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In this article, we go through everything you need to know about forex copy trading and how you can gauge the benefits and drawbacks it offers to both beginners and experienced traders.

What is Copy Trading?

Copy trading is software that is used to duplicate the trading strategies of selected traders.  

 
While this may sound like “mirror trading” (a technique used to mimic another trader’s strategies), the key difference is in copy trading the copying trader has their account linked to the account of the trader being copied. This means that whenever the trader being copied opens, closes, or alters a position these actions are also applied to the linked account (the copying trader).  

Before we dive into more details about copy trading, it’s important to distinguish between copy trading and social trading, as they are often mistakenly considered to be one and the same. Since we have already made clear what copy trading is about, let’s go into what social trading is, and how it might differ from copy trading. 

In essence, social trading is a combination of social media and investment. In social trading platforms, you can directly communicate with other investors, and exchange information about what trades to perform in a given time. This allows more people to collaborate. 

The main advantage of this is that you can analyse the trades yourself, meaning in some cases, you can try to see if there are any errors in making the trades before you execute them yourself. 

In mirror and copy trading, traders are in most cases using automated software to mimic the strategies of selected traders. 

In both mirror trading and social trading, you are not directly following someone’s trades, but are instead either automating their strategy (mirror trading) or manually following their strategy (social trading). 

In contrast, copy trading follows the trades of the selected trader, including when a position is opened and closed, as the accounts are linked. 

While social trading involves a closer look at trades and is great for people who want to learn trading by experiencing it first-hand, it also includes investing more time in research on the terminology and strategies of the industry.  

It should also be noted that with social trading, you might still be solely responsible for the trades that you perform. You only gain information from other traders within the social trading platform, and you can't automatically execute the trades based on other traders, as copy trading platforms allow you to do. 

In a sense, the main difference is in the way people approach trading in the first place.  

For those who are keen on learning everything about trading, social trading is a fantastic place to start. They gain knowledge along the way as they perform trades themselves. They copy other traders but also do their own research in the process, because they want to know the reasoning behind those trades.  

Copy trading, on the other hand, is for people who want a hands-off approach to trading, who prefer not to have to constantly monitor their trades. It’s for people who would rather just trust their trades to an experienced trader or someone they know personally.  

Why Should I Learn About Copy Trading?

These days, when markets are monitored around the clock, a variety of strategies are called for and across various asset classes.  

Investors might favour some strategies they have applied for a long time and with good results, but there’s no guarantee that those strategies will always work in the future. 

History of Copy Trading

While popular now, the first iteration of copy trading goes back to 2005, when researchers found a way to create an algorithm that could replicate trading behaviours.  

This use of algorithms quickly grew in popularity as investors and brokers picked up on it. This became the birth of mirror trading. 
 

However, it wasn’t long until brokerages and popular traders used the popularity of mirror trading to instead allow investors to link to their account, and for a small fee, allow investors to get complete exposure to their positions and strategies. 

Copy trading has turned out to be a unique way of getting access to the financial markets. The innovation spread to others who wanted to invest in foreign exchange, crypto or stocks but didn't have the time to follow markets, analyse information, or devise strategies they weren’t even sure would work.  

What Are the Benefits of Copy Trading? 

Copy trading has several benefits. These fall under two main categories: Income and Learning.  

You Earn Passive Income

Copy trade forex allows for passive income. You only need to set up your account, find a reputable investor that has hopefully been investing or trading for many years and has a reliable track record with few bumps along the road in their performance. Ideally, they take less risk than the average investor by holding fewer drawdowns and accessing markets you wouldn’t either get exposure to (e.g., Forex, Commodities etc.).  

In a way, to copy trade forex is to ride the wave that the experienced investor is creating and profit from it. 

Of course, investing in this way is not entirely risk-free. That is what makes the other benefit category, learning, more significant if you’re a beginner trader. 

You Learn from the Experts

One crucial benefit of copy trading, which beginners should be aware of, is that it can save them tons of time learning the fundamentals of forex trading.  

Learning how to analyse market information and plan a strategy from scratch can take a long time. Copy trading helps shorten that learning process by following the market in real time with actual skin in the game.  

You can experience how seasoned traders approach trading and pick up ideas from them. Eventually, you may even make your own variations of their strategies.  

You Learn How Experts Handle Losses

That doesn’t mean you should blindly trust what an established investor is doing with their trades. Even experts make mistakes.  

In fact, good investors study their past losses to identify errors in their approach and make adjustments, intending to minimise future risk further. 

Among the things you can also learn from copy trading, then, is how to recognise these mistakes for yourself, despite an expert’s opinion or because of an expert’s mistake, when a trade will result in a loss. 

And from the expert traders’ example, you learn how to learn from your mistakes. 

What Are the Drawbacks of Copy Trading?

Like all other investment strategies, copy trading has its fair share of disadvantages across any platform.  

Even Experts Make Mistakes

As mentioned before, even professional investors can make mistakes. They might trade something they wouldn’t normally trade, or refuse to close a trade when they should have. These are common mistakes we can all make due to our hidden biases. It's best, therefore, to partially monitor your investments as well, and not passively hope for the best. Ideally, you’re following along and can understand the reasoning for why the trader you’ve followed has done what they’ve done.  

Investing Involves Costs 

For people keen on investing in high volume, the commission fee that professional investors take can sometimes add up if money has already been lost through a bad or missed strategy.  

With a copy trading platform like Fusion’s, you only pay fees for any positive performance. There are no hidden management fees or entry or exit fees. You simply agree to the performance fee when signing up and away you go.  

Dealing with Drawbacks

Like everything else, copy trading has its pros and cons. With careful decision-making, proper research, and intelligent risk management, you can maximise the benefits of copy trading and minimise its drawbacks.                                      

Final Thoughts 

There isn’t much difficulty to copy trading. All you're doing is finding someone you know with a decent track record which has steady gains with minimised risk and hopefully mimicking their strategies for trading in the markets.  

That can be done by looking at investors’ trade history and analysing their trade entry (both buy order for long positions and sell order for short positions). At least two years of history is a good place to start.  

Overall, copy trading can minimise the risk of capital loss if you have found the right trader. For professional investors already familiar with various strategies, copy trading is still a good option - it might get you access to an uncorrelated asset class they might not have traded before or sharpen their own skills by following and learning from someone else.  

If you’d like to get started with copy trading, Fusion offers a range of options for both beginner and seasoned traders. Fusion+ allows traders to copy trade some of the most successful traders in the financial markets.  
 

We also offer a copy trading service through our partner DupliTrade. For those who wanted more of a social trading experience we also provide that with our partner, Myfxbook Auto Trade. 

If you’d like to learn more, contact us and we’ll happily answer any questions you have about copy trading, Forex or CFDs.  

FAQs

What’s the main benefit of copy trading? 

The main benefit of copy trading is to automate the investors' trading and minimize risk. It can also prevent slippage in buy and sell orders because most copy trading platforms are fast and automated. 

How does copy trading work? 

It works by copying the strategies of other experienced investors and applying them to your portfolio. 

Can I use MT5 and MT4 for forex trading? 

You can use MT5 and MT4 for forex trading. While MT4 is explicitly designed for forex investments, MT5 has a range of other assets, both centralized and decentralized. 

What are the risks of copy trading? 

The main risk of copy trading is that even experienced traders whose strategies you might copy can make mistakes. You have to monitor your own investments to spot issues at once if something goes wrong. 

Thousands of brokers are ready to help you invest. Experience copy trading with MT4 or MT5. Sign up now!