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Have you ever experienced the tedium of listening politely to someone loudly brag about his stock investments or the fabulous returns his little-known investment manager generated during a party? It is possible by learning mirror trading.
There may be a way for you to get involved in the action through mirror trading or investing. However, before you plunge into a mirror trading account with your hard-earned savings, you should know I have several reasons this trend may appeal only to a small section of the investing public. Discover what mirror trading entails by reading on.
What is mirror trading?
Mirror trading occurs on international currency exchanges or stock exchanges. It is not illegal by definition. However, there are several varieties of mirror trading.
In essence, mirror trading involves the purchase of bonds or shares in one currency and their sale in a different currency. By trading foreign exchange markets and taking advantage of exchange rate fluctuations, one can make a legal profit. In other words, one can practice Forex trading.
Forex is a market where buyers and sellers of currencies exchange online. There are many financial markets worldwide that use Forex.
A mirror trading method is sometimes described as a method by which investors copy the strategies of successful investors. They usually copy each other’s trade flows rather than opposing them. This article does not discuss mirror trading; it is the mirrored transaction of selling and purchasing the same security at the same time.
Besides using exchange rate fluctuations as a mirror for trading, this scheme is also helpful in another way. For instance, money can be transferred from one jurisdiction to another through the capital market. When this occurs, the parties involved are obscured or partly obscured. An opposite transaction would look like this.
The two entities purchase and sell the same number of financial instruments, almost simultaneously, but in different currencies. In this way, there are two parties involved in the transaction. It is the same person who owns and controls the two components of the transaction. Institutions engaged in facilitating trade often have difficulty recognising that the entities they are dealing with are the same.
Russian company – UBO – Offshore – Stock
exchange – Share 1 – Share 2 – Share 3
Press reports describe examples of how to convert Russian roubles into dollars. An inconspicuous Russian company purchases securities on behalf of a client. Legal entities in offshore jurisdictions, which shield their owners from liability, sell securities for a dollar. In reality, both trade flows are inseparable, but they involve the same party. There was a currency exchange, and funds moved from the Russian company to the offshore company.
Mirror trading vs. copy trading vs. social trading
Mirror trading is often referred to as copy trading, though significant differences exist. In copycat investing, investment ideas of top-rated investment managers are copied without a physical connection between accounts.
Another significant difference is the time lag. Money managers can acquire or dispose of stocks weeks before the information is made public to copycat investors. This time delay may virtually disappear when mirror trading is used. Those are the same orders, as they are all grouped and sent to the exchange together.
How does mirror trading work?
Each broker’s mirror trading process is different. However, mirror trading features, such as those offered by eToro, are usually available. In addition, successful traders referred to as “Masters” display their results on their account pages.
It is recommended that you choose a Master trader based on your desired asset (forex, stocks, options, etc.), technique (for example, day trading or swing trading), and, above all else, your risk tolerance. By tying your account to theirs, you will mirror their trades – meaning that every trade they make will appear in yours.
Mirror trading can also involve using an Expert Advisor (EA) bot, which executes trades on your behalf using algorithms. If market data shows a pattern or trend is developing, the EA will trade. The majority of platforms allow users to download EAs. You can purchase these from the Codebase in MetaTrader 4 (MT4).
Relevant authorities govern the practice of mirror trading around the world. For example, according to the UK’s Financial Conduct Authority (FCA), mirror or copy trading is considered portfolio management under ESMA’s MiFID directive. Therefore brokers offering this service must adhere to relevant regulations.
Pros of mirror trading
The following are some advantages of mirror trading.
1. Removes emotional cues
Using mirror trading eliminates emotion from the equation since it is automatic. In some cases, the data may indicate a trend is forming, but if the forex pair has burned traders in the past, they may be overly cautious and miss the opportunity.
The trader may be eager to invest in shares again if they have profited by investing in stocks before. This problem is avoided by mirror trading, which relies on data points and the success of an experienced trader.
2. Reduces time & effort
To trade successfully, you need deep analysis and a lot of time. This element is removed with mirror trading, allowing traders with other commitments to focus on them. The EA or Master Trader will carry out the legwork while the investor watches.
Cons of mirror trading
The following are some disadvantages of mirror trading.
1. Losses are also mirrored
Trades are automatically made on your behalf by mirror trading software. It can be advantageous in executing successful trades efficiently and comes with risks. It is essential traders understand that returns are not guaranteed and that Master Traders and EAs can make errors that may result in losses.
2. Control of portfolio
By definition, mirror trading results in traders not being in control of their positions. It can be advantageous as it removes the need for time and effort. However, it can also mean traders put a great deal of trust in an algorithm or a master trader.
Limited in the US
Mirror trading platforms (such as eToro or XM ) typically deal with CFDs rather than the underlying asset. For example, an agreement between the trader and the broker to trade the difference between a trade’s open and close value is called a contract for difference (CFD).
By doing this, traders can profit from changes in an asset’s value without owning it. But unfortunately, CFDs are heavily regulated in the US, making it difficult for South African traders to locate a broker who offers them.
