What is Copy Trading?
Copy trading allows traders to invest their trading funds with other successful traders and copy their trading strategies, usually for a small fee or a cut of the investing trader’s profit.
The biggest advantage of copy trading is that it allows beginner traders to profit from the sophisticated trading strategies used by professional traders. The downside is that beginner traders may end up following risky trading strategies without fully understanding the consequences.
Most Forex brokers now offer some form of copy trading function, but there are major differences between the products they offer and how they integrate into trading platforms.
The best copy trading and social trading brokers will clearly explain how the copy trading platform works with detailed metrics on each trader offering their services. These metrics should include the return as a percentage over time (days, weeks, months, years), the largest drawdown (peak to trough decline), average daily profit, the total time the trader has been active and a detailed risk assessment.
How does Copy Trading Work?
Successful traders, or strategy providers, provide their trading strategies for others to follow. Other traders, or investors, can select the strategy provider they wish to follow, usually for a fee or a cut of the investor’s profits. Brokers provide the trading platform that the strategy provider will use to trade. The broker provides the social platform for the provider and the investor to meet and co-operate, brokers also provide the trading platform that the provider will use to trade.
Most copy trading platforms will also display the manager’s investment return, risk profile, length of experience and trading style. It is essential to also examine the manager’s largest drawdown, this the largest single peak to trough decline in the manager’s trading account. If you are thinking of investing a smaller amount than the manager’s largest drawdown you are putting yourself at serious risk of losing all your capital. Controls for investors are also key, allowing you to choose how much money to invest with a provider and which strategies to follow.
Which Platforms Allow Copy Trading?
MT4, MT5, and cTrader all have built-in copy trading functionality. This means that traders with a preference for these specific trading platforms will find a copy trading community.
Is copy trading legal?
Yes, copy trading is legal in almost all jurisdictions. Copy trading and social trading are considered self-directed by most regulators, as traders who use this function always select the trading system to copy. Prior to the explosion in social trading, copy trading was only available via a managed account. Managed accounts required a power of attorney and a large account balance, and so are unpopular amongst typical retail traders. Copy trading, or social trading, on the other hand is considered self-directed by most regulators, as traders who use this function always select the trading system to copy.
A brief history of Copy Trading
Prior to the merging of Forex trading and social media, the only form of copy trading available was managed account trading. While managed accounts are still an integral part of institutional trading, on a retail level they have been almost completely eclipsed by the rapid rise of copy trading.
Also called mirror trading, auto trading and social trading, copy trading began in the late 2000s with the advent of the eToro and ZuluTrade platforms. eToro has since become one of the most successful Forex brokers in the world, purely based on the strength of their social trading platform, while ZuluTrade is one of the most popular copy trading platforms in the Forex community.
The success of these early pioneers means that most major brokers now offer some form of copy trading or social trading, either through their own platforms or via a third-party, such as ZuluTrade, Mirror Trader or Myfxbook.
Which brokers are the best for Copy Trading?
eToro, FXTM, and AvaTrade are the best brokers for copy trading.
eToro’s unique social trading platform allows for users to copy each other’s trades and share trading tips. Easy-to-use and web-based, the eToro platform has won many awards over the years for innovation and simplicity. With over 6 million clients, eToro has successfully made social trading an integral part of Forex industry.
FXTM run the FXTM Invest platform, which connects investors with Strategy Managers. Strategy Managers are graded on several metrics and investors can filter Strategy Managers to find the right combination of return and risk they feel comfortable with. Investors only pay a fee on successful trades.
Avatrade offers multiple direct and indirect copy trading options. AvaTrade has also partnered with the Mirror Trader and ZuluTrade platforms to offer a wide range of copy trading functionality. Mirror Trader allows investors to switch between manual copy trading, semi-automatic trading, or automatic trading when following a provider. ZuluTrade is a community of providers, who have been ranked using various practical parameters including maximum drawdown and average profitability.
How do I choose the best copy trading system?
The best copy trading system will not always be the most profitable. It is important to look at a provider’s long-term strategy and risk management to make sure these align with your account balance and goals. Aggressive strategies may make money in the short-term – and may even be successful for those with larger account balances over the long term – but can lead to account wipeouts for those with smaller balances.
Like with all Forex trading, it is important to do your own research and manage your risk appropriately.
Final Word
While a relatively recent method of Forex trading, copy trading has fast become one of the largest. The advantages are obvious for beginner traders, and many experienced traders also swear by it. But, like all Forex trading, it must be entered into with education, caution and a thought for risk management.
Accepts UK Clients. Average spread EUR/USD 0.60 pips with 0.0 USD commission round turn on the trading account with lowest minimum deposit. Max leverage 30:1. Islamic account available. MT4, MT5 & cTrader platforms supported. Pepperstone is regulated by the FCA, ASIC, and the DFSA. 75.8% of traders lose money with this provider.