Forex copy trading allows you to replicate the trade placements of professional forex traders, meaning even a newcomer, with little forex experience can potentially profit from the trades of experts.
Do you want an insight into forex copy trading including how it works, how to get started, how it differs from manual trading, and tips for copy trading success?
By reading our Axcess FX article you will be able to make an informed decision of whether to copy trade or build up your own forex knowledge to trade manually.
The History and Mechanism Behind Forex Copy Trading
Copy trading, also known as mirror trading or follow trading is a recent service that only dates back to the early 2000s. Brokers began to see the benefits of trades placed from a trader’s account being automatically copied in real time by others for a commission. It was an alternative to receiving manual forex signals by email and text that needed placing manually.
The mechanism behind forex copy trading is straightforward. Within a a trading platform, an individual, or “follower” can select from a list of professional traders (also known as forex signal providers) to follow.
Once an individual decides upon a trader to mirror, the platform automatically replicates their trading actions in the follower’s account. Advanced online trading platforms include respected providers such as Zulutrade, Vantage Markets and Etoro.
Copy Trading Popularity and Adoption Among Traders
Copy trading in forex has seen a surge in popularity due to the ease with which copy trade platforms allow any level of trader the potential to earn profits by leveraging the expertise of listed forex signals providers. Furthermore, it offers a learning curve for beginners to understand about forex trading and risk management before being immersed in the trading process through their own trades.
As part of a broader social trading trend, the adoption of the copy trading method is widespread, from newbie traders to seasoned participants, and those who simply prefer a passive trading approach.
The Benefits and Drawbacks of Copy Trading In Forex
We will now look at both the advantages and disadvantages of copy trading to provide you with a broader context and a balanced view of this innovative service.
|Benefits of copy trading|
|Learning opportunities||Provides a platform to observe and learn from the actions of experienced traders, including strategy, insights into market analysis and decision-making processes.|
|Accessibility for beginners||Offers a gateway for newcomers to to engage in trading without requiring extensive knowledge.|
|Potential for passive income||Allows for potential profits without active involvement in trading.|
|Portfolio diversification||By following multiple traders, followers can diversify to better spread risk and enhance the potential for returns.|
|Time efficient||No need to spend time following trades as forex signal providers do this task.|
|Drawbacks of copy trading|
|Trade loss risks||Following experienced traders might mitigate some risks, but they can also place losing trades.|
|Dependence on Other Traders||Your trading success is linked to the performance of others.|
|Limitations of past performance||When choosing traders to follow, past performance serves as a crucial indicator, however, past success does not guarantee future results.|
|Risk of complacency||The automated nature might lead to the “follower” neglecting regular monitoring and adjustments.|
|Potential for Misaligned Strategies||The copied trader’s strategy may not always align with the follower’s strategy or risk tolerance.|
Get Started In Copy Trading In Three Steps
There are three steps you need to follow to get started in copy trading and are as follows:
The first step is to select a trading platform and open a trading account. Opt for a platform that not only facilitates copy trading but also provides a user-friendly interface and transparent fee structure. Platforms like ZuluTrade and Vantage Markets are well-respected options due to their comprehensive guides and straightforward trading processes.
Next is choosing which traders / signal providers to copy. The step involves scrutinizing past performance, trading style, and risk management of experienced traders available on the platform. Platforms like ZuluTrade provide all this information at a touch of a button in their Top Trader’s Tab, so there is no need to go off-platform for further research.
Do keep in mind though, it is vital that a trader you want to mirror has a trading approach which aligns within your parameters. Importantly:
- What is your trading style – Do you prefer day trading or like a longer term outlook? If you prefer high frequency day trading, then a forex signal provider that takes a long term view and trades infrequently may not be the best to follow.
- What are your profit goals: Does the signal you want to follow allow you to meet your goals yet remain within your risk tolerance levels?
Lastly, setting up your account involves establishing your capital amount, setting up risk management parameters, and ensuring that the trades of the copied trader are mirrored in your account accurately and promptly.
What Is Manual Forex Trading?
Manual forex trading, is the traditional trading method in forex. It provides full control over all decisions which requires a comprehensive understanding of the forex market and a strategic approach towards trading. Essential requirements include:
- Analyzing the Market: An ability to use both technical and fundamental analysis to predict market movements.
