What is Mirror Trading?
Mirror trading entails “mirroring” a successful trader’s trades. Because trading information is frequently available online, traders can utilise a digital platform to automatically “mirror” and copy the orders of the successful trader in real-time. Beginners typically employ this method since they may not understand how to profit from the markets.
It is possible in both the forex and stock markets, however it is much more popular in the forex market. Mirror trading has become a more acceptable option for traders and investors to explore as the quality of information and transparency technologies has improved.
What is Mirror Trading?
Mirror trading is permitted on all markets, making it useful for all beginners. It was initially available to institutional investors, but it is now available to all investors and traders via digital platforms. Mirror trading has spawned other comparable tactics, such as copy trading and social trading, since its inception in the mid- to late-2000s.
Its automated nature can help investors avoid trading decisions based on emotion. In the forex markets, mirror traders will frequently utilise a brokerage’s trading platform, such as MetaTrader 4 or 5, to investigate the histories and specifics of various trading techniques. They may employ broker services like as Interactive Brokers’ Interactive Advisors or a third-party site in the stock market.
The trader then selects an algorithmic trading strategy from the available possibilities depending on their investment goals, risk tolerance, investment capital, and selected assets to invest in after researching performance characteristics.
For example, if a trader has a low risk tolerance, he or she may opt to mimic a technique with a low maximum drawdown. When strategy creators execute their trades, these trades are replicated in mirror traders’ accounts using automated software that runs 24 hours a day, 7 days a week in order to replicate similar results. Mirror trading is available from a variety of brokers.
Difference between Mirror trading, Copy Trading and Social Trading
These names are frequently used interchangeably. However, there is a distinction between these approaches. The fundamental principle of mirror trading, copy trading, and social trading is the same, namely that a trader duplicates the methods and techniques of another trader. However, when it comes to putting these three options into action, they differ.
In mirror trading, the trader determines the lot size and number of trading positions in each mirrored trade. The ‘original’ trader in this situation programmes and directly hosts his strategy on the server of the company that provides this service for the rest of the traders to duplicate. The trader who facilitates the technique must be familiar with programming in order to deliver the signals that will subsequently be reproduced in the client’s trading account.
When we speak of copy traders, we mean the process by which a trader connects their account to the system of the organisation that provides this service, so becoming a signal provider. This approach, like mirror trading, can be applied to Forex copy trading or any other market. The follower should contribute a portion of its capital to the signal provider as well as pay fees and commissions for the services supplied. Furthermore, each trade is opened based on the assigned capital to provider’s capital ratio.
In contrast to mirror trading, it does not programme its strategy on the company’s server, but rather hosts it on its own server and provides it to the trading platform for the broker to forward to its clients. Based on this method, a client can then become a copy trader.
Social trading is a type of user community that functions similarly to a social network but focuses on a specific topic such as trading. In this situation, there are two types of participants in this network, signal providers or professionals who share their operations, and their followers who seek guidance, exchange opinions, and explore winning tactics.
Advantages of Mirror Trading
There are basically three advantages of mirror trading. First it reduces emotions, results are verified and there is transparency.
- Emotions – With mirror trading, you don’t have to worry about opening, closing, or modifying trades at crucial moments. This is especially helpful for beginner traders who may feel overwhelmed by the foreign exchange market. An investor can avoid the stress of monitoring their portfolio in real time by instead monitoring the performance of their mirror trading account at the end of each week.
- Verified Results – In order to weed out unprofitable trades, Forex brokers that provide mirror trading typically evaluate, test, and confirm the trading results of methods that their clients submit to the platform. For instance, a broker might need a 12-month profitable track record and a maximum drawdown limit before accepting a new strategy.
- Transparency – The broker that provides the strategies offers each of the details of the same and, therefore, the entire process.
Disadvantages of Mirror Trading
Mirror Trading also has its disadvantages:
- Not easy to assess the risk – A mirror trading account’s profitability is easy to ascertain, but the risks required to achieve that profitability are not always so clear. A strategy that has returned 300% in the past year may seem fantastic at first glance, but a deeper dive may reveal that the investor would have had to suffer a drawdown of 80% of their capital to obtain that return.
