Imitating and cloning the moves of the great traders: thus copying and social trading have revolutionized the market and distributed earnings. You may have often heard of copy trading, mirror trading and social trading.
But what is meant by these concepts? What use can they have for those who want to make online investments? Does copy trading work?
We have to start from a premise. The Internet has revolutionised the world of financial markets, making it possible for virtually anyone with resources to invest, large or small.
In parallel with the exploitation of the potential of the Internet, large financial services companies have also understood the great potential of social networks. And that is how important it can be to encourage the sharing of trading strategies and dynamics.
Social Trading
It was precisely from this factor that the so-called social trading came to life, which is precisely the sharing of everything that revolves around the way of investing online.
The pioneer of this trading system is eToro. With social trading, what you do is made public.
78% of retail investor accounts lose money trading CFDs with this broker. You need to consider whether you can afford this risk of capital loss
Not only. Own views regarding future market evolutions are also made public, and experiences and points of view are shared. Just like in a social network, you can research other traders and check their performance, profits, success rate, and the like.
The Other Traders Become Advisers and Guides
Conceptually, online investment activity should be something individual, in the sense that everyone invests their own resources and risks their own capital.
However with social trading instead we are witnessing an enlargement of the circle of subjects involved. Everyone can make their own contribution that could be exploited by an indefinite number of users. And in turn, take advantage of the suggestions of others.
Copy Trading and Mirror Trading
A concept that goes even further is that of Copy trading, automatic trading or mirror trading. What is meant when these expressions are used? Simply cloning the investment activities of others, clearly the best ones, to obtain one's profit.
Again, the revolution started from the eToro broker.
But what use can such an activity have? Let's try to understand it.
The Principle of Copy or Mirror Trading
How often does an investor see or read about someone who has made big profits and dreams of being in their place?
Well, that's exactly what Copy Trading is for. The movements of another speculator are completely imitated and the same results are obtained.
This type of automated trading thus creates two individuals: one who invests alone, and one (or many) who copies what he invests.
It could be argued that those who copy are not real traders. Which is true, but only partially. In fact, before copying someone you need to know whether or not he can produce profits, and the only way is to see how he works and understand how he thinks. If he loves the risk or if he is a cautious one.
Another aspect must also be considered: the trader who decides to clone could diversify his operations on different brokers, so following him only on one could be completely busted.
Wanting to give an example, cloning a trade by looking only at its performance is a bit like betting on a team just because it is a little higher in the standings than the others, without inquiring if it has any unavailable players or if it has been facilitated up to that moment by a simple calendar or was helped by good luck. That might be fine for you, but you could also make a very costly mistake.
The Advantages of Those Who Let Themselves Be Copied
On the other hand, reversing the point of view, what is the use of being copied by someone else? Many brokers recognise great advantages (even percentages on trades) to those who stand out for the number of followers. And, naturally, this is the case, given that the more followers you have, the more trades will be made through that specific broker, who thus earns money.
Copy Trading Launched by eToro
But let's get back to copy trading from the copyist's point of view. The reason why it is becoming widespread is that it allows you to clone professional traders waiting to gain their own experience to travel alone, or because it allows us to copy the moves of those who are more expert than us in certain markets (shares, currencies, indices, etc.), where instead we are less practical.
As mentioned, the broker who launched this revolutionary way of approaching online trading is eToro. You choose another investor to clone, press "Copy" and you will be able to replicate all his operations in real time without additional costs. If he earns, you earn.
Risk Warning: 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Another Example: AvaTrade
But there are other examples as well. AvaTrade has also decided to offer a platform capable of adopting copy trading. Again, individual trades or entire strategies can be copied. This allows you to trade even when you have little time because it is someone else who is operating on the market, while we limit ourselves to imitating him.
AvaTrade offers two different solutions, namely DupliTrade and ZuluTrade.
What to Decide in Automatic Trading
But if you wanted to try your hand atit, how should you go about it?
The first decision to make is who to clone. It can be one or more than one. The platform we use generally gives us some information about each user, to make the choice easier for us.
- Feed Back of other users
- Number of followers
- The type of market where it usually operates
- Earnings obtained and their weekly, monthly and annual average
- Average exposure.
- Market diversification.
Once you have decided which “tutor” to follow, you will need to determine some settings that the software will follow. You have to give it instructions to define which operations to copy and which ones to discard.
Here are the settings that you define:
- Risk level (Low-High).
- Negotiable amount.
- Markets on which to operate.
- Winning percentage.
- Cyclical average of positions.
- Maximum/minimum earnings.
Once this is done, let's get started.
It is also possible to set stop loss levels, which, if reached, interrupt the "copying process". So if the trader you are following ends up making a loss, your account will automatically stop copying him.
Pros and Cons of Copy Trading
Like all strategies and techniques that can be used in the financial sector, copy trading also has its strengths and weaknesses. There is neither the perfect technique nor the certain gain.
The great value lies in the earnings-commitment ratio, which can be convenient. If you copy the "right" trader, his work will bring you profits, perhaps even considerable ones. Your job, on the other hand, will be mainly to monitor it constantly.
Another advantage is that the copy trader is always active on the market, and can seize opportunities 24 hours a day. This is because he can take advantage of the time zones to "cover" the activity throughout the day. This way you won't miss any opportunity.
The flaws are essentially a couple. The first is that one's results depend on someone else. If they get it wrong, the results don't come. The second flaw is that the software doesn't filter out bad decisions. If one is set, you have no way to stop it right away.
Conclusions
As we always tell you, in trading, you should never focus on just one aspect. This applies to both strategies and individual techniques. That's why we can tell you that copy trading can be useful to you and bring you benefits, but it still needs to be seen as part of a broader action.
Wanting to give an example, some use copy trading with a very low-risk profile (therefore to obtain small gains) while reserving riskier or more profitable operations for themselves. But this is just an example because there are so many possible configurations. It's up to you how you use it.
