Copy Trading: What Is It And Should You Consider It?

Copy trading has become one of the most popular approaches to trading over the past several years. But what is it and is it something you should consider as part of your trading strategy or even its foundation?

Copy trading, or social trading as it is also referred to, is pretty much as the term suggests. One trader simply copy/pastes the trade of another, presumably more experienced or successful, trader. The ‘copier’ has control of the cost of their trade and doesn’t have to match the value or leverage of the position being mirrored. But the copy trader automates their entry and exit points to exactly match those of the lead trader.

The copy trader can also choose to mirror all trades of the lead trader they are following, only those involving a particular instrument or just individual trades.
Several brokers have sprung up that are exclusively copy or social trading platforms. eToro is the largest and probably best known of this category. But many other mainstream online trading brokers have introduced a copy or social trading option to sit alongside their traditional trading accounts and platforms.

While copy trading tends to refer to CFDs (or spread betting in the UK) trading, there are also now some platforms that allow traditional investors in the stock market to employ the tactic.

What’s In Copy Trading For the ‘Lead Trader’?

A natural question around copy or social trading is what’s in it for the lead traders that make their trading positions publically visible and able to be mirrored by followers? There are different answers to that question that vary from broker platform to broker platform.

Two models are the most common. The first is that the lead trader gets a cut of the broker’s spread or commission for each trade their followers make on the platform. This is win-win as the best performing lead traders will attract the most followers. And the more followers who take trading positions mirroring those of the lead trader the more money the broker makes on the spread and/or commission.

The second model is the lead trader earning a cut of any returns their followers realise by copying their trades. Here the burden of remuneration is placed on the copy trader and not the platform. There are also other less common social trading models such as copy traders paying a flat subscription to access the trades of a lead trader.

Does Copy Trading Actually Work?

While it is healthy to be sceptical about placing your trading success or failure in the hands of a complete stranger there is evidence that, especially for beginner and less experienced traders, there is merit in the copy trading approach.

Last year new ESMA regulations obliged retail-facing online trading brokers to publish statistics on the percentage of the trading accounts held with them that actually realise a profit from trading. The idea was to highlight brokers not doing enough to provide their traders with the tools or other resources needed to stand a reasonable chance of making informed trading decisions. Or, in the worst case scenario, unmask brokers actively working against the interests of their account holders.

Industry media Finance Magnates looked at this data across 30 leading online trading platforms. Two of the five brokers whose traders had the highest winning percentage from the 30 offered copy trading or social trading as a product. The two were eToro in second spot and Darwinex in fourth.

This suggests that there is at least some merit in the concept of copy trading. Traders should of course not blindly copy lead traders if they do decide to give copy trading a go. Copy trading also shouldn’t be considered a shortcut to becoming a successful trader without having to put in any of the work. But it is another useful way that less experienced traders can gain experience while controlling their risk exposure.

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