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Differences between copy trading, mirror trading and social trading

by Martin L. Forex Managed Account Reviews
Previously there was only mirror trading as a form of automated trading based on real-time monitoring of the operations of other traders, then came copy trading, and finally, social trading arrived, and today we tend to call all these forms of social investment simply like social trading.

As a result, we have a great deal of confusion of terms. But aren't they all the same?

No, even though the current trend is to use the term social trading for all these investment options, just as we do in Trading Techniques.

The truth is that each of these terms represents a specific sector with precise rules, and to avoid confusion and misuse of one term instead of another, one must at least know its basic operation.

More than anything, by knowing their differences, the investor may find that he prefers one sector over another.

In this article we will discuss precisely the differences of these three investment modes, citing the main companies in each of these sectors. We will also talk about the possible risks and the future of this industry.

How do these three sectors work?

Let's start by saying that these sectors are so new that their explanation on Wikipedia took shape and evolved only in the last three or four years, whereas previously you could only find generic references without any information.

Also, given the evolution and constant changes made by these companies, who were, and still are, literally building a new market from scratch, it took some time to delineate the boundaries of one sector or a specific service compared to another.

Now, a few years after its creation, we can say that we have come to a conclusion and each piece has found its place on the board. However, before explaining these three elements in very simple terms, we must talk about a fourth very important concept: Autotrading.

Autotrading is when a trader, instead of trading manually, uses a computer program to trade instead. The rules that determine when to buy, sell and why are included in the program codes, which constantly monitor the market and, when certain conditions occur, automatically act as expected.

Applying auto trading means being a programmer and knowing how to create these programs in your programming language, or buy and install them on your own personal trading platform.

Now we are going to enter the description of the forms of social investment:

Mirror trading

With  Mirror Trading, the trader uses Autotrading strategies, but these are not installed on the investor's platform, but rather are hosted and run on the servers of the company that offers the mirror trading service.

The user, after having evaluated the performance, can choose the automated strategies that he or she prefers and replicate them automatically in their trading account.

When the strategy sends a signal to perform a trade, the same signal is sent and replicated in the trader's trading account, which replicates (like a mirror) the trading orders of the strategy.

Therefore, this system assumes that there is a trader who sends his computerized auto trading program to the mirror trading company, who then makes it available to other traders for mirror replication.

Copy trading

Copy Trading is very similar to mirror trading, but with a big difference.

The trader who decides to share his trading signals does not have to send an automatic program to the company that offers the copy trading service; instead, you simply need to connect your personal trading account to the company system.

In practice, the trader connects his trading account with the copy trading company, which from then on will record every transaction that has occurred in the trader's account.

From there, the investor can view these trades to evaluate their performance and, as in mirror trading, if they wish, they can decide to copy all trades made by that trader.

The trader sending the signals (also called the signal provider ) can trade manually, or even use auto trading systems, but the fundamental difference from mirror trading is that automated trading systems "run" on your trading account, and Orders are simply sent to the copy trading company that automatically "forwards" them to the user who wants to copy them, while with mirror trading it is the company itself that has the strategy and sends the orders for the opening and closing of trades.

acorn2oak-fx.com/forex-copy-trading.html has a way for investors to discover the best broker that offers copy trading by way of filling out a form to receive a comparison of the top ranking places to Copy Trade

Social trading

Social Trading is the largest among these three sectors, or rather, which has less defined more widely and, until recently.

Today, this term can mean two things:

  • It can be interpreted, on the one hand, as a  "social" extension of Mirror Trading and Copy Trading  (that is, the ability to interact with other users and with the same signal provider trader in a social context, to obtain advice on trading, to comment and vote on the work of the trader, and see the opinions of other users). In this case, we tend to use this term to denote both mirror trading and copy trading together.
  • On the other hand, social trading also means the simple exchange of opinions and ideas about markets and trading; It is the exchange of ideas related to new opportunities and operations in the markets. 

Users can create their own profile, and they can share the operations they intend to do or have done, comment on the operations of others, offer their interpretation of economic events and their implications, explain the same in simple terms and, in general, generate discussions in which all members can participate.

Basically, with these three new sectors, what we are witnessing is the birth and evolution of investment portfolios based on people.

Before the advent of these systems, traders chose one of two investment methods, which were:

  • The investor could take his money, give it to an investment company (bank, mutual fund, etc.) that, against a payment of commissions, would build a portfolio of financial products that would reflect the risk profile and the return expected by the client.
  • Through the use of a broker, the investor can enter the market directly to create his own investment portfolio. If the investment objective was speculative, then we are talking about " retail trading ".