- Robustness of strategies – Certain market circumstances may be necessary for the success of mirror trading methods. A strategy may, for instance, fare well when markets are moving but poorly when they are range bound. To ensure a strategy’s longevity, investors should put it through its paces in a number of distinct market conditions. Many people have the misconception that mirror trading is fool proof since it relies on the successful trading tactics of other traders. But this is not the case, there are always hazards involved with investing. Since market conditions are always shifting, one successful trading approach may fail in another.
- Trading scams – Scammers prey on people’s lack of knowledge by making extravagant profit claims. Don’t believe any promises of assured profits, and dig into the foundations of the solutions they give. Potentially discouraging a desire to learn. One misconception is that users need only select a strategy and wait for the results to show up in their account; everything else is handled automatically. However, we can’t tell if the chosen method is in our best interests or not without proper training.
How to start Mirror Trading?
The following steps can be followed to start mirror trading:
Pick Your Broker
You will need to register with a licensed broker that accepts mirror trading.
Download a Trading Platform
If your broker provides a third-party platform for mirror trading, you must download and install it on your computer. Otherwise, some brokers offer this service directly on their website, which you can access via a browser.
Select Trading Strategy
There are numerous strategies from which to choose. If you’re a successful trader seeking for an algorithm that focuses solely on data patterns, you should probably utilise one. However, if you are a beginner and want to learn how to trade with emotion, you should 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 you can bear.
Study, Analyse, and Test
There are several strategies to choose from. You should probably employ one if you’re a successful trader looking for an algorithm that concentrates purely on data patterns. However, if you are a newbie and want to learn how to trade with emotion, an algorithm should be used.
Mirror trading in money laundering schemes
The potential for mirror trading to be exploited in illegal financial activities such as money laundering is a possibility. Understanding the criminal’s motivations in engaging in money laundering is necessary before delving into what mirror trading may do for such a scheme.
To launder money is to conceal its illegal origins or to give it a false veneer of legitimacy so that it can be used in legitimate financial transactions. Money laundering is a process that involves placement, layering, justification, and spending.
The goal is to deposit the cash into a bank account, but huge cash deposits are easily spotted. Criminals do not want this. Smurfing is a method of positioning used to lessen the likelihood of being discovered. Smurfing is the practise of dividing a large sum into several smaller ones such that the sums add up to less than the minimum required for reporting. This is possible for a number of accounts in various financial institutions.
After that, complicated schemes are set up and/or money is transferred. The process at this point is known as “layering.” The funds are channelled through offshore firms, exchanged for other currencies, and otherwise hidden.
The justification stage aims to offer the illegal proceeds a purportedly legitimate status. If the cash does come to light, it can be explained away by producing fake documents like phoney invoices, loans, or purported winnings from casinos.
Criminals can then spend the money freely without raising. It’s likely that some of the money gained through criminal activity will never see the light of day. Think about all the bribes, taxes, and expenditures associated with establishing a new business or exchanging currency that must be paid for when engaging in money laundering.
Now that we know what the criminals want, we may return to mirror trading and the image of the acquisition of assets in roubles and the sale in dollars, which was done virtually immediately. What will the offender gain if he or she begins this strategy with criminal proceeds?
The criminal obstructs the paper trail, moves value, and converts currencies by using illegally obtained money to buy rouble securities, which are then sold in another country and the proceeds in dollars are channelled through multiple parties, including offshore companies, and deposited in the criminal’s foreign bank account.
It may be most important to hide the proceeds, so if schemes use dozens of letterbox companies with companies in high-risk countries like Cyprus and the British Virgin Islands, one can be sure they are hiding transactions and people.
In essence, while the deposit in the foreign bank account may complete the phenomena of mirror trading, criminals will still need to follow the necessary measures in order to use their money freely.
Pros and Cons of Mirror Trading
Easy for beginner traders to learn
Easy to follow a professional trader
No emotions involved
Need to choose the right trader
Time delays can cost you
Mirror trading is one method for new traders to get their feet wet in real trading. It does, however, carry some hazards because it increases the possibility of making poor decisions and incurring financial losses.
Mirror trading allows new traders to put their knowledge and talents to the test. It is also an excellent method for developing a strategy that works for them. One can begin their exploration in this field of trading with a pre-defined risk appetite and a well-tested method. Most Forex trading tactics are available globally. As a result, if you want to start forex trading, this could be a better option because there is more talk about it in the Forex market.