The Benefits of Copy Trading Forex

Fusion Markets

Read Time: 10 - 15 Minutes

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).

What’s the Difference between Social Trading and Copy Trading?

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.

	Manual Trading	Copy Trading	Mirror Trading	Social Trading
Beginner Friendly	No	Yes	No	Yes
Fully Automated	No	Yes	Yes	No
Algorithmic	No	No	Yes	No

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!

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“I used fundamentals for nine years and got rich as a technician”

– Martin S. Schwartz
(author of Pit Bull: Lessons from Wall Street's Champion Day Trader).

Are you leveraging the power of forex indicators in your trading strategy? Indicators play a vital role in identifying trends, assessing price momentum, and pinpointing potential entry and exit points.

Whilst no single indicator guarantees success, understanding how to properly use a blend of them can greatly improve your trading decisions. However, used incorrectly, they can be devastating to a traders’ performance.

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Introduction
Moving Averages
- Using MAs for Trend Analysis
- Using MAs for Support & Resistance
Relative Strength Index (RSI)
Bollinger Bands
MACD (Moving Average Convergence Divergence)
Fibonacci Retracement
Using and Combining Indicators Effectively
Pros and Cons of Indicators
Conclusion

Moving Averages

Moving Averages (MAs) are used to identify trends and smooth out price action. Two common types include:

Simple Moving Average (SMA): Average prices over a specified period, giving equal weight to each data point.

Exponential Moving Average (EMA): Gives more weight to recent prices, making it more responsive to price changes.

Moving averages trading helps determine overall trend direction, but can also be used as support and resistance.

Using MAs for Trend Analysis

The 50-day and 100-day simple moving averages are widely used by traders around the world. As a rule of thumb, the wide the delta between two moving averages, the stronger the trend, as shown in Figure 1 below.

Figure 1 – Examples of a strong and weakening trend using the 50sma and 100sma.

Another commonly-used moving average is the 200-day SMA. When combined with the 50-day moving average, traders keep a close eye out for a ‘Golden Cross’, or ‘Death Cross’, when the 50sma crosses above, or below the 200sma. This pattern has a history of identifying a possible reversal after a strong trend.

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Figure 2a – example of a ‘Death Cross’ on the AUDUSD daily chart.

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Figure 2b – the resulting change in trend direction.

Using MAs for Support & Resistance

Some traders use MAs as support and resistance levels for entering, and exiting trades. This method works on all timeframes but is most commonly used for intraday trading. For example, Figure 3 highlights a number of support and resistance points using the 50, 100, and 200 SMA’s on the 15min chart of EURUSD;

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Figure 3 – Support and resistance using 50, 100, & 200sma on a 15min EURUSD chart.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. It ranges from 0 to 100, providing insight into whether an asset is overbought or oversold.

Using RSI to identify overbought and oversold extremities:

Overbought (70+): Indicates that an asset may be overvalued and could be vulnerable to a pullback.

Oversold (30 or below): Suggests that an asset may be undervalued, potentially leading to a price rebound.

Additionally, divergence occurs when the price and RSI move in opposite directions, signalling a potential reversal. For example, if the price makes a new high but the RSI does not, this “bearish divergence” may suggest a decline, as shown in Figure 4 below.

A graph with lines and arrowsDescription automatically generated with medium confidence

Figure 4 – RSI divergence on EURUSD 4-hour chart.

This method of analysis is heavily relied on by pattern and reversal traders. However, it’s important to note that the lower the timeframe you trade on, the more ‘false’ divergence signals you will encounter, thus making this method of analysis more suitable for longer-term swing traders.

Bollinger Bands

Bollinger Bands consist of a middle SMA line with two outer bands representing standard deviations from this average, creating a channel around price action. The width of the bands indicates market volatility.

Bollinger Bands Strategy for Breakouts and Squeezes:

Breakout Trading: Price moving beyond the upper or lower band can signal a strong directional move.

The Squeeze: When the bands contract, it indicates low volatility and a potential breakout in either direction. Traders can prepare for a price move when bands begin to widen after a squeeze.

Figure 5 below shows an example of the contraction (“The Squeeze”), followed by an explosive move upward.

Figure 5 – Breakout trade on 1-hour EURUSD chart using The Squeeze method.

Bollinger bands are typically used with default settings, however, some traders may edit the settings to adapt the indicator to be more closely aligned with their trading stye/strategy.

MACD (Moving Average Convergence Divergence)

MACD is a trend-following momentum indicator that displays the relationship between two moving averages (commonly the 12-day EMA and 26-day EMA).