Now, in addition to the two methods we just mentioned, an investor can also create a portfolio not of financial products, but people.

In this case, the investment is only made through traders who have already proven profitable and who offer the investor the possibility to automatically replicate their performance in their own trading account.

What do traders who offer their trading signals and strategies gain?

Of course, traders or signal providers do this to make additional profit from their trading strategies and operations.

It would be strange to see someone with a profitable trading strategy share it without any interest involved, and, in fact, this is not the case.

"So, how is it that the trader obtains his profits with these investment options?"

When a trader has a trading account, every time he asks the broker to open a trade, he has to pay a commission, which in some areas is also called a  spread. Almost all income in these sectors is derived primarily from commissions and spreads.

When the investor uses a mirror trading or copy trading service, he is opening operations in the trading account that belongs to the broker, with the only difference that the "buy or sell" orders do not come from the investor himself, but from the system or platform through which you are following the chosen Signal providers.

When the broker makes a profit, part of those profits is shared with the mirror trading or copy trading company, which in turn shares the profits with the signal provider that generated the trading signal.

There are three things to keep in mind:

  • The spread or commission to the broker is always paid, regardless of whether the operation is profitable or not. That is, the investor pays for the simple fact that the operation has been opened.
  • The commissions or spreads paid on these services are slightly higher than world standards, precisely to guarantee this remuneration.
  • The mirror trading company or copy trading company, and the signal provider that generated the trading signal, win only if on the other side the investor has replicated the signal using real money.

The main variation of this system involves paying a monthly fee.

Instead of charging a very small portion of each commission and spread paid by the investor on each transaction, the mirror trading company asks for a simple monthly fee for following the signal provider and replicating its signals.

In both cases, at an ideal level, this should create a win-win situation.

The investor, even without experience, can rely on those traders who have already proven to have experience and profitability to replicate their performance. For his part, the trader can obtain additional profits thanks to the spreads or monthly fees, as long as someone replicates or pays for his transactions.

What are the main risks?

Despite good intentions, each goal must face a harsh reality. The premise of obtaining a win-win situation is valid, but unfortunately, the remuneration system of the signal providers has created many problems.

To put it simply: the more trades performed, the more commissions the signal providers get and the problem is that in many companies in these sectors the payment of these commissions is made regardless of whether the trades ended with a profit or a loss. 

It didn't take many 'fake' traders long to start exploiting this condition for easy money at the expense of inexperienced investors.

Behind the performance of these so-called traders, there is no serious trading strategy. Behind the scenes, there is only an attempt to generate a stratospheric return (with stratospheric risks) in the short term in order to quickly gain followers and obtain large sums of money through commissions or monthly fees.

These practices occur less than before, but the reality is that they still exist.

Usually, these scammers make use of well-known approaches such as averaging down (averaging down)  or martingale, very risky techniques that, if not handled perfectly, can lead to a catastrophe. If you don't believe me, ask Nick Leeson, the trader who caused the bankruptcy of Barings Bank, the second oldest merchant bank in the world.

However, for an average expert, it is easy to realize these risks and avoid them, and this is where we come to the second problem.

Despite the premises to be able to start investing without any experience, without having to study to become a trader, the fact is that the investor who wants to invest in these areas needs at least to have a basic knowledge of finance and the market in you are investing in (including your rules). Indeed, investors are not required to become traders, but they must at least know what a trader is, how a trader operates and especially what an absolutely serious trader would never do to recognize real traders and stay away from the fake ones.

Also, don't forget that we are talking about derivatives markets and that " Derivative " is associated with " Leverage ". As we know, financial leverage is what allows you to invest with a large capital, even if we have little initial capital to operate, but it can crush us in an instant if we cannot control it or if we use it excessively.

An investor unfamiliar with these concepts could suffer large losses even if they choose excellent signal providers.

Therefore, it is true that investing with mirror trading, copy trading and social trading is easier to trade on our own, but it is also true that it still requires a certain level of knowledge.

Put simply: the investor needs to have a notion of what it means to trade, a good understanding of what it means to invest, and a better understanding of what it means to manage money.

That said, each company has its own peculiarities and strengths and weaknesses, so in addition to knowing what we just said, you should also be familiar with the operation of the company you decide to invest with.

How is the industry changing?

Without a doubt, Mirror Trading, Copy Trading and Social Trading are among the most interesting innovations of recent years in the field of capital investment and trading.

Rumours are growing that the global banking system is trying to stop the rise of these systems, simply because this form of investment "takes" money from old instruments and classical investment companies.

