What is copy trading and how does it work?

Copy trading is a form of portfolio management. The goal is to find other investors that have a track record you would like to emulate. The process of copy trading allows traders to monitor strategies of other successful traders. Like any trading system a trader decides to employ, traders are best served by following the investor before they decide to risk real capital.

Copy trading can be useful for traders who don’t have the time to follow the markets themselves. Generally, copy trading is focused on short-term trading, in particular day trading and swing trading strategies, but there are several different strategies that are used to generate revenue. Copy trading tends to focus on assets within the forex market, as well as other complex or volatile markets. While copy trading can be lucrative, there are also risks involved, and traders should remember that past results are not a guarantee of future returns.

There are several ways to copy trade another investor. For example, a trader could copy all the transactions, including trade-entry, take-profit and stop-loss orders. Alternatively, they could receive notifications of trades and manually copy these transactions. This done through either a spread betting or CFD trading account, two derivative products that allow you to speculate on the price movements of an underlying financial asset, without actually owning the asset.

Copy trading allows traders to diversify their portfolio. This means that a trader is using multiple ways to make money in the markets. Instead of putting all of their capital into one position, asset or strategy, traders can use multiple trading strategies that benefit each individual market. When copy trading, you should consider using a few different traders to copy.

One way to diversify your portfolio further is to find copy traders that trade on different financial instruments. For example, one could copy a forex trader or a commodity trader. They could also consider copying traders that use different time frames. One might be a short-term intraday trader and another might be a long-term position trader within the stock market, where this strategy is most common. Traders that experience high volatility on their returns compared to those that have low volatility on their returns are also considered. Lastly, one may consider very active traders compared to less active traders.

The business model used in copy trading can be lucrative. Most copy trading businesses are subscription models, where an individual pays a fee to copy traders every month. An alternative model that can be used is revenue sharing. Here, one receives a certain percentage of winning trades.

There are slight differences between copy trading and mirror trading. The definition of mirror trading is mirroring a trading strategy. Traders mimic the trading style or trading strategies of other traders. Initially, traders were interested in specific algorithms that were developed and developers shared their trading history. Traders would find algorithms with strong returns and then copy their results, asking for permission first to access their strategies. Copy trading was born out of mirror trading, but in this case, a trader doesn’t receive the layout of the copy trader’s strategy. Instead, they follow the trader’s trades blindly.

Copy trading also shares similarities with social trading. In the case of social trading, investors gain ideas from many different social trading networks. Traders are able to share ideas with each other and develop new strategies, as well as replicating similar strategies and tools, whereas copy traders prefer to replicate exactly the positions of an individual trader and the subsequent results.

Social trading is available on our online trading platform. By opening a live account, you will have access to our chart forums, where both professional and amateur traders share information with one another, relating to strategies, indicators and news releases.

Copy trading can result in high profits if the trader finds a successful trader to copy. However, the greatest risk a trader will face when copy trading is market risk. If the strategy a trader is copying is unsuccessful, they can lose money. Traders also face liquidity risk if the instruments they are trading experience illiquid conditions when markets are volatile. Lastly, traders can face systematic risks if the product they are trading experiences sharp declines or rallies.

Our award-winning online trading platform*, Next Generation, allows traders to directly copy trades and technical analysis onto their own charts. Our spread betting chart forum is a social section where traders of all experience levels share knowledge, tips and strategies on how to execute effective trades. You can comment on other traders' posts, use drawing tools to demonstrate and ask questions, and save analysis as you go along, so it is there to revisit. Learn more about our trading forum​​ here.

Copy trading software options are available to add-on to existing online trading platforms, such as the international MetaTrader 4 platform. It is always a good idea to practise first before depositing live funds in case of loss. Learn more about trading with MT4 or register for an MT4 account here.

Copy trading is a portfolio management strategy where one copies the trades of another trader, tracking the performance of that investor. There is also an automated version of copy trading where one’s trades are automatically transacted. A manual version will allow a trader to execute their own trades. The manual version offers discretion, and if one employs their own discretion, they should expect the returns to be different, relative to the historical returns of the copy trader. Traders can certainly make money through copy trading, but before starting, you should consider pracsiting to manually copy the trades to see if the returns are as profitable as had been expected.