Mirror trading is a form of investing that involves the automated trading of assets based on algorithmic strategies rather than individual trades. It is a strategy that allows investors to view and copy the trades of experienced and successful investors and implement the same trades, in almost real time, through their own accounts. It is a methodology of trade selection used primarily in forex markets but is now more frequently used in stock markets due to the changes in regulation governing FX and CFDs.
Major Cost Reduction
The biggest advantage of mirror trading is that it reduces costs. Exchange listed products are typically associated with higher costs either in terms of execution or brokerage services. These include functions such as analytics, market data or any type of information that the professional trader may need, in addition to the time required to screen the market, analyze it, and select the right instruments or sectors to invest in.
Particularly for FX broker firms, mirror trading is not only cost efficient, but it also helps in gaining a competitive edge in a market, drives the opening of more new accounts, it ensures improved account conversion rates and boosts the trading activities of existing customers.
Mirror trading saves everything mentioned above by offering a ready-made investment tool to the client in which he will only pay the execution fee without having to pay for any additional service to make a better investment decision.
Access To A Multi-Asset Environment
Mirror trading is most suitable for technically inclined investors—traders who understand how trading algorithms work and are more likely to make informed decisions when choosing a mirror trading platform or algorithm. With our FIX API engine and dynamic risk management systems, a financial institution can provide a significant value-add to their clients by offering them the concept of mirror trading that is not restricted only to the world of FX and CFDs, but also to a real multi-asset environment including exchange listed products.
It also fits with global macro traders as algorithms are often developed based on strategies established by hundreds or thousands of expert traders who share similar strategies. Investors who understand and value how experts react to macroeconomic trends and data will likely want to choose mirror trading over copy trading. It is particularly useful for emotionally driven traders who tend to make poor trading decisions based on emotions as they can assign portfolio management responsibilities to a mirror trading algorithm.
Resolving The Confusion
Mirror trading was initially only available to institutional clients but has since been made available to retail investors through various means. Since its inception in the mid- to late-2000s, mirror trading has inspired other similar strategies, such as copy trading and social trading. Mirror trading has become a more acceptable alternative for traders and investors to consider because information and transparency tools have increased in quality.
Mirror trading, social trading and copy trading has been used interchangeably, often referring to the same thing. They are similar in nature but different altogether. Mirror trading refers to a trading style where an investor automatically copies trades executed by a variety of auto-trading and signal services.
Copy trading on the other hand is similar to mirror trading but enables an investor to directly copy a particular trade or a trader. Mirror trading differs from copy trading in the way that accounts are linked. In copy trading, the trader directly copies the moves of an individual successful trader, whereas in mirror trading, investment decisions are based on algorithms developed from trading patterns of number of successful traders.
Both mirror trading and copy trading are examples of social trading, a concept that emerged throughout the 2010s and is a form of investing in which traders make investment decisions based on observations and collaboration with their peers.