Mirror trading: definition, how it works and pros and cons

Mirror Trading is an investment method that allows investors to automatically replicate algorithmic trading strategies in real time. With Mirror Trading, investors can choose from various algorithmic trading strategies hosted on a dedicated platform. When the selected investor or strategy executes a trade, the same trade is automatically mirrored in the follower’s account, ensuring identical positions and timing.

Investors can choose from a wide array of algorithmic trading strategies hosted on a dedicated Mirror Trading platform. Mirror Trading platforms provide detailed performance metrics for each strategy, such as historical returns, risk levels, drawdown rates, and trading frequency.

Mirror Trading eliminates emotional decision-making and provides access to sophisticated strategies that require advanced expertise. Mirror Trading is not an easy trading strategy, as it requires thorough research a critical step in the process.

Mirror Trading works by allowing investors to replicate the actions of automated trading strategies created by Signal Providers. These strategies are uploaded to a Mirror Trading platform, where they are thoroughly examined, tested, and approved before being made available to users. Once an investor selects a strategy, it is automatically executed on their trading account, mirroring the trades generated by the algorithm running on the platform’s server.

Mirror Trading takes places on Mirror Trading platform, which serve as a centralized hub for strategy selection. Mirror Trading can be applied on any market, and allows traders to tailor the strategy to different market conditions, risk appetites, and trading styles. Mirror Trading involves searching for how each strategy work, including historical returns, volatility, and average trade duration.

Once an investor selects a strategy, Mirror Trading is fully automated. The trades generated by the algorithm running on the platform’s server are mirrored directly in the investor’s trading account with a real-time synchronization, so each trader following the Mirror Trading strategy can have identical positions, entry points, and exit points without manual intervention.

Copy Trading focuses on replicating the actions of an individual trader rather than an automated strategy. Traders link their accounts to a platform, which shares their performance data for investors to follow. While Copy Trading emphasizes human decision-making, the distinction from Mirror Trading blurs when traders rely on algorithmic strategies, creating functional similarities between the two approaches.

In Mirror Trading, trades are generated by predefined, algorithmic strategies designed and tested for consistent performance under specific conditions. This means that there’s no human intervention in Mirror Trading.

In Copy Trading, trades stem from the decisions of individual traders, and are made and copied in real time to all copy trading accounts linked to the copied trader. Copy trading lies on human judgment and the strategies revolving around it are less structured and systematic compared to Mirror Trades.

The key difference between Mirror Trading and Social Trading is that Mirror Trading allows you to actually trade, while Social Trading is primarily an interactive aspect layered on top of trading.

Mirror Trading involves selecting and replicating automated trading strategies directly in your account. These strategies are executed automatically.

Social Trading is more about interaction and community. Social Trading enhances trading platforms by adding features like discussions, sharing insights, and learning from other traders. The primary function of Social Trading is to provide a platform for collaboration and engagement, rather than focusing exclusively on executing trades.

The advantages of Mirror Trading are listed below.

