What Is Mirror Trading?
Mirror trading (or mirror effect trading) allows traders to copy the positions of other traders in real-time. It is a popular practice for those that are new to online forex trading, as it allows beginners to learn from experienced traders. By definition, it is almost identical to copy trading, though mirror trading is mainly automated, whilst the former can be manually executed.To get more news about
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How Mirror Trading Works
Mirror trading works differently depending on the broker you sign up to. In most cases, they’ll offer a mirror trading feature, such as eToro’s copy trader. Successful traders, known as ‘Masters’, will display their account results.
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Select a Master trader who matches your preferred asset (forex, stocks or options to name just a few), technique (for example, day trading or swing trading) and importantly, risk appetite. You can then tie your account to theirs and mirror their positions entirely – meaning if they make a trade, you do too.
Another type of mirror trading involves a bot, known as an Expert Advisor (EA), that executes trades on your behalf based on algorithmic logic. When market data shows that a pattern or trend is forming, the EA will make the trade. Most platforms offer the opportunity to download an EA to your account. On MetaTrader 4 (MT4), these can be purchased from the Codebase.
Mirror trading is a practice that is regulated by relevant authorities across the globe. The UK’s Financial Conduct Authority (FCA), in conjunction with ESMA’s MiFID directive, defines mirror or copy trading as portfolio management and therefore brokers offering this service must adhere to relevant regulatory obligations.
Pros Of Mirror Trading
Removes Emotional Cues
Mirror trading is automatic and therefore emotion is removed from the equation. Traders may spot a trend forming in the data, but if they’ve been burned by the forex pair in the past, they may be overly cautious and miss the opportunity. Similarly, if the trader has profited from stock in the past, they may be eager to invest again without proper analysis. Mirror trading prevents this, relying on data points or an experienced trader’s success.
Reduces Time & Effort
Trading successfully requires deep analysis and time dedication. Mirror trading removes this element and allows traders who have other commitments to focus on these. The EA or Master Trader will complete the leg work, whilst the investor watches.
Cons Of Mirror Trading
Losses Are Also Mirrored
Mirror trading software places trades automatically on your behalf. While this can mean that successful trades are executed with minimal effort, it also brings risks. It’s vital traders understand that returns are not guaranteed and losses can be made if the Master Trader or EA is incorrect.
Control Of Portfolio
Mirror trading automatically means that traders are not in control of the positions being executed. Whilst this can be beneficial as it means the time and effort is removed, it also means that traders are placing a lot of trust in the algorithm or Master Trader.
Limited In The US
Most platforms that provide mirror trading features (such as eToro or XM) do so on CFDs rather than the underlying asset. CFDs (contracts for difference) are an agreement between the trader and the broker to exchange the difference in the value of an asset between the open and close position. Essentially, it allows traders to profit from changes in an asset’s value without owning it. CFDs are heavily regulated in the US so American traders may have problems finding a broker that will offer them.
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