Mirror Trading
Mirror trading is an increasingly popular investment strategy among forex and stock traders. The minimal time and effort required can be attractive to new traders, in particular, who may be seeking to replicate the returns of seasoned investors. In this article, we explain how mirror trading works, how to get started, and the potential risks involved.
Mirror Trading
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Pepperstone offers the replication of skilled traders' strategies via MetaTrader Signals, DupliTrade, and its new proprietary copy trading app, in collaboration with Pelican Trading. This service, available in select regions, grants access to numerous experienced traders and customized risk settings. However, it does not support cTrader Copy, which might discourage traders who prefer Spotware's platform.
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What Is Mirror Trading?
Mirror trading is a strategy that allows investors to automatically copy the trades of experienced financial market participants into their own accounts. The technique has been used since the early 2000s and is most popular in forex and stock markets. Mirror trading is available to retail investors through various means which we cover below.
Mirror trading differs slightly from copy trading in that it is usually fully automated, making it an easy system for beginners. With copy trading, investors still mimic top strategies but can often also manually amend and execute positions. The automated nature of mirror trading frees investors from making emotionally-charged investment decisions.
How Mirror Trading Works
Investors use brokers’ mirror trading platforms which work differently depending on the provider you sign up with. Mirror trading platforms often use software similar to MetaTrader 4 (MT4), for example.
Platforms that offer mirror trading list successful participating traders, known as ‘Masters’. Users can choose a Master who matches their own investment preferences such as technique (day trading) and asset type (forex, options, stocks, cryptos).
Importantly, users can select Masters based on their own risk parameters. From then on, whatever the Master trader does on their own account is automatically replicated in the client’s account. No intervention is required by the user as all activity is managed by the trading platform.
Another type of mirror trading involves a server or bot, known as an Expert Advisor (EA). The EA will execute trades for you using algorithms that react when certain patterns or trends appear in market data. Most platforms that offer mirror trading allow users to install an EA on their accounts.
Mirror Trading Regulations
Mirror trading is a legal practice and is regulated by various international authorities including the US Securities and Exchange Commission (SEC) and the Australian Securities & Investments Commission (ASIC).
The UK regulator, the Financial Conduct Authority (FCA), supports the European Securities and Markets Authority (ESMA) view as to how mirror trading fits within the MiFID directive. According to the FCA, mirror trading fits within MiFID’s definition of portfolio management. Therefore, brokers may offer the service so long as they abide by relevant licensing rules.
Pros Of Mirror Trading
- Suitable for beginners
- Legal and regulated in the UK
- Limited time and effort required
- Automated so limited emotional decision making
Cons Of Mirror Trading
- Losses are mirrored too
- Difficult to assess overall risk
- Less control over your own portfolio
How To Start Mirror Trading
Choose A Broker
To start mirror trading, you need to register with a broker that offers the service. We always recommend choosing a brokerage with strong customer support, positive user reviews, fast withdrawals and multiple Masters to choose from.
It’s also worth selecting a trusted provider that protects your personal information including contact details and address, as well as offering secure 2FA login. Popular options that offer mirror trading include JFD Bank and the XM Group.
Download A Platform
Brokers that offer mirror trading through a third-party platform like MetaTrader 4 will need you to download or install the software from their website. Some providers also offer a digital login for web trader solutions. An increasing number of mirror trading providers, such as eToro, also offer mobile investing.
Pick A Strategy
There are a couple of ways to be successful at mirror trading: copying Master traders or relying on algorithmic software that assesses market trends. There are positives and negatives to both. Arguably traders have already analysed their own risk appetite and found a technique that compliments their profit objectives. However, algorithms remove emotion from trading and can spot trends quicker than a human.
Define Risk
We cannot assess the level of risk that you are willing to take so we always recommend taking the time to think about this before trading with real funds. One piece of advice is to choose a trader whose aims are aligned with your own.
Research
You should aim to understand the success of the method you’re choosing to invest in. We’d recommend running an Expert Advisor on a demo account before investing real funds. There should be enough backtesting data to help you make an assessment, meaning there is proof that the algorithm could be profitable. Master traders’ results are also posted on platforms so viewing their trading success and history should be straightforward.
