Mirror trading is a trading methodology used primarily in forex markets. It involves copying the trading activity of other forex traders and implementing the same trades.
Initially, Mirror trading was only available to institutional clients, but now it is available for retail investors through several brokerage platforms.
Since its inception in the 2000s, Mirror trading has paved ways for similar techniques, such as copy trading and social trading.
What is Mirror trading?
Mirror trading’s automated nature can help prevent traders from making emotion-based decisions. Mirror traders in the forex markets involve usage of brokers trading platforms (such as MetaTrader 4 or 5) to analyze historical data of various trading strategies.
After researching, a trader then selects an algorithmic trading strategy from the available options based on their trading goals, risk tolerance, investment capital, and desired assets for investing. For instance, if a trader has a minimal risk tolerance, he/she may select to mirror a strategy that has lower risks. Although, historical performance is by no means any guarantee of future results.
Pros of Mirror trading
Mirror trading provides several trading benefits. They are:
1. Reduces Emotions
As Mirror trading determines the opening, closing trades, it removes the stress of making emotion-based trading decisions. This is especially helpful for beginners who may initially find the forex market overwhelming.
2. Provides verified results
Forex brokers that offer Mirror trading usually analyze, test, and validate the trading results of strategies they upload to their platform. This helps filter out losing trades. For example, before a new Mirror trading strategy, a broker may require checking the past 12 months’ profitability record with the low maximum risk.
Cons of Mirror Trading
As no strategy is 100% accurate, there a few drawbacks of Mirror trading as well.
1. May work under specific conditions
Some Mirror trading strategies may provide good trading results under particular market conditions. For example, a strategy may work well in trending markets but doesn’t work in ranging markets. Therefore, traders should test the results of a strategy in various market environments to ensure their performance.
2. Risk Assessment
Although it is easy to see if a Mirror trading account is generating a profit, however, it is often difficult for traders to determine what risks were taken to make that profit. For example, a trading strategy that has returned 100% over the last 12 months may look great at first, but more in-depth analysis of the approach may reveal that to achieve this return, an investor would have had to endure an 80% loss on their capital.
A scandal involving Mirror trading
In 2017, Germany’s Deutsche Bank was fined $630 Million by the US and the British financial bodies for trades that were referred to as “mirror trades.”
However, this reference should not be confused with the approach of retail traders following professional traders, but rather, a way to launder money.
Russian stocks were bought through Deutsche Bank in Moscow (with Russian rubles), and the same stocks were being sold to Deutsche Bank in London (for the US dollars). This created a money-laundering pipeline that went on for several years, without any notice. This type of fraudulent activity should not be confused with the legitimate Mirror trading, despite resembling kind of a Mirror strategy.
Mirror trading conclusion
Mirror trading can prevent traders from making emotional decisions by separating emotions from the trades. By trading more than one strategy at the same time, traders can diversify their portfolio and manage risks.
Before copying a trader’s strategy, a trader must understand their trading style so; he/she can go with proper risk management. Traders also need to keep an eye on their accounts to not overtrade, as it can trigger more losses.
It must be noted that there are no guarantees on performance when copying trades from other traders. Trading online is risky and you should have a clear understanding of the signficant risks invoved before you start.
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