it and spare themselves the emotional roller coaster. However, if you like to ride on the wild side and are OK with taking big risks in return for big reward potential, copy trading might be for you.
- You’re Comfortable in the Passenger Seat. As a copy trader, you relinquish control to a professional you believe will make the right moves. However, you can’t grab the wheel if things go wrong. You have to be comfortable with taking a bumpy ride in the passenger seat from time to time.
How to Start Copy Trading
If you’ve decided you want to start copy trading, here’s how it’s done:
Step #1: Open a Trading Account
You can’t copy trades into your own trading account until you have one set up. Compare brokers that offer copy trading like those listed above, paying close attention to the assets available and the fees they charge. Sign up for the platform you feel fits you best.
Step #2: Assess Opportunities
Comb through the different traders who give others the ability to copy them. When assessing the traders, there are three key criteria to look for:
- Assets Traded. If you’re interested in trading stocks, you don’t want to track a trader who makes the vast majority of their moves in cryptocurrency. Make sure the traders you copy are interested in the same assets you are.
- Track Record. Look into the past performance of each trader you’re interested in. Although past performance isn’t always indicative of the future, a strong historical performance does suggest the trader knows what they’re doing.
- Longevity. How long has the trader been trading and how many trades have been made? A trader with an 80% success rate that only has five trades under their belt is far less impressive than a trader with the same success rate after 500 trades. You want to make sure the trader you follow not only has a strong performance, but that this strong performance has been repeated over time.
Copy Trading With a Twist
If you’re not comfortable sitting in the passenger seat and you want to have full control over your own portfolio, there is another way to copy professionals.
Become a social trader.
When making your trading and investment decisions, take to social media to see what the pros are talking about. Once you find a compelling opportunity, do your own research and execute your own trades based on the parameters in your trading plan.
Copy trading is an exciting concept, and many newcomers have quickly generated profits in financial markets taking advantage of it.
However, not all traders have the same performance. If you plan to ride this vehicle into the markets, make sure to do your research and only copy traders who trade the assets you’re interested in and have a long-term history of compelling market performance.
Also, when choosing a platform, pay close attention to fees. Fees associated with copy trading vary wildly and can cut deep gashes into your profit potential.