- Developing Strategies: Formulating and adhering to a robust personalized trading strategy that aligns to financial goals and risk tolerance.
- Executing Trades: Making decisions regarding entry and exit points and managing trades actively.
- Risk Management: Implementing strategies to manage and mitigate potential losses.
- Time investment: A significant amount of time is required to follow the markets and place trades
- Continuous learning: An ongoing commitment to staying abreast of market changes and adjusting strategies accordingly.
Copy Trading Versus Manual Trading
While both copy trading and manual trading exist within the same market, their operational methodologies starkly contrast as evidenced in the previous sections. To easily compare the operational elements of copy trading versus manual trading in an easy to view format, we have populated the information in the table below:
|Operational Comparison||Copy Trading||Manual Trading|
|Time and labor intensive||✖||✔|
|Market analysis required||✖||✔|
|Reliance on other traders||✔||✖|
|Ongoing learning required||✖||✔|
|Trade execution and management||✖||✔|
|Stress of active trading||✖||✔|
|Passive income potential||✔||✖|
|Accessible for newbies||✔||✖|
|Potential for portfolio diversification||✔||✔|
|Potential for misaligned strategies||✔||✖|
|Risk of complacency||✔||✖|
Five Tips for Copy Trading Success
Success in forex copy trading is not merely about replicating trades but also involves strategic planning and continuous oversight. Here are five important tips to help you:
1. Researching and selecting signal providers
You must thoroughly investigate the performance, strategies, and risk management of traders before deciding to copy them. Reputable copy trade platforms provide this information within the platform on each trader on their follow trader lists.
2. Portfolio diversification
It is not good practice to mirror one trader only. By following multiple traders rather than putting faith in one signal provider is a better way to minimize trade risk.
3. Risk management
Establish clear risk management strategies to ensure that trading does not destabilize your capital account. If you want to take away one thought from this article on copy trading, it is to never stake more than one percent of your capital on a single trade. We have written a full resource about risk management in forex.
4. Maintain control through regular monitoring and making adjustments
Despite the automated nature of follow trading, maintaining control and intervening when necessary is crucial to protect your capital account. Always keep a close eye on your trading account performance. If traders you are copying are not performing or you want to reduce your trade size make the necessary adjustments.
5. Continuous learning and setting realistic expectations
Use the opportunity of copy trading to learn from experienced traders. What is their strategy? How are they managing entry and exit points? How often are they trading? Learning whilst keeping your profit expectations realistic and grounded is a solid base.
We know that copy trading allows newcomers or those with limited time to potentially benefit from the forex market without being actively involved; while manual trading requires a hands-on approach, where traders are responsible for all decisions and actions, providing more control over trades but also demanding more time and expertise.
Are you hands on and have a desire to learn about the forex market? Or are you time poor and happy with passive income? The choice between manual and copy trading is yours to make!
Axcess FX: The top 10 best forex signals providers
What is the minimum investment needed for forex copy trading?
The minimum investment required for copy trading varies among the different trading platforms. Some platforms like Etoro allow you to invest in a trader with as little as a $100 deposit. Vantage has a minimum of $200 while ZuluTrade requires a $300 deposit to start copy trading. Always check the specific requirements of the platform you choose and ensure it aligns with your investment capacity.
How to choose the best traders to copy?
It is important to choose forex traders whose strategies and risk levels align with your own trading objectives and risk tolerance. To select the best follow traders, evaluate the five key areas we list below in order of importance:
- Analyze their past performance.
- Understand their trading strategy.
- Evaluate the trader’s risk management practices.
- Check their duration of trading and consistency.
- Read reviews or feedback from other copiers.
Is copy trading profitable?
Copy trading forex can be profitable, but it comes with trading risk. Profitability is influenced by the expertise of the forex signal provider, market conditions, and the copier’s risk management strategies. Although past performance can be a useful indicator, it does not guarantee future success.
Written by Chris Gillie
Chris Gillie is the founder of Axcess FX, a forex software review and research website. He is a former investment banker who worked in FX Sales on the UBS London trading floor. Chris has been using forex trading software as part of his trading set-up since the late 2000s and the embryonic days of MetaTrader and the MQL coding language.