When I started my trading career in equities in the mid-1990s and Forex in the early 2000s, few resources were available to retail traders. There were a handful of in-person courses, some well-known books (which I still recommend today), and a few brokers started to appear advertising to retail traders. It was a fledgling industry. The services offered to brokers were basic: for example, there were no connecting accounts to third-party services.
Over the last two decades, the number of retail traders has exploded, and technology has improved vastly. The brokerage industry became more dynamic with newer account types, such as mini and micro accounts, direct access to liquidity with ECN accounts, mobile trading, platform choices, and much more.
The trading community's growth and better technology have also led to mirror trading. It has become such a key offering that I believe all traders, regardless of skill level, should consider its benefits.
Let’s take a good look at mirror trading:
- What is mirror trading?
- What are the benefits and drawbacks of mirror trading?
- How can traders use mirror trading to their advantage?
Let’s explore.
What is Mirror Trading?
Mirror trading is the ability to replicate trades from another source on your account automatically.
The keyword in that definition is “automatically.” If I must log in to my account and manually intervene to execute the trades, this is not genuine mirror trading.
Mirror trading is also known as copy trading. In this article, I will stick to the term “mirror trading.”
Mirror Trading is Legal and Regulated
Mirror trading is legal, and to help provide safety in the industry, many leading regulators oversee mirror trading, such as the UK’s Financial Conduct Authority (FCA), Australia’s ASIC and the US.
Mirror Trading is Not a Signal Service or Social Trading
Signal services and social trading use other sources’ ideas for trades, but there’s no automatic execution—traders must log into their accounts to execute the trading signals. Without automatic execution, there will be discrepancies between the signals and execution—maybe I miss some of the signals because of the time zone, or I don’t take a signal because I’m emotional about getting into a particular trade. And, of course, not all signal services or social trading platforms contain entry points, stop losses, and take profits. These drawbacks do not exist with mirror trading, which makes it different.
How Does Mirror Trading Work?
Whose Trades Do I Access for Mirror Trading?
The first step in Mirror Trading is to decide whose trades to copy into my account. How do I go about that process?
Research Track Records
Unless I know a trader personally, I want to see a track record to determine their success rate. Track record can be measured in different ways, but here are the metrics on which I focus:
- Length of track record.
To state the obvious, the longer the track record, the better. I would not consider anything under a year, but over two years is ideal. This is subjective, and many traders are comfortable with a track record of six months or more.
- Number of trades.
This is like the length of the track record because it speaks to experience and not necessarily results. However, having a good sample size of trades is relevant because it shows the trader can perform repeatedly. I prefer to see at least 50 trades in a track record for swing traders and 200 trades for short-term or day traders.
- Profit factor.
This is my favourite method of tracking performance. Profit factor is the sum of the wins divided by the sum of the losses. Let’s say all your winning trades amounted to $10,000, and your losing trades amounted to $5,000 (regardless of the number of wins and losses). Your profit factor, or PF = 2 ($10,000 / $5,000). It’s that simple. I like the profit factor statistic because it considers two key ingredients: the win rate (number of wins vs. number of losses) and the size of the average win to the average loss. For example, a high win rate strategy may seem appealing, but if the losses are large, the strategy will not be as profitable. Because the profit factor considers the size of the losses, it will spot this as an issue.
- Win rate.
The win rate is the number of wins compared to the number of losses. If a strategy has nine wins to every loss, the win rate is 90%. Win rate is probably the first thing that traders look at it. Having a higher win rate is nice, but remember, it only makes sense if the size of the wins is decent compared to the size of the losses. I’ve seen 80-90% win rate strategies which still lose money because the strategy has large stop-losses, so when it loses money, it loses big.
- Average win to average loss size.
Ideally, the average win size should equal or exceed the average loss size. Let’s look at an example where it’s the other way around: for example, the average win is 10 pips, but the average loss is 30 pips. Assuming the same position size, if I experience 3 losses, which is very possible, I will need 9 wins in a row to break even. In actual trading, large losing trades create large drawdowns. Sadly, I’m seeing too many traders pursue high win rate strategies but with high average loss sizes. The last product I reviewed won 90-95% of the time but had an average loss ten times larger than the average win. One or two losses would wipe out all the gains, sometimes bringing traders’ accounts to zero.
- Drawdown.
The most accepted definition of drawdown is when the account loses money from its peak value. When I look at the drawdown, I look at the percentage drawdown and how long it takes to return to the previous value. For example, if I grow my account to $20,000 and then shrink it to $17,000, my drawdown is 15% ($3,000 / $20,000). If it takes me two months from my $20,000 peak to return to $20,000, I consider my drawdown time to be two months. When looking at a drawdown, I ask myself, “Would I be comfortable being in a drawdown for the longest drawdown period in this person’s track record?”.
