Pros and Cons of Mirror Trading

6 mins read
by Angel One

In wake of the pandemic, many have made a switch in their careers to include trading and a few have become full-time traders. For whatever reason the majority of the population turned towards stock markets, this has opened up avenues for exploring different ways of trading in equity, derivatives, commodities, and currency.

One such way people use is Mirror Trading. In this article, we shall explore more about it like mirror trading meaning, how it works, its advantages and disadvantages. Stick till the end of this article and you can flaunt about this topic in front of your friends and colleagues.

So let’s begin!

What is Mirror Trading?

Mirror trading is a technique that allows traders to copy the movements of other traders in real-time. It is very similar to copy trading. In this type of trading, a novice trader can mirror the trades executed by a preset strategy. This strategy allows them to trade with others without having to spend a lot of time on the analysis part of the trading. It’s a good way to get started and learn about the markets.

How does it work?

Unlike traditional mirror trading, it works seamlessly. Most brokers will allow you to mirror your account performance. A master trader will have the necessary skills and experience to match you with the right asset or technique. They will also have the ability to mirror their positions so that if they make a trade, you do too.

A mirror trading system uses a bot known as an Expert Advisor (EA) to trade on your behalf. The EA will trade based on the data it has collected.

Mirror trading is regulated by various authorities across the globe. This practice is referred to as portfolio management and is required by various regulators.

Pros of Mirror Trading

  • Keeps Emotions at Bay:

Mirror trading works by analyzing the data points that were used to create the trade. This eliminates the emotion involved in making a decision. One of the major reasons why many do not make it in their trading careers is a lack of control of their emotions. Greed and fear are two emotions that need to be defined and restricted while choosing to day trade.

  • Time-saving and convenience:

Trading requires a lot of time and effort. Without a regular analysis, it is not possible to trade successfully since every minute thing keeps changing in the stock market. Mirror trading eliminates this factor and allows traders to focus on the details that they’re good at.

  • Proven Results:

The trading platforms and brokerage houses offering the services of mirror trading conduct comprehensive testing of various strategies before they are put up for novice traders to mirror. They remove all the loss-making strategies and the ones with proven positive results remain on the platform.

Cons of Mirror Trading

  • Wrong Trades Also Get Mirrored:

With Mirror trading software, you can trade on your own instead of with a Master Trader. However, this can also bring risks, as it can be prone to making poor decisions and incurring losses. It is important to note that along with profitable trades, potential trades that could hit the stop loss levels will also get mirrored.

  • No Active Control:

Mirror trading means that the traders are not in control of what is being executed. This is a bit of a trust issue as it means that the algorithm is being used to execute their positions. While some might be comfortable letting some codes sit on the driver’s seat, others may not be quite okay with this.

  • Limited Scope:

Most platforms that offer mirror trading features don’t provide options for trading on the underlying asset. Instead, they offer contracts for difference (CFDs). A CFD is a type of contract that allows traders to profit from the changes in the value of an asset without owning it. So the scope of exploring different instruments remains restricted in this type of trading.

How To Start Mirror Trading?

Now that you are aware of the advantages and disadvantages of Mirror Trading, let us take you through the process by which you can begin to explore what this trading style has to offer. One can follow the below-mentioned steps for the same.

  • Pick Your Broker:

You will need to register with a licensed broker that accepts mirror trading. Some of the popular options are JFD bank, eToro, and Binance. The Indian broker which offers this service is Trade Bhai.

  • Get Trading Terminal/Platform:

If your broker offers a third-party platform for mirror trading, then you will need to download and install it on your computer system. Otherwise, some brokers also provide this facility directly on their website which you can access through a browser.

  • Select Trading Strategy:

There are different strategies to choose from. If you’re a successful trader and you’re looking for an algorithm that looks purely for data trends, then you should probably use an algorithm. However, if you’re a novice and would like to learn how to trade with emotion, then use an algorithm.

  • Plan Your Risk:

Before you start trading with real funds, make sure that you have a clear understanding of the risks involved. Always define your risks and never take risks more than your appetite to bear the same.

  • Study, Analyse, and Test:

Before you decide to open a real account, make sure that you have thoroughly analyzed the advantages and disadvantages of each method. One of the most critical factors to consider is the lack of backtesting data. This means that there is no proof that the algorithm is profitable. You can avoid such strategies and prefer the ones which have tested and proven results.

The Bottomline

Mirror trading is a great way to start, as it gives new traders an opportunity to test their knowledge and skills. It is also a great way to develop a strategy that works for them. With a pre-defines risk appetite and a well-tested strategy, one can begin their exploration in this area of trading. Globally, most of the strategies are available for Forex trading. So this could be a better option if one is looking to begin forex trading as there is more buzz about the same in the Forex market.