The world of trading can often seem big and intimidating. There are so many different assets, markets and opportunities to trade that it can be hard to know where to start. Once you have chosen a particular market, it becomes even more difficult to know which trading strategy to use.
The most dangerous thing about trading is that when you are new and just starting out, you will make mistakes, but those mistakes will cost you real money. If you have a trading strategy that you are not very good at, you will probably lose more than you can earn.
This means that you will have to go through a period of learning to trade in order to get better, but this does not have to be the case. In all existing trading strategies, there is one aimed at beginners who want to become better and make money at the same time - it is called mirror trading.
Mirror trading is a trading method where a trader - usually a beginner - uses a strategy that is modeled on the trades of more successful and experienced traders. Essentially, a new trader is copying the steps of an experienced trader.
This strategy has only emerged in the last 20 years and has become prevalent with the rise of digital commerce.
This type of trading has a number of advantages, especially for people who have just started to try their hand at the financial markets. It also helps avoid emotional trades and helps beginners learn how to trade.
Of course, there are some drawbacks to mirror trading, and we will look at them. We will also look at the benefits so that you can decide for yourself whether mirror trading is right for you or not.
What is mirror trading?
Mirror trading is a trade selection methodology used primarily in the foreign exchange markets. This is a strategy that allows investors to copy the trades of experienced and successful traders and execute the same trades in near real time on their own accounts. Initially, mirror trading was available only to institutional clients, but then it became available to retail investors and traders as well.
Mirror trading is the copying of trades of successful traders in a particular market on the trading platform of your choice. Most trading platforms today allow you to see who is trading what and how well they are doing it.
When you decide to mirror a trading strategy, you are essentially looking at trades that another trader is making. This means that your account is linked to their deals. This allows you to choose the type of trader you like based on their trading style and risk level.
When a selected trader executes his trades, these trades are duplicated in the accounts of mirror traders using automated software that works around the clock.
Mirror trading is easy to implement as there is automated software that can allow traders to set up copy trades for an experienced trader of their choice. This means that once a trader is selected, the mirror trader just needs to sit back and watch the trades work without any input from them.
Advantages and disadvantages of mirror trading
Mirror trading can be an advantage for a trader. It requires very little time or market research and is well suited for beginner traders who don't want to lose money. However, mirror trading also has disadvantages that need to be taken into account.
Mirror trading is not a magic wand in trading, it has its limitations, because the effectiveness of the copied trades of another trader may decrease and losses may occur. It may also lead to a higher risk that was originally intended to be avoided.
The automatic nature of mirror trading can help prevent investors from making trading decisions based on emotion. Mirror traders in the foreign exchange markets often use a broker's trading platform (software similar to MetaTrader version 4 or 5) to learn the history and details of various trading strategies.
After researching the performance characteristics, the trader then selects an algorithmic trading strategy from the available options based on their investment objectives, risk tolerance, investment capital, and desired assets to invest. For example, if a trader has a minimum risk tolerance, he may choose to mirror a strategy with a low maximum drawdown.
Advantages
Opportunity to gain experience
Perhaps the biggest advantage of mirror trading is that it puts the new trader in the same position as someone with potentially years of experience in the same market. There is a lot to learn in trading, you can make a lot of mistakes and lose a lot of money, so experience is very important. Experience usually cannot be bought or faked, but with the help of mirror trading it is possible.
Low effort and cost
Even if a trader is experienced, they may not have the time or desire to trade all markets, or they may be otherwise busy. Therefore, a trader can start copying another trader's trades, and all the work will be done for him.
Trading without emotions
One of the biggest challenges traders face is the ability to manage their emotions. Watching the charts too closely can lead to trades that violate the trading strategy. This often results in losses.
However, in mirror trading, all emotions are eliminated and put into the hands of a more experienced and successful trader, who is probably more adept at sticking to his strategy and managing his emotions.
Since mirror trading determines when a trade is opened, closed or changed, it removes the stress associated with making trading decisions. This is especially useful for beginner traders or investors. Instead of worrying about the daily fluctuations of the market, an investor can simply check the performance of their mirror trading account at the end of each week and determine if you want to keep copying the selected trader's trades.
Confirmed Results
Brokers that offer mirror trading usually study, test and validate the trading results of the strategies they upload to their platform, which helps filter out losing trades. For example, before a new strategy is adopted, the broker may require it to have a 12-month track record of profitability with a certain maximum drawdown limit.
Flaws
Lack of trading history
This style of trading has only been around for 20 years, however it is still not enough to get the full picture due to the limited history of results.
Risks
The idea of mirror investing means finding a trader that is right for what you want to achieve, as well as finding a successful trader in the style you choose. However, the style of traders may start to differ from what you initially liked, or your own choice may change.
Moreover, traders never succeed 100% of the time. They may get your attention at first, but they may lose your money later on.
While it can be easy to see if a mirror trading account is making a profit, it is often more difficult to determine what risks have been taken to generate that profit. For example, a strategy that has generated a 300% return in the last 12 months may look great at first, but further analysis may show that an investor would have to endure an 80% drawdown in their capital to achieve such a result.
It's not a magical way to make money.
Even the most successful traders are not always right and go through a period of drawdowns. Most professional investors and mutual fund managers are incapable of consistently beating the market. What are the chances that someone else can do it?
There are a number of other strategies that can be more successful than mirror trading in the long run, but they require more time, effort and experience.
Some mirror trading strategies may only give good results under certain market conditions. For example, a trading strategy may work well in trending markets but fail in range-limited markets. Investors should test the results of trading strategies under various market conditions to ensure they are reliable.
Mirror trading and fraud
In 2017, regulators in the US and the UK fined Deutsche Bank $630 million for what it called "mirror" deals. However, this link does not refer to retail traders following more experienced traders, but rather to a way of laundering money.
Russian shares were bought through Deutsche Bank in Moscow (for rubles) and the same shares were sold to Deutsche Bank in London (for US dollars). This effectively created a money laundering channel that continued for several years. This fraudulent activity should not be confused with legitimate mirror trading, despite being a misnomer in the financial markets.