Copy trading

Copy trading allows traders to copy trades executed by other investors in the financial markets. The goal of copy trading is for the trader to have the same positions as the investor they are copying. When copying another trader, one doesn’t receive the layout of the trader’s strategy, but simply follows their trades blindly. This compares with mirror trading, which allows one to copy a trader’s actual strategies.

Copy trading was born out of mirror trading in 2005. Initially, traders copied specific algorithms that were developed through automated trading. Developers shared their trading history, allowing others to copy their trading strategies. This scenario formed a social trading network. Eventually, traders began to copy trades in their personal trading accounts, copying another trader rather than a strategy.

See inside our platform

Get tight spreads, no hidden fees and access to 9,300+ instruments.

What is copy trading?

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 cryptocurrencies and 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.

How to copy trade

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.

Join a trading community committed to your success

Copy trade in forex

Copy trading within forex trading is perhaps the most utilised market for this strategy. This may be because the forex market is the largest and most liquid worldwide, and therefore the preferred market to trade in. Various brokers offer specialised software for FX copy trading, allowing traders to emulate the actions of others in the hope of making a profit. Crypto copy trading is also very popular within the cryptocurrency market, with widespread instruments such as bitcoin and ripple. However, these markets can both be very volatile and present risks.

Mirror trading vs copy trading

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.

Social trading vs copy trading

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.

Is copy trading profitable?

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.

Market risk

Market risk describes the risk of loss due to changes in the price of a security. The goal is to generate gains from an increase in the value of the asset being traded. Obviously, there is a risk that the asset will lose value. Traders can protect themselves from market risk beyond what they expect to lose by using an asset allocation strategy. This means that only a certain amount of funds are allocated to a certain strategy. By allocating all their assets to a single trade strategy, a trader could face large losses if an unexpected event occurs, and this could wipe out your entire capital.

Liquidity risk

Liquidity risk means that one may not be able to exit positions at expected levels. A trading strategy’s risk management method should have a historical precedence so the trader can see the copy trader’s maximum historical drawdown. The maximum drawdown shows the peak-to-trough decline during the life of the strategy. This is a very important figure as it lets traders see historically the maximum amount they may be comfortable losing at any given time if they choose to enter the strategy. For example, a copy trader may have a maximum drawdown of 20%. This means that one can expect to lose at least 20% at any point once they start copying the trader.

It is also useful for traders to gather information about the products and asset classes they are trading. This is because each instrument has a different liquidity level. For instance, it will be much easier for a trader to exit positions in EUR/USD, compared to liquidating emerging currency pairs. When copying traders that focus on emerging market currencies, you should examine the slippage incorporated into their returns, which can be significant during periods of heightened volatility. One should also ensure that the bid/offer spread of the currency pair or security is not eroding the copy trader’s returns. Is the copy trader incorporating commission costs into their returns? Copy traders that transact often will have elevated costs of trading.

Systematic risk

Emerging market currencies are more exposed to systematic risks. This means that one’s money could get locked up and the trader may not be able to exit their positions. This has happened in the past when countries are overthrown and capital is locked up and forbidden to leave. While this scenario is very rare, it needs to be included in a strategy where this situation could happen, especially in the foreign exchange market.

Copy trading platform

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 the best 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.

Powerful trading on the go

Seamlessly open and close trades, track your progress and set up alerts

MT4 copy trade software

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.

Summary: can you make money copy trading?

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.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

Join over 90,000 other committed traders

1

Apply for a live account

Complete our straightforward application form and verify your account

2

Fund your account

Deposit easily via debit card, bank transfer or PayPal

3

Find and trade

One touch, instant trading available on 9,300+ instruments