What is Copy Trading and how does it work?

Education / 5 Min Read
Milan Cutkovic / 09 Nov 2021

Are you interested in trading the financial markets but feel like you don’t have the time to learn new strategies? Maybe you already trade but can’t find a way to take your trading up to a professional level, or perhaps you’re just looking for an easier way to improve on the strategies you are already using. If this is the case, copy trading may be for you.

Whatever your reasons, copy trading opens up a world of unique opportunities in the markets. In this article, we’ll explain what copy trading is and how simple it is to get started.

What is copy trading?

Simply put, copy trading allows you to copy trades placed by other traders. The basic goal is to find another investor with a proven track record, and begin copying their trades. Their success may continue and you will be on the winning side of things but if trades do not go in their favour then you will also be copying their losses.

Remember to always monitor and keep up to date with the trading performance of the signal providers you are copying.

When we talk about copy trading, there are usually three parties involved:

  • Provider - This is the trader whose trades are being copied. Sometimes they are also referred to as a "Master Trader" or "Signal Provider".
  • Copier - This is the person copying the provider's trades, using their own trading account.
  • Broker - The broker provides access to the copy trading platform (like an app or MetaTrader 4) which allows the provider and copier to connect.

How does copy trading work?

To be able to start copying someone's trades, first you need to open your own live MT4 trading account. This is the account you will use to follow other traders. It’s worth noting here that once you’ve got a live account, you always have the option to open additional sub-accounts, which gives you extra flexibility. For example, you could use one account for manual trading and another for copying trades.

Next, you need to link your live MT4 account(s) to the Copy Trading app. Once that’s done, you’ll be able to see a list of providers whose trades you can copy. Now it’s simply a case of clicking on a trader to view their stats – this includes things like their past performance, drawdown and the things they typically trade. While copy trading is especially popular in the forex market, it’s not limited just to currency pairs. Each provider or master trader will have their own expertise and preferences for what they like to trade, such as forex, indices, commodities, single stock CFDs, crypto CFDs (not available for FCA retail clients) and more.

Before you confirm that you want to copy a trader, you can adjust the overall risk settings to suit your own goals and risk tolerance. This is important because all traders come from a different starting point – for example, an experienced trader might have more money to trade and a higher tolerance for risk than someone who is only new to trading. The flexibility to follow top traders makes copy trading for beginners the perfect way to start in the financial markets – especially those who lack the time or resources to trade on their own – but more experienced traders do use it as well.

Either way, the ability to change your individual settings helps ensure you remain in control over how much you are risking on each trade.

If all you want to do is copy trades, there is no manual intervention required. You simply click ‘copy’ and your account will automatically start copying the trades of your chosen signal provider.

You’re then free to go off and do other things while the app will keep running in the background. However, you should always keep an eye on your account, not only to track the performance but also to ensure that you always have enough margin in your account.

Man on his phone copy trading with top trader information

Which copy trading platform should I use?

The Axi Copy Trading app allows you to easily connect to your MT4 account and start copying a variety of traders. The in-built leaderboard will give you quick insights about the top provider's performance and help you in choosing the one that suits you. 

It’s worth remembering that you retain full control over your account, meaning you can pause or completely disable the copy trading for each provider at any time. Furthermore, you can control your risk by either mirroring the provider's level of risk and position size or by setting a fixed size per trade.

You can download the Axi Copy Trading app from the Apple Store and Google Play Store now!

Can copy trading be profitable?

If you find a successful trader to copy, copy trading can certainly be profitable. However, trading in general is inherently risky and copy trading is no different.

No trader wins every trade, and even though you might have picked them because they have positive results overall, the provider you choose to copy might go through a period of drawdown – meaning that you would be facing losing positions. One way to try and mitigate this risk is to use multiple providers, preferably with different trading strategies/styles to achieve diversification.

Read more → Explore top traders on the Axi Copy Trading app

Advantages of copy trading

Discover four advantages of copy trading below:

Flexibility

While copy trading involves simply copying the trades of the provider, the copier still maintains control of how much they want to risk per trade. For example, if the provider is trading large lot sizes but the copy trader has insufficient funds in their account, they can adjust the trade size so it works proportionally to their own account balance.

Efficiency

Becoming a successful trader is a long journey and not every trader can dedicate multiple hours per day on this. However, copy trading allows you to trade right alongside top traders even if you’re busy with other things – you just need to make sure you have your risk parameters set up and monitored properly.

Transparency

Copy trading is similar to social trading in the sense that there is a leaderboard where you can compare different providers and their performance. This means wins and losses are visible to see.

Diversification

Copy trading is not only helpful for traders who lack the time to do any trading on their own. Traders can also choose to copy someone as a diversification tool. For example, you may feel most comfortable using a swing trading strategy but could copy someone who has shown they are successful at scalping. If your own strategy isn’t performing well or you’re finding a lack of trading opportunities, copy trading might make up for some of it.

Disadvantages of copy trading

Discover four disadvantages of copy trading below:

Picking the right trader can be difficult

If you were thinking of buying into a stock or investment fund, you would probably spend some time doing research to figure out if it’s the right decision, and this is the same sort of approach you should use when choosing which traders to copy.

You need to realise that it’s not necessarily the trader with the highest monthly return you want to copy. There are always other factors to consider, such as maximum drawdown and how much trading history the trader has.

Understand the risk

Copy trading can be risky. While you have some control over the risk (for example, how much money you will allocate to your trading account and the risk settings), you do not have any control over the trades of the trader you are following. Market conditions could change and the master trader might struggle to adapt, or they could be stressed out and struggling to manage their emotions when trading. While these things are beyond your control, you do need to consider them.

Additional costs

Some providers charge a subscription fee if you want to copy their trades, so always check before you trade.

Market risks

Copy trading does not protect you from all the typical market risks such as slippage, rejected orders or platform outages.

Is copy trading too risky?

All trading involves a degree of risk, therefore so does copy trading. However, it is your account, you have full control of it and you can adjust risk parameters to suit your own requirements. Even though you’re copying another trader, it’s always your responsibility to conduct due diligence and not just blindly follow someone because they have proven success in the past.

For example, the trader with the highest return might experience massive drawdowns or could have a very short trading history. Other traders might have lower returns, but demonstrate greater consistency. Unfortunately, there is no way to remove risk from trading, but you can help to reduce it.

What is the difference between copy trading and mirror trading?

Mirror trading and copy trading are similar, but there are some key differences. With mirror trading, you are literally copying whatever the master trader does, including the same position size they place on their trades.

With copy trading, you are following the same trading strategy and the exact trades the signal provider is taking, but crucially you can adjust position sizes. This means that if you are not fully confident in all the trades of the master trader, you can reduce the size of your position on certain trades you follow.

 

Download the Axi Copy Trading app, explore the top traders and start copying their trades today!

 

 

 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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