Mirror Trading Overview Benefits Limitations
Mirror Trading: Overview, Benefits, Limitations
Mirror trading is a trade selection methodology primarily used in forex markets. It allows investors to copy the trades of successful forex investors and implement them in their own accounts, almost in real-time. Initially available only to institutions, mirror trading is now accessible to retail investors. It has inspired similar strategies like copy trading and social trading.
Key Takeaways:
– Mirror trading enables traders to mimic others’ trades in their own accounts.
– It is commonly used in forex trading but can also be done in stock markets.
– Mirror trading has become more acceptable as transparency and information tools have improved.
Understanding Mirror Trading
Mirror trading’s automated nature helps prevent emotional trading decisions. Forex mirror traders use brokerage platforms like MetaTrader to analyze trading strategies. In the stock market, they may use services like Interactive Brokers’ Interactive Advisors or third-party sites like collective2.com.
After researching performance characteristics, traders choose an algorithmic trading strategy based on their investment goals, risk tolerance, capital, and desired assets. Trades executed by strategy developers are duplicated in mirror traders’ accounts using automated software, aiming to achieve similar results. Prominent forex brokers offering mirror trading include AvaTrade, FXCM, and Dukascopy.
Benefits of Mirror Trading:
1. Reduces Emotions: Mirror trading removes the stress of making trading decisions by determining when to open, close, or amend trades. This is particularly helpful for new investors who find the forex market overwhelming. They can check their mirror trading account’s performance weekly and decide whether to continue using the strategy.
2. Verified Results: Forex brokers offering mirror trading examine, test, and validate uploaded strategies to filter out losing trades. Brokers may require a new strategy to have a 12-month track record of profitability with a specific maximum drawdown limit. Investors should ensure selected strategies have undergone rigorous testing.
Limitations of Mirror Trading:
1. Robustness of Strategies: Some mirror trading strategies perform well in trending markets but underperform in rangebound markets. It is important to test a strategy’s results in various market environments to ensure its robustness.
2. Risk Assessment: While it is easy to determine if a mirror trading account is generating a profit, assessing the risks taken to achieve that profit is more challenging. A strategy may have returned 300% over 12 months, but further analysis could reveal an 80% drawdown on the investor’s capital to achieve that result.
Fraud in Mirror Trading:
In 2017, Deutsche Bank faced fines for fraudulent "mirror trades" used for money laundering. However, this fraud is unrelated to legitimate mirror trading where retail traders follow experienced traders. The fraudulent activity involved buying Russian stocks through Deutsche Bank in Moscow (with rubles) and selling them to Deutsche Bank in London (for US dollars), creating a money laundering pipeline that lasted several years.
Note: The repetitive paragraph about Deutsche Bank’s fine has been removed to maintain conciseness.