Mirror trading is one of the many trade selection methods used in the forex markets. Investors make use of this strategy to replicate the trades of veteran and successful forex traders in real time. When it was first introduced, only institutional traders could access this method. However, this is not the case anymore. Retail traders can access mirror trading in many ways now. Visit multibankfx.com
Mirror trading allows automated trading which plays an important role in eliminating emotions from the picture when trading. Typically, a majority of mirror traders in the forex market use the trading company’s platform to analyze the history as well as the other relevant details about various trading strategies.
How does it work?
Upon analyzing the different performance elements, the trader chooses an algorithmic trading strategy from the multiple options available. The selection is done on the basis of investment goals, risk appetite, capital available, and the assets picked for investment. For example, if a trader doesn’t want to opt for a risky trade, they’d want to mimic a trading strategy that has a low maximum drawdown. When strategy developers place their trades, the same are copied on the mirror traders’ accounts with the help of automated software that operates round the clock, five days a week, Monday to Friday. The goal is to obtain similar results.
Pros and cons of mirror trading
Pros of Mirror Trading
Control of your capital:
You’re the one who controls your funds in mirror trading. This aspect sets mirror trading apart from the various other typical investment methods where an assigned manager handles your funds. If you want to invest, first open a trading account and then add funds to trade. Remember that you will be the one responsible for the capital and a third party would manage the funds which could make sure there is some solid fund security.
Keeps Emotions at Bay:
Mirror trading is carried out by analyzing data points on which a trade was created. This keeps emotions at bay that could possibly affect trading decisions. A leading reason why there are plenty of investors whose trading careers do not take off is that they’re unable to control emotions. Trading, especially day trading should never be motivated by greed and fear.
Time-saving and convenient:
Trading demands both time and effort. You need to be actively researching and analyzing the market to be able to trade successfully since the market is changing constantly. Mirror trading takes the need for research out of the equation as you copy someone else’s trade and allows you to focus on the parts where progress has been made.
Trading platforms as well as firms that allow mirror trading also have room for comprehensive testing of many strategies which is great for amateur traders. They can further use these strategies for mirror trading. The strategies where one made loss are eliminated whereas the ones that have worked well remain on the platform.
Cons of Mirror Trading
Wrong trades get mirrored:
Mirror trading software lets you trade independently without working with a master trader. But be cautious with this as it may turn out to be risky and result in costly mistakes. Do consider the fact that not it is not not just the good trades that would be mimicked. Even the ones that are about to hit stop loss levels will also be copied.
No active control:
Mirror trading basically makes it clear that you don’t control the execution of the trade. It could lead to trust issues among the traders who rely on algorithms to fill their positions. This would differ from one trader to another as while some would be reluctant of codes handling their trades, others may not be so uncomfortable about this.
Generally, the platforms which facilitate mirror trading don’t give you the option to trade on the underlying asset. Instead, you must pick from contracts for difference (CFDs). A CFD is essentially an agreement that allows traders to earn a profit when there are changes in an asset’s value without actually owning the asset. This limits the chance to explore different elements.
Start mirror trading
Now that you are aware of the advantages and disadvantages of mirror trading, here’s a look at the process with which the method operates:
Pick an exchange:
Step one is to choose a licensed exchange that lets you mirror trades and get registered with them.
Get access to the trading terminal:
If your exchange lets a third-party platform carries out mirror trading, you’ll be required to download and install the software. You may even come across certain exchanges that let you access this facility on the website that you may connect to through a web browser.
Select a trading strategy:
You can choose from a number of different strategies. As a successful trader, you could be on the lookout for an algorithm that operates on data trends. On the other hand, if you happen to be a novice still picking up ways to trade unemotionally, choose your algorithm accordingly.
Protection against risk:
Avoid rushing into your trades with real money. You could be inviting trouble. Rather, get stock of the situation and be cognizant of all the risks involved. Identify them and have a strategy in place to deal with them.
Is mirror trading profitable?
It is hard to give a black-and-white answer for this one.
There are two possible scenarios: one you’re damn lucky as the trader you’re copying strategies from is able to trade consistently and remain profitable in any given conditions.
The other possibility is that you face some risky scenarios which are not uncommon and are rather a part and parcel of any trade.
We took you through the various benefits of mirror trading and how to start mirror trading. You must always know that no trading can guarantee success. Thus, if you’re comfortable giving away control of your portfolio, you need to be aware of your risks. On the whole, it’s a particularly great option for new traders which can help them learn the tricks of the trade.