Figure 6 – MACD indicator applied to EURUSD daily chart.

The MACD indicator comprises of:

Fast line: The difference between the two MAs (blue).

Slow line: Signal line, which is a 9-day EMA of the MACD line (yellow).

Histogram: Represents the difference between the MACD and the signal line.

There are many ways to use the MACD in trading. The most common of which, is to identify the end of a trend.

Interpreting MACD crossovers for trend exhaustion:

Bullish Reversal: The two moving averages are below the zero line, the fast (blue), crosses the slow (yellow) to the upside, and the histogram turns bullish (green).

Bearish Reversal: The two moving averages are above the zero line, the fast (blue), crosses the slow (yellow) to the downside, and the histogram turns bearish (red).

MACD is often used on higher timeframes to determine whether a current trend is showing signs of exhaustion. In doing so, traders can identify profit-points and/or opportunities for reversal trades.

Fibonacci Retracement

Fibonacci retracement levels are horizontal lines drawn at specific price points that can act as potential support and resistance levels. These levels are derived from the Fibonacci sequence and include 23.6%, 38.2%, 50%, 61.8%, and 78.6%.

How to Use Fibonacci Retracement: Identify a significant peak and trough in the price chart, then draw the retracement lines to determine possible areas of reversal. Many traders use Fibonacci levels to predict areas where pullbacks might end, providing opportunities to enter trades in the direction of the main trend, as shown in Figure 7 below.

A graph of stock market

Figure 7 – Example of using Fibonacci retracements for trade entry.

As shown in Figure 7, the Fibonacci tool is drawn from the previous high, to the previous low. In this example, we’ve used the most common retracement levels – 38.2%, 50%, and 61.8%.

Fibonacci levels are effective on all timeframes and work extremely well in conjunction with other technical analysis indicators.

Using and Combining Indicators Effectively

Whilst each indicator provides valuable insights, using multiple indicators can prevent produce more reliable signals. Here are some practical tips:

Avoid clutter: Using similar indicators (e.g., two momentum indicators) may clutter charts without adding any significant value.

Complementary combinations: For example, combining RSI with MACD can offer insights into both trend strength and momentum. Additionally, pairing Bollinger Bands with Moving Averages can highlight breakout opportunities and trend directions.

Multiple timeframes: Balancing indicators across different timeframes allows you to gauge the broader trend while identifying precise entry and exit points.

Every technical analysis indicator has its own strengths and weaknesses, so what might work for one trader, might not work for another

Pros and Cons of Indicators

Here are some Pros and Cons of the indicators we’ve discussed in this blog post;

Moving Averages

Pros:

Smooths trends
Acts as dynamic support/resistance
Versatile across different timeframes

Cons:

Lags in fast-moving markets
Prone to false signals
Often requires confirmation from other tools

Relative Strength Index (RSI)

Pros:

Identifies overbought and oversold conditions
Provides divergence signals
Simple to learn and interpret

Cons:

Can generate false signals
Limited effectiveness in ranging markets
May stay in overbought or oversold zones for extended periods

Bollinger Bands

Pros:

Measures market volatility
Provides breakout signals
Makes spotting volatility easy

Cons:
- Can be complex to interpret
- Prone to false signals
- Does not provide clear directional information

MACD (Moving Average Convergence Divergence)

Pros:
- Combines trend and momentum analysis
- Generates clear crossover signals
- Histogram visually represents momentum changes
Cons:
- Lagging indicator
- Less effective in sideways markets
- Can produce false signals

Fibonacci Retracements

Pros:
- Highlights natural support and resistance levels
- Works well in conjunction with other indicators
- Useful in trending markets
Cons:
- Placement of levels can be subjective
- Often requires confirmation from other tools
- Not all price pullbacks respect Fibonacci levels

We strongly recommend looking into all the different technical analysis tools and forex indicators available, find the ones that ‘make sense’ to you, and research into how they are calculated and how they were intended to be used. From there, you can adapt the settings as needed to fit your trading style and strategy.

Conclusion

Incorporating the right indicators, whether it’s Moving Averages, RSI, Bollinger Bands, MACD, Fibonacci retracement, or other, can provide a more comprehensive view of market conditions, allowing you to become more confident in your analysis.

Remember, whilst indicators offer insights, they are most effective when personalised to fit your strategy and continuously practiced. So, experiment with these tools, find what works best for you, and let your trading skills evolve.

Ready to get started? Open an account with us.

Remember: Successful forex trading requires a balance of economic insight, technical skill, and disciplined risk management. Stay informed, practise consistently, and adapt your strategies to ever-changing market conditions.

03/12/2024