How to start mirror trading?
- Select a broker – Your first step will be to register with a company that offers mirror trading. You can also consider JFD bank, Binance, or eToro. We recommend choosing a provider with good customer service, fast withdrawals, 2FA privacy, and positive customer reviews.
- Download a trading platform – This is needed if your broker offers mirror trading through a third-party platform like MetaTrader 4, which requires you to download it from their website or log into the web trader.
Many brokers offer apps that can track your portfolio on the go. Mirror traders will find these very useful in tracking automated trades.
- Choose a strategy – Think about whether you want to rely on an algorithm that looks purely at data trends or whether you want to copy successful traders? Both strategies offer advantages and disadvantages. To ensure profit motive, traders should also have skin in the game. Nonetheless, an algorithm can identify trends faster and removes all emotional factors.
- Define risk appetite – Before investing with real money, you must assess the risks involved. Avoid conflict of interest by choosing a trader with a similar perspective to your own.
- Research, research, research – Before engaging in mirror trading with real funds on your account, thoroughly analyse the method you’re investing in. It is best to run an EA on a demo account before doing anything else. Before making a purchase, you should be able to find its most recent backtesting results.
- A lack of backtesting data is one of the most significant warning signs since it implies that the algorithm is unprofitable. A master trader should have established a track record of success with low drawdown over a sustained period.
Mirror trading fraud
It is essential not to confuse the term “mirror trading” used here with a different type that was part of a large-scale Russian fraud case that made headlines in 2017. As a result of mirror trading in this instance, linked organisations made different trades to avoid money laundering controls.
Companies in Russia paid in roubles for trades on blue-chip stocks. On the other hand, an offshore firm would also conduct trades in USD or another reserve currency with the same bank.
These trades would mirror each other and intentionally add layers of complexity to hide money laundering. The case resulted in more than $20 billion in launderings, and Deutsche Bank, the financial institution most heavily associated with the case, was fined $425 million.
Mirror trading international
Mirror Trading International (MTI club) is another business that uses ‘mirror trading’ but is not connected to the practice itself. Mirror trading as a strategy is not a scam, but companies like these have given it a bad reputation.
In South Africa, MTI was a crypto-gambling company that advertised 500% returns every year to lure in victims. It turned out that this too-good-to-be-true offer was a scam. In 2020, Johann Steynberg, founder and CEO of the company, disappeared with over $589 million worth of bitcoin.
So should you even consider mirror trading?
The reasons outlined above might make mirror trading unsuitable for most investors. But if you plan to take your account over to your cousin Bob’s portfolio, you might want to take a few precautions. First, start by doing your research. Make sure Bob understands investments and isn’t just an amateur who considers himself an expert merely because he scans the business news and online investment portals.
The second step is to review performance records. The investment strategy Bob comes up with might be a great one, but if his track record isn’t impressive, why should your account be used as a guinea pig?
Limit your risk by only funding this mirror account with a small percentage of your total capital. The funds allocated to Bob’s account can consistently be increased in a measured manner later if he becomes the next Buffett. Even with a sizable deposit in the account, if Bob blows it up and you had money in it, you might not be able to recover from the loss.
As a final point, Bob’s investment philosophy should align with your own – after all, this is mirror trading. For example, do you honestly think Bob should be managing your money if you prefer steady rather than spectacular returns on large-cap stocks while Bob’s approach is to gamble on microcap stocks and shoot the lights out?
- Does mirror trading work?
Thousands of traders throughout the world use mirror trading as a successful strategy.
It is recommended that those interested in getting involved do thorough research on the practice because it can be risky. Verify the success history of the Master Trader you copy over an extended period. You should have backtested it thoroughly before tying your account to an algorithm or EA.
- Is mirror trading a pyramid scheme?
The term ‘mirror trading’ refers to automating trades to replicate the actions of a selected trader or an automated bot. It is unrelated to Mirror Trading International, a South African company whose crypto-gambling site was exposed as fraudulent. The MTI scheme rewarded its user’s commissions for referring new users to the scheme.
- Is mirror trading legal?
Several financial authorities worldwide regulate mirror trading (also called copy trading), including the FCA, SEC, and ASIC.
- Is mirror trading safe?
Investors should always research before authorising automatic trades before engaging in mirror trading, which carries an equivalent risk profile to traditional trading. However, it is possible to maximise profits by following specific steps.
Consider choosing an EA that has been backtested thoroughly or a Master Trader with a track record of success.
- how do I copy a successful trader?
Mirror trading is a feature offered by brokers such as eToro, Pepperstone, and AvaTrade, in which you can copy the positions of successful traders. Choose a profile based on the trader’s risk appetite, asset, and strategy, and then copy their trades.
In this article, we discussed how mirror trading works and its benefits. There is no guarantee of success when trading, so you should also know the risks if you are willing to relinquish any control over your portfolio. Mirror trading is, in general, an excellent way for new traders to get started and can be an excellent learning opportunity.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst