Copy trading has become one of the most popular forms of trading, in addition to trading signals. It is often said that imitation is the best form of flattery, and this couldn’t be further from the truth when it comes to copy trading.
Copy trading is simple and easy to use. A trader doesn’t need to go through the hassle of learning about the financial markets themselves. Many beginners in trading tend to struggle with technical analysis. Indeed, this is one of the key points that intimidates many traders.
For those who have a lack of time or the patience to learn something new, copy trading offers a good way out. You can trade the forex and CFD markets by simply copying the trades of other successful traders.
Copy trading is also commonly referred to as social trading, although these two terms might differ, they basically mean one and the same. Other terminologies that you may come across include terms such as mirror trading.
No matter what you call this trading approach, the bottom line is that the trader simply copies or mirrors the trades. No trades are executed at the discretion of the trader, but it is completely automatic.
Copy trading, mirror trading, and social trading are thus different names for the same thing. It is a more cost-efficient way compared to other approaches such as a forex-managed account. In this article, you will learn more about what copy trading in forex is all about.
This article aims to give the reader a basic background in the world of copy trading and how you can get started.
Evolution of copy trading
Copy trading as we know it today has evolved over the decades. A few decades ago, the most popular form of such a style of trading was through a PAMM account. PAMM or Percentage allocation management module later morphed into different aspects.
LAMM (Lot allocation management module) and MAM (multi-account manager) are some of their subdivisions. The bottom line was that traders simply provide the funds while allowing for a forex fund manager to do the heavy lifting.
In turn, the forex fund manager skims a bit from the profits they generate. Back in the day, opening a PAMM account was tedious and required multiple steps. From identifying a good PAMM fund manager to signing additional documents for the fund manager to be able to access these funds.
As with most things, PAMM gradually evolved into something more simplistic. Many online articles attribute the start of copy trading to circa 2005, where a brokerage by the name Tradency spearheaded this revolution.
Christening it as Mirror Trading, the concept caught traction among traders. With mirror trading, one could simply pick a trader of their choice and allow their accounts to replicate the trades. Over time, additional bells and whistles were thrown in.
Brokerages such as eToro are the biggest names that branded social trading, by bringing in the social concept of trading. Other brokers quickly caught on and it was only a matter of time before Metaquotes also introduce this.
Zulutrade was among the early movers as they built a platform that showcased the trading skills of traders who wished to publish their trading history. Others such as DarwinX soon caught on to the concept, bringing their own value adds and branding it in their own way.
What are the benefits of copy trading?
Copy trading became famous for the simple reason that it played on the psyche of the trader. Let someone else make all the effort, pay them a fee for their service and reap the rewards. At the same time, copy trading also opened up a new revenue stream for traders.
While earlier on, it would take huge amounts of capital and bureaucracy, copy trading made it easy for anyone with good trading skills to build additional income.
For a trader, copy trading was a hassle-free way to get rich quick. Greed, as you may know, is the biggest driver of trading decisions. And copy trading is no exception to this. Some may argue that copy trading is the best way to make your money grow.
But there is also an equal number of opponents to copy trading. The risks of losing money remain the same. Perhaps the biggest argument that opponents to copy trading use is the fact that past performance does not indicate future profits (or losses).
Thus, unfortunately, if you think that copy trading is the silver bullet answer to being successful in forex trading, you will be disappointed. There is no way to avoid market risk. Whether you are trading yourself or copying someone else’s trades.
Still, copy trading has some inherent benefits.
Firstly, it is simple and easy for anyone to get started. You only need to have basic knowledge about how to analyze the traders that you want to copy from. A background in the financial markets in general is also beneficial.
For those who have any day trading or investment experience from other markets, copy trading in forex is relatively easy with a short learning curve. Most importantly, traders need to know which platform they wish to sign up with.
Different ways to copy trades in Forex
When it comes to copy trading, the trader is literally spoilt for choice. There are many forex brokers that offer copy trading as part of their service. Of course, you can also sign up with a broker of your choice and still make use of copy trading even if they don’t allow this as a value-added service.
Websites such as MQL5.com, Zulutrade, MyFxbook, and many more offer trading signals, which is yet another name for forex copy trading. With this approach, you are not bound to your forex broker on whether or not you can use copy trading.
