Definition of mirror trading and key differences with copy trading

What is mirror trading?

Mirror trading is an automated trading method that allows investors to replicate the trading strategies of experienced traders. You select a specific strategy, and your trading platform automatically executes all the trades associated with that strategy. You don’t need to manually enter any buy or sell orders. Instead, you choose a pre-existing algorithm or strategy. This strategy is based on the performance history of a successful trader or group of traders.

The basic idea is to remove emotion from trading. It also allows beginners to benefit from the expertise of professionals without having to do their own market research. It is especially popular in the forex market because of its highly automated nature. It gives traders access to advanced trading techniques and diversification that might otherwise be unavailable to them.

Before you choose a mirror trading strategy, learn more about trading without risking real money. Open a demo account.

Mirror trading vs. copy trading

The terms mirror trading and copy trading are often used interchangeably and both involve following other traders, but their mechanics differ.

Mirror trading

Here, you mirror a pre-defined trading strategy, not an individual trade. This strategy is an algorithm built on the trading history and patterns of one or more successful traders. It is a fully automated process. Once you select a strategy, all trades are executed automatically without any manual input. The system manages everything, from entry and exit points to risk management. However, it is important to choose to mirror a strategy that fits your risk profile and goals.

The advantage is that mirror trading is based on proven, back-tested strategies rather than the real-time decisions of a single person. Plus, the automated nature helps avoid impulsive, emotional decisions. In addition, you can manage risks by mirroring multiple strategies from different traders.

As with any strategy, mirror trading has some limitations. Firstly, you have limited control over individual trades. You are trusting the algorithm entirely. Also, remember that past performance does not guarantee future success. If the mirrored strategy performs poorly, you can lose money.

Copy trading

Here, you directly copy individual trades of a specific trader by opening the same positions as the lead trader. This strategy is also automated, but it is based on the live actions of the trader you choose to follow. If the lead trader buys a currency pair, your account also buys it.

So, with copy trading, you have more control. You can choose which traders to follow, and you can often set parameters like the amount of money to allocate to each trade. You can also stop copying a trader at any time. There is also greater transparency, since you see the exact trades being made by a real person. Moreover, you can choose from a wide range of traders and set your own risk levels. Copy trading can be a great way to learn from the trading decisions of an expert.

However, remember that the lead trader can still make emotional decisions, which will affect your trading results. Plus, your success is tied to the performance of a single person. Also, you must be careful because some ‘successful’ traders might engage in risky behaviours or fraud.

How mirror trading works

Mirror trading works in a simple way. First, you choose a trading strategy from the platform. Mirror trading platforms provide detailed information about each strategy’s historical performance, including win rates, risk levels, and profitability.

Next, link your trading account to the chosen strategy and decide how much capital to allocate to this strategy. Once you do this, the platform’s software takes over. When the strategy’s algorithm generates a trade signal, the platform automatically executes that trade on your behalf. This happens almost instantly. The system will open and close positions and manage stop-loss and take-profit orders just like the original strategy.

A key part of how mirror trading works is the proportionality. If the strategy’s account is $10,000 and it opens a $500 trade (5% of the account), your account will open a trade of the same proportion. So, if you have a $2,000 account, your trade will be $100 (5% of your account).

Mirror trading in the forex markets

Mirror trading is very popular for forex. The forex markets are highly liquid and open 24/5. This makes them ideal for automated trading. Also, the forex markets move quickly and require constant monitoring. Mirror trading handles this automatically. Many forex traders prefer CFD trading, which uses leverage. This can lead to big profits or big losses. Mirror trading can help manage this risk through its pre-defined strategies. This is especially useful for beginners. It also gives beginners access to sophisticated strategies they can’t create on their own.

Common mirror trading forex strategies include:

• Scalping: this involves making many small profits from minor price changes. An automated system is perfect for this.
• Trend following: this strategy identifies a trend and trades in its direction. The mirror trading algorithm will automatically enter and exit trades as the trend evolves.
• Breakout: here, you look for sudden, strong price movements. The system can quickly enter a trade at the start of a breakout.

Other trading strategies

Mirror trading and copy trading are part of a larger trend in automated and social investing. Algorithmic trading is a general term for this strategy. It refers to any trading that uses computer programmes to follow a set of rules.

Social trading is a broader term. It includes copy trading and other forms of social interaction associated with trading. Traders can share their ideas and performance. It allows investors to learn and collaborate.

These strategies are all modern ways to participate in the financial markets, using technology to make trading more accessible.

Conclusion

Mirror trading is a powerful, automated strategy. It allows investors to replicate pre-designed trading algorithms. It is fundamentally different from copy trading, which involves following an individual trader’s live trades. Mirror trading focuses on the strategy, not the person. This can help remove emotion from trading and provide access to professional expertise.

However, you must do your own research and choose strategies that align with your risk tolerance.

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