Mirror trading has become a popular strategy for forex and stock traders in recent years, allowing those with little time to benefit from the experience of others. In this article, we’ve explained how it works, the pros and cons and listed the best mirror trading platforms and software.
What Is Mirror Trading?
Mirror trading (or mirror effect trading) allows traders to copy the positions of other traders in real-time. It is a popular practice for those that are new to online forex trading, as it allows beginners to learn from experienced traders. By definition, it is almost identical to copy trading, though mirror trading is mainly automated, whilst the former can be manually executed.
How Mirror Trading Works
Mirror trading works differently depending on the broker you sign up to. In most cases, they’ll offer a mirror trading feature, such as eToro’s copy trader. Successful traders, known as ‘Masters’, will display their account results.
Select a Master trader who matches your preferred asset (forex, stocks or options to name just a few), technique (for example, day trading or swing trading) and importantly, risk appetite. You can then tie your account to theirs and mirror their positions entirely – meaning if they make a trade, you do too.
Another type of mirror trading involves a bot, known as an Expert Advisor (EA), that executes trades on your behalf based on algorithmic logic.
When market data shows that a pattern or trend is forming, the EA will make the trade. Most platforms offer the opportunity to download an EA to your account. On MetaTrader 4 (MT4), these can be purchased from the Codebase.
Mirror trading is a practice that is regulated by relevant authorities across the globe. The UK’s Financial Conduct Authority (FCA), in conjunction with ESMA’s MiFID directive, defines mirror or copy trading as portfolio management and therefore brokers offering this service must adhere to relevant regulatory obligations.
Pros Of Mirror Trading
Removes Emotional Cues
Mirror trading is automatic and therefore emotion is removed from the equation. Traders may spot a trend forming in the data, but if they’ve been burned by the forex pair in the past, they may be overly cautious and miss the opportunity. Similarly, if the trader has profited from stock in the past, they may be eager to invest again without proper analysis. Mirror trading prevents this, relying on data points or an experienced trader’s success.
Reduces Time & Effort
Trading successfully requires deep analysis and time dedication. Mirror trading removes this element and allows traders who have other commitments to focus on these. The EA or Master Trader will complete the leg work, whilst the investor watches.
Cons Of Mirror Trading
Losses Are Also Mirrored
Mirror trading software places trades automatically on your behalf.
While this can mean that successful trades are executed with minimal effort, it also brings risks. It’s vital traders understand that returns are not guaranteed and losses can be made if the Master Trader or EA is incorrect.
Control Of Portfolio
Mirror trading automatically means that traders are not in control of the positions being executed. Whilst this can be beneficial as it means the time and effort is removed, it also means that traders are placing a lot of trust in the algorithm or Master Trader.
Limited In The US
Most platforms that provide mirror trading features (such as eToro or XM) do so on CFDs rather than the underlying asset. CFDs (contracts for difference) are an agreement between the trader and the broker to exchange the difference in the value of an asset between the open and close position. Essentially, it allows traders to profit from changes in an asset’s value without owning it. CFDs are heavily regulated in the US so American traders may have problems finding a broker that will offer them.
How To Start Mirror Trading
- Select a broker – Firstly, you’ll need to register with a broker that offers mirror trading. Some popular options include JFD bank, Binance or eToro. We’d recommend finding a provider with strong customer support, fast withdrawals, 2FA security and positive customer reviews.
- Download a trading platform – If your broker offers mirror trading through a third-party platform, such as MetaTrader 4, you’ll need to download the platform from their website or log in to the webtrader.
- Many brokers also offer an app to help you track your portfolio on-the-go.This is useful for mirror traders to keep track of automated trades.
- Choose a strategy – Ask yourself: do you want to mirror successful traders or do you want to rely on an algorithm that looks purely at data trends?There are pros and cons for each.A trader should also have skin the game and so profit motive can be assured.But an algorithm removes all emotional elements and can spot trends sooner than humans.
- Define risk appetite – It’s vital you assess the risks before trading with real funds.Choose a successful trader who has a similar view to you to avoid a conflict of interest.
- Research, research, research – You should never allow mirror trading on your account with real funds until you’ve fully analysed the success of the method you’re investing in.It’s a good idea to run an EA on a demo account beforehand.You should also be able to find its latest backtesting results before you’ve purchased.One of the biggest red flags is a lack of backtesting data as this means there is no proof the algorithm is profitable.Master Traders should have a demonstrated history of success, with low drawdown, over a sufficient period of time.
Mirror Trading Fraud
The term ‘mirror trading’ discussed in this article should not be confused with a different type that was involved in a large scale Russian fraud case that hit the news in 2017.
Mirror trading is a strategy where linked organizations make two opposite trades to avoid money laundering controls. Russian companies pay in Roubles for trades on blue-chip stocks, while an offshore company makes the opposite trade with the same bank in USD or another reserve currency. These trades mirror each other and add complexity layers to hide money laundering activities. Deutsche Bank faced a $425 million fine for its involvement in over $20 billion in laundered money.
Mirror Trading International
MTI club is a fraud case involving the term ‘mirror trading.’ MTI was a South African crypto-gambling company that promised annual returns of 500%, but founder and CEO Johann Steynberg went missing with over $589 million in customers’ Bitcoin, causing the company to collapse in 2020.
Final Word On Mirror Trading
While mirror trading has benefits, success is never guaranteed, and relinquishing control of your portfolio comes with risks.
Overall, mirror trading is a great starting point for new traders and can be a useful learning activity.
FAQ
Does Mirror Trading Work?
Mirror trading is a strategy that is successful for thousands of traders around the globe. However, those looking to get involved should complete thorough research into the practice as it can be risky. Ensure the Master Trader you copy has a proven track record of success across a long period of time. If you’re using an algorithm or EA, ensure it has been thoroughly backtested before you tie it to your account.
Is Mirror Trading A Pyramid Scheme?
The term ‘mirror trading’ refers to a strategy where trades are executed automatically in order to mirror a selected individual’s trades or an automated bot’s algorithm. It is unrelated to the South African firm ‘Mirror Trading International’ whose crypto-gambling site was uncovered as fraudulent. MTI was a pyramid scheme that required users to recruit new users in exchange for a commission.
Is Mirror Trading Legal?
Mirror trading (also known as copy trading) is legal and is regulated by many of the world’s financial authorities including the FCA, SEC and ASIC.
Is Mirror Trading Safe?
Mirror Trading carries an equivalent risk profile to traditional trading, so investors should always research before authorising automatic trades.