On the contrary, by using an MQL plugin or indicator, you can connect to these traders and copy their trades. It is important to point out that trading signals and copy trading, although they might seem the same, are not really the same.
Trading signals are where the trader can choose to send out the buy and sell signals either via text or any instant messenger. They can also opt to send out the trading signals as direct trades which are executed automatically to your trading account.
At the end of the day, the options are indeed limitless and it is up to the trader to pick a method that they find best.
What should you keep in mind when using copy trading in forex?
Copy trading as you may now know is nothing but copying the signals from a trader. The trades are executed automatically into your account.
As you may have realized now, with copy trading you are trusting your trading capital to be managed by another trader (although they may not have full access to your funds).
Therefore, when using any copy trading service, it is best to analyze the trading performance before you start using it. The below points will help you to do basic background research into finding the best traders for copy trading.
Trading History
Having a good trading history is important. Quite often you will find copy trade accounts that are less than half a year. These accounts may show tremendous growth. No matter what the trader says, it is always best to go for a trading account with a bigger history for you to analyze the various aspects of the trading style.
Trade Management
Depending on the copy trading service that you choose, trade management is key. Do you want to copy trades exactly as the main trading account? If you answered yes, then do you have the same trading capital and leverage as the main account from which you want to copy trades?
These are some of the questions you should ask yourself before copying the trades. Depending on the copy trading platform, you may be able to tweak these settings such as lowering the leverage or even the trading size so you do not risk all your money on a single trade.
Copy trading fees
Copy trading is not free and there is a fee or a commission that you have to pay. This fee or commission can vary, ranging from a monthly standard fee to a commission per trade. It is in your best interests to understand how the fees are calculated. There is no point for you to pay a fee on a losing trade.
Therefore, doing your due diligence is important before you get started with copy trading.
Markets
Knowing what markets the trading account primarily trades with is another important aspect. It is always best to pick a trading account that trades in the markets that you are familiar with. For example, if stock CFDs aren’t your cup of tea, then it is best to filter such trading accounts.
Knowing the risks
Losses are an inherent aspect of financial trading. Copy trading is not immune to this either. Therefore, traders should realize beforehand that copy trading also carries the risk of you losing your trading capital.
Many traders do not give this much attention and end up expecting to become rich by using copy trading services. But this is not always the case. A bad month can occur, even for the best traders. And if unfortunately, that bad month happens just when you signed up for the service, it can be devastating.
Therefore, as we mentioned earlier, pay attention to trade management. This ties in closely with having to analyze the trading account that you want to copy.
Trading Fees
Trading fees are applicable even to copy trading. For your forex broker, it does not matter whether it is you or someone else trading. Therefore, take into account the trading fees and other overheads you might face (overnight swap rates, etc). If the trading account you choose scalps and thus trades quite a lot, then you might want to consider the impact of this in terms of fees and commissions you will be paying.
It is always good to go for a trading account to copy that also trades with your same forex broker. This way, you are better able to align yourself with the main trading account that you want to copy.
Copy trading in forex – Is it worth it?
To conclude, copy trading in forex is a relatively easy way for you to get into the world of forex day trading. These days, copy trading is also big when it comes to cryptocurrencies. You will not get rich by using a copy trading service.
There are fees for everything and it is in your best interest to thoroughly investigate the trading account that you want to use. Managing your expectations is also important. When a trader starts to see not as big of a growth as the trading account promised, you might be tempted to pull out.
Sticking with one trading account to copy is important. More importantly, you need to give it time for your capital to grow. This can only happen if you are diligent in ensuring that you are not risking too much of your trading capital.
Risk management is unavoidable when it comes to day trading. Copy trading does not make you immune from this. Therefore, risk only what you can lose. It is never a good idea to risk your personal savings into a copy trading account. You might end up losing all of your trading capital, if not more.
Remember that copy trading is merely another way to trade the financial markets. It is simple, fast, and easy and does not require much on your end. But as with anything, do not let greed dictate your decisions when it comes to choosing the right account to copy trades from.
Just as you would spend time in choosing a forex broker, choosing the right forex trading account to copy trades from is important. Therefore take your time to do your due diligence before honing in on a trading account.