• Control of your capital: one of the first news of this method of investment was the fact that every investor, unlike traditional investment methods where you have to deliver your funds to a manager, retains possession of the capital. To invest you need to open a trading account in your own name and pour capital into it, but it will always remain under your control and it will not be physically managed by other entities, and therefore is a better form of security for your funds.
• Emotional impact reduction: among the main obstacles to all beginners who approach the world of online trading, there is lack of strategy on the one hand, and certainly the inability to manage emotions on the other. Investing in financial markets is very stressful, and can greatly impact on people’s emotions. Mirror trading removes part of this component because you are not the one to decide when and how to open or close the trades, but the strategy you have chosen.
• Wide range of instruments and markets: in the beginning Mirror Trading was born only on Forex market, and still this the most followed and rich market. Over the years, however, platforms have evolved, the offer has expanded and today you can find mirror trading services for CFDs, Stocks, Futures, Options and Binary Options.
• Proportional Signals Replication: one of the main advantages of Mirror Trading is definitely the proportionality of the signal replication. In essence, if the strategy, for example, works on a $ 100,000 account, but ours instead is only $ 10,000, it is clear that its and our trades should not have the same size, because if so, on our smaller account, they would impact in a much greater extent, with consequent greater risks. With Mirror Trading we have various replication options, the fixed or proportional, both created to allow users to replicate the signals with the appropriate amount given the size of their own capital.
• Ability to check the performance before: in the world of Forex, automated trading Robots or EA are very famous, i.e. programs that trade automatically, to be installed on your trading platform. The problem with these solutions is that it is never possible to be sure of the actual effectiveness, and you almost always have to test the system sight unseen, because the creators rarely release a real performance statement. With Mirror Trading of course there is no certainty of future performance (unfortunately we will never have it, anywhere and anyhow), but at least you have a view on the real performance of the strategy recorded up to that point, and therefore you have a parameter and truthful information to help you better choose.
• Ability to manage risk: investing with Mirror Trading means you have total control over your capital, and this also means having the ability to manage risk according to your own will.

The disadvantages of Mirror Trading are listed below.

• Slowness of automatic strategies to adapt: markets often change frequently and rapidly. Automatic strategies usually are not as quick to adapt to such changes, and many times they are only able to generate good performance in specific market conditions. You should therefore only evaluate those strategies with enough historical track records, strategies that have already faced different situations and market conditions, managing to overcome them by behaving well.
• Risk assessment is not as easy as it seems: evaluating the performance and effectiveness of a strategy is not always as simple as it might seem. Understanding whether it is in profit or not is certainly immediate, but understanding how this profit is generated is the difficult part. In essence, to generate profits every strategy must necessarily take some risks. Many investors often find it difficult to identify and to really understand these risks and what they entail.
• Complicated portfolio and money management: after performing an assessment of performance and risk, the second step is to translate these assessments in operational decisions. Translated in other words, according to our expectations and the risks we are willing to take, we have to learn how to transform these choices and create a diversified portfolio to achieve our goals. Although Mirror Trading takes the problem of not knowing how to trade out of the equation, it is equally true that it poses a different kind of problems, problems that the investor must necessarily learn to deal with and manage in order to be successful.
• Unexpected risks: since we are talking about automatic strategies, Mirror Trading has also eliminated the risk of having the signal provider we are following going mad. Nevertheless, being an investment constructed through the use of different technologies and platforms, there are still risks of malfunctions. Therefore, always maintain a certain level of periodic inspection on your investment.

There are no platforms dedicated exclusively to Mirror Trading. All Mirror Trading platform have evolved into Copy Trading platforms and Social Trading platforms, as they share the core principle of allowing investors to delegate trading decisions to others through automated strategies or professional traders.

Among the best platforms for Social Trading there are are eToro and ZuluTrade, which combine user-friendly interfaces with robust trading tools. eToro and ZuluTrade allow investors to replicate trades and strategies while offering social features for interaction and collaboration.

Yes, Mirror Trading is completely legal in most jurisdictions. Mirror Trading is a regulated trading practice where investors replicate the trades of automated strategies, but its legality depends on the platform’s compliance with local financial regulations and the jurisdiction in which the trading occurs.

Mirror Trading brokers and platforms must comply with local laws when offering Mirror Trading services. Check if your Mirror Trading platform is regulated by making sure it is regulated by reputable entities and financial authorities such as FCA (UK), ASIC (Australia) or CySEC (EU).

Yes, Mirror Trading is a legitimate trading tool, and is a suitable alternative for investors seeking a hands-off approach. The legitimacy of Mirror Trading depends on the platform’s credibility and regulatory compliance.

To make the most of Mirror Trading it’s crucial to treat it like any other trading method. Mirror Trading is a trading tool which inherently carries risks, and the success of a Mirror Trader depends on his ability to select reputable platforms and his understanding of the trading strategies being mirrored.