What Is Copy Trading

Copy Trading Meaning

Copy trading allows an investor to copy trades from other investors in the financial markets. This allows the copier to take the same trades and positions instantly. It does not however copy a specific strategy but blindly takes the exact same trades, this is the risk behind copy trading as an investor you’ll never understand why they’re investing.

Generally, the trader who has his trades copied will receive commissions, the more traders that copy them the more commissions one receives. However, a research study has shown that copy trading has seen investors taken on "excessive risk". [1]

Copy trading is an evolution of mirror trading which was where traders copied algorithms or automated trading bots. Now copy trading is a form of social trading where traders can discuss why they’re trading a specific financial product and letting traders automatically copy those trades from their personal accounts. In this case you’re copying the trader and not the strategy, this can range from qualitative or quantitative strategies and traders.

Learn what copy trading is and how it may impact your trading.

Table of Contents:

• Copy Trading Explained with Examples

• How Copy Trading Works

• Copy Trading vs Mirror Trading

• What It Means for Retail Investors

Copy Trading Explained with Examples

Copy trading can be used in multiple ways. When copy trading the trader can copy another trading by:

• Automatically copy all transactions from entry price, stop loss and take profit.

• Receive signals when the trader they’re copying enters a trade to manually review and copy.

Therefore, we can categorise Copy trading investors into two separate categories: signal providers and followers.

"Signal providers are individual investors whose investment decisions are available for followers to track and analyse. Followers are also individual investors; however, they copy the investment decisions of signal providers." [2]

Copy trading is a trading method which allows one trader to copy another trader with little or no effort. Copy trading is not limited to one trader; you can copy multiple traders at any one time to diversify your trading portfolio and take advantage of bullish or bearish movements.

One way to diversify your trading portfolio is to copy traders who trade non-correlated financial instruments this way you're not centralising your risk through correlated assets. For example, copying a forex trader, stock trader or commodity trader simultaneously. Alternatively, you may copy traders that focus on different timeframes such as long-term traders, swing traders and scalpers.

Traders that are copied can use copy trading as another source of income. Most copy trading models require a subscription fee, some are free but share revenue. The copied trader may also receive a form of payment based on how many traders copy them.

How Copy Trading Works

Copy trading works by using some of your portfolio (money) and essentially copying a trader with that allocated amount. Once you copy a trader you will automatically enter and close the same trades in your own trading account.

Traders will generally be capped at how much of their portfolio can be used to copy another trader, generally around 20%.

For example, if you were trading with £1000 and decide to copy a trader. If you invested 20% of your portfolio you are copy trading with £200 with that specific person and the other 80% can be allocated elsewhere. The overall invested amount wouldn't be the same however as if the trader opens a £1000 trade and you only invested £200 you'd only be trading a % of that £1000 so to make things easy you may only trade with £20 so 10% of your invested amount.

Copy trading vs. Mirror trading

Overall, both mirror trading and copy trading have their pros and cons. Mirror trading was the first type of automated trading which copy trading then evolved from. They’re both different types of trading methods which can be utilised depending on the trader’s goals.

Top 3 Copy Trading Platforms

1. Etoro

2. ZuluTrade

3. Tradeo

The above platforms are shown to have millions of users in the past years few years which shows the growing popularity of copy trading.[1]

What It Means for Retail Investors

Retail traders with the advancements of technology and trading platforms now have access to trading methods like copy trading and mirror trading. This not only makes the entry to trading easier for beginners as they can copy another trader but it also helps diversify traders portfolios who may have concentrated their risk before.

Implementing copy trading or mirror trading you need to understand the risks involved. This includes you may not fully understand the why behind the trades when copy trading, if the trade turns into a loss you are blindly entering based on a person.

Article Sources

1. Jose Apesteguia, Jörg Oechssler , Simon Weidenholzer , “Copy Trading, https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2019.3508” Accessed Aug 21, 2021.

2. Anthony Creed, Aodan Cotter, Luke Merriman, John McAvoy, Philip O’Reilly, "The Delegation of Investor Decision Making: What Drives Participants in Social Trading Networks to Engage in Copy Trading, https://escholarshare.drake.edu/bitstream/handle/2092/2234/DMR100202R.pdf?sequence=1", Accessed Aug 21, 2021.