Two other significant metrics in measuring trading performance are Sharpe ratio and expectancy.
Is the Trader’s Strategy Algorithmic or Discretionary?
Some people prefer discretionary strategies because the trader can consider market conditions. Other people prefer algorithmic (rules-based) trading there’s less room for emotionally driven decisions, and it is easier to back test. It is a personal preference.
Now, let’s look at the pros and cons of mirror trading.
Pros & Cons of Mirror Trading
Pros
- It’s a shortcut to trading, saving the time to learn and practice.
This is the single, biggest reason people mirror trade. Developing the skill to trade profitably can be a long, long journey. I mean, extremely long. Some people find that after devoting years to trading, they’re not cut out for it. Even if the strategies are learnable, some individuals can’t handle the emotional element to stay disciplined with their trading. That’s okay—not everyone can do everything in life. But mirror trading can jump that effort and allows anyone to potentially grow a trading account.
- Life can be too busy to trade, or trading isn’t suitable for your time zone.
There have been times in my life as a parent that I did not have the time to trade. And I’ve moved countries in my life—I used to live in London, UK and traded the London open. Unfortunately, moving to Toronto made the London open the middle of the night for me. Mirror trading would allow me to have money in the market while I adjusted to a new schedule and adjusted my trading to the US sessions.
- It diversifies a trading account.
Even successful traders find mirror trading useful. Sometimes, they’re not performing well or want to take a break. mirror trading can introduce a strategy that performs independently of their own trading, thereby giving another stream of growth.
Cons
- Mirror trading does not teach me to trade.
My trading does not improve because I sign up for a mirror trading service. If that’s all I use as a trader, I will never professionally develop and build a skillset that nobody can take away from me.
- I’m reliant on another individual’s abilities and performance.
If that person stops trading profitably, for example, maybe they have changed strategies, market conditions don’t suit them, or they have lost some of their discipline, my account will suffer.
How to Start Mirror Trading
Connecting an Account to a Mirror Trading Service
This step is technological. Once I’ve decided on a mirror trading service to follow (and nothing stops me from following more than one), I need to connect my account to it.
Most Forex mirror trading services work with a MetaTrader trading platform. The advantage is that most retail Forex traders offer MetaTrader, giving lots of flexibility. If you have a non-MetaTrader account, check for mirror Trading services that work with your broker & account type.
MetaTrader Signals
It’s worth highlighting the Mirror Trading service from MetaTrader called MetaTrader Signals (both a signal service and a copy trading service). At the time of writing, they offer over 3,000 different signal providers. Any MT4 or MT5 account can connect to MetaTrader signals. MetaTrader lays out their performance in a standard format, making them easy to compare.
I like that their performance page has a description tab where the copy trading provider describes their methodology, whether they’re trading a real account and even how much money the copy trading person has in their real account. It’s a great insight into the person behind the service.
Start With a Small Test Account
Start with a demo account or a quarter of the money you intend to use in a live account. Track the results and ensure your account's results match the stated track record. There may be some small differences on occasions because different brokers will give different fills to trade. However, overall, that should even out.
Fraud in Mirror Trading
Other authors on this topic mention fraud in mirror trading, partly because a company named Mirror Trading International operated a fraudulent scheme involving Bitcoin. The United States’ CFTC ordered the company to pay $1.7 billion to its victims. This was not a mirror trading service as defined in this article; the company happened to have the words “mirror trading” in its name.
Fraud in actual mirror trading is rare. Mirror trading providers may falsify track records, but that’s hard to do if it’s a verified record through MetaTrader or another reputable service like Myfxbook.
Bottom Line
Mirror trading allows anyone to automatically copy another person’s trades in their own account. It is a shortcut to the time it takes to learn how to trade and be available to execute trades.
Even for successful traders, mirror trading can still be an option to help grow their accounts further. However, mirror trading will not make you a better trader as it does not teach you how to trade.
Some people are comfortable with that but remember that it does not help build a skillset in the market. Also keep in mind that if the person whose trades you are copying becomes unprofitable, you will lose money.
There are thousands of mirror trading services available—especially for MetaTrader users, the options are phenomenal and worth exploring.
FAQs
What is mirror trading?
Mirror Trading is the ability to replicate trades from another source on your account automatically.
Is mirror trading safe?
Mirror Trading does not guarantee profits, and it is possible to lose money. However, a mirror trading service does not take your capital (it remains in your broker’s account under your name), so it is safe from theft.
Why is mirror trading illegal?
Mirror trading is not illegal, and many leading regulatory bodies recognize it.
What are the benefits of mirror trading?
Mirror trading does not require learning how to trade, having the discipline to trade, or being available to trade. The main benefit is potentially growing your account using another person’s trades.