Mirror Trading Fraud
It is important to note that the following mirror trading fraud cases are a different type from those discussed in the rest of this article. With that said, having an understanding of the dangers posed may help you take a careful approach to risk management.
Mirror Trading International
Mirror Trading International Limited (MTI club), registered in South Africa, used its online trading platform to trade Bitcoin. However, cryptocurrency-related investments were not officially regulated in South Africa and many investors lost money.
Mirror Trading International always denied it was a scam and heavily promoted itself on Twitter and Facebook via influencers in the crypto community. There are claims that the company used false testimonials and reviews by paid members to attract innocent investors.
A significant attraction of Mirror Trading International was its growth calculator which showed investors enormous projected returns. In addition, videos posted on its YouTube channel explain MTI’s referral program which offers its investors referral, binary, or leadership bonuses.
In mid-2020, a panel in the US issued a cease-and-desist order against MTI for operating a pyramid scheme. Mirror Trading International collapsed and its website (www.mirrortradinginternational.co.za) went down meaning investors couldn’t make withdrawals.
Blockchain analysis firm, Chainalysis, released a crime report that named Mirror Trading International as the biggest cryptocurrency scam of 2020 after raking in $589 million which its CEO disappeared with. According to News 24, Mirror Trading International Ltd was placed into provisional liquidation in January 2021 after it stopped paying out funds to its thousands of members.
Mirror Trading & Money Laundering
Anti-money laundering (AML) regulators have paid close attention to mirror trading activities in recent years. In January 2017, mirror trading made the news concerning Deutsche Bank (DB) and Russian money laundering of around $10 billion.
Russian rubles were used to buy blue-chip stocks. The same value of identical Russian stocks was sold in London for US dollars and other currencies with the same bank—DB. The Russian buyer of the shares and the seller—offshore entities in Cyprus and the BVI—had the same beneficial owner. This ultimately created a money laundering pipeline that continued undetected for years.
Deutsche Bank’s compliance department was ultimately responsible for ignoring the red flags and identifying the beneficial owners of the companies executing the mirror trades. The bank was fined a total of $630m by the UK’s FCA and US regulators after it was alleged that the former Director of the bank’s Russian trading desk had accepted bribes in exchange for overlooking the questionable trading activities between 2011 and 2014.
Final Word On Mirror Trading
The term ‘mirror trading’ has been tarnished in recent years by the fraudulent activities of companies and individuals. In reality, when executed correctly, it can be a successful strategy. However, while handing over control of your portfolio is an attractive prospect, success is not inevitable and you should always do your own risk assessment. Ultimately, mirror trading is a good starting point for inexperienced traders looking to learn the ropes.
FAQ
Does Mirror Trading Work?
Mirror trading is a strategy that can be successful when applied correctly. However, when choosing a method and broker, make sure that the Master trader you copy is aligned to your preferences, especially risk tolerance, and has a proven successful track record. If using an algorithm or EA, do your research and check that it’s been properly backtested before linking it to your account.
How Do I Start Mirror Trading?
Firstly, choose a broker that offers mirror trading on its platform, such as AvaTrade, eToro, JFD Bank, or Pepperstone. You can then copy the strategies of successful traders based on asset, strategy, and risk appetite. Whatever the trader does on their account will be automatically replicated in yours.
Is Mirror Trading Legal?
Yes, mirror trading is legal and is regulated by most international financial authorities including the UK’s FCA. It’s also important to open an account with a UK-regulated broker to reduce the risk of online scams.
Is Mirror Trading Safe?
As with traditional investing, there is always going to be a risk when mirror trading. Knowing your own risk appetite is important before you start authorising automatic trades. Fortunately, you can usually check a Master trader’s track record or use an Expert Advisor that has been backtested before making a decision.
Is Mirror Trading A Pyramid Scheme?
Mirror trading allows investors to automatically execute and replicate a selected trader’s strategy or an automated bot’s algorithm. This is not to be confused with the fraudulent South African investment company, Mirror Trading International Limited. Its Bitcoin trading website was named the biggest cryptocurrency scam of 2020 after accumulating $589 million which its CEO vanished with. MTI was a pyramid scheme in that it paid its user base to recruit new investors.