Users who decide to invest in these sectors maintain possession of their account and money and simply move it according to what others do. This means that they do not give their money directly to third parties (which in essence belong in most cases to investment banks) to invest it on behalf of their investors, charging expensive fees for the service.

We will see what will happen in the next few years.

However, we can already see how various major institutions have begun to take an official stance towards these new forms of investment, particularly concerning investor protection.

We are talking in particular about the European Union which,  with the upgrade to MiFID II, has equated mirror trading and copy trading with asset management. 

Little has changed on a practical level; the operation has remained almost the same as before, but companies like Zulutrade, eToro and Earnex have had to update their regulations and some services. Investors now have a little less freedom than before, but they are more protected.

From an 'old-style broker' point of view, these forms of investment make it easy to acquire new clients and retain old ones, as both can access profitable strategies even without experience, and that is why each time more Forex and CFD brokers are integrating different tools and functions of mirror trading, copy trading and social trading as part of their offerings.

You can consult a complete list of platforms and services for mirroring, copying and social trading, along with the companies that offer these services, including brokers, at the following link:  List of Social Forex Trading Networks

Many are sceptical as to whether socially sharing information can make a difference, even a little, in an area as complicated as retail trading. However, important studies have been carried out showing that the ' wisdom of the crowd ' (if used in the right way) can be a valuable ally when trading and investing in the markets.

From a media point of view, there is no doubt that the entire industry is generating more and more interest. The major industry websites are dedicating more and more articles to the topic. When searching on Google, there is a growing demand for "Reviews" about companies and their services; More and more blogs are dedicating posts to these topics and even complete courses on social trading like the one we share with you on this site have appeared.

What does the future hold for these sectors?

Looking at the latest developments of the main companies in these sectors, we can define on which fronts we will see the greatest effort in the coming years.

Safety

Important steps have been taken to try to identify and eliminate traders or signal providers who are only interested in commissions, but the problem is still not solved, and companies continue to improve controls and tighten certain parameters to filter more and more the thousands of available traders, to make room only for traders who deserve it and improve their conditions.

Among the main manoeuvres carried out, we can mention the payment of commissions to signal providers only if their operations are profitable, or only after they have closed the month with profits, in addition to having tightened the performance parameters (in particular those related to drawdown ) within which the trader can operate to prevent excessively risky situations.

That being said, in such a difficult and sometimes extreme environment as the derivatives market, even good traders can sometimes make mistakes. Companies are working to ensure that there are security systems designed to protect their investors' capital in the event of an emergency.

Technology

In a system where replication is the foundation of everything, speed certainly plays a role. The prices of financial instruments are constantly changing, so the more orders that are replicated quickly, the smaller the difference in prices between the orders that are sent and the orders that are received, allowing better replication.

Companies have already improved significantly in this regard, and the phenomenon, called slippage, has been greatly reduced.

However, companies continue to work to further increase speed, ease of use (see API integration) and robustness of the entire system, especially in times of extreme volatility that sometimes affect markets, such as what happened when the Swiss National Bank decided to abandon its policy of maintaining the 1.20 floor in the exchange rate of the EUR / CHF currency pair.

Offer of products and trading instruments

Although users were initially restricted to Forex trading (meaning they could only replicate forex traders), there are now a wide variety of financial products to choose from.

As we indicated earlier when we talked about eToro, some companies are beginning to offer the ability to copy traders who trade other instruments, such as indices, stocks or commodities.

Even controversial binary options have appeared in some companies, such as ZuluTrade.

It seems very likely that in the coming years we will see an increase in the supply and diversification of the products in which traders can trade.

From options (not binary options but classic options) to the wide variety of underlying markets offered by CFDs, and even the bond market and cryptocurrencies that are starting to reach these investment sectors, the possibilities are still many, and we will likely see more and more companies, old and new, taking on these new challenges.

Conclusions

In this article, we have explained very clearly the differences between these three "new" sectors:  Mirror Trading,  Copy Trading and  Social Trading.

The term social trading is certainly what is heard the most recently, but it is often used to speak (sometimes wrongly) about those forms of investment that are now known to be mirror or copy trading.

In the coming years, we will see an expansion of these concepts in all areas of global finance and, of course, also through an increase in announcements and offers.

The world changes. It is becoming more and more connected and more and more "social", and our next big investment could be in social trading or one of the other related industries.

Certainly, these sectors are in full growth and offer many opportunities that investors are trying to take advantage of. As with all forms of investment, it is not a quick and easy way to earn money and requires effort and preparation, but if done correctly and seriously, the benefits can be substantial. 

The fact that social investing requires less preparation than retail trading is one of its biggest advantages.

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About Martin L. Freshman   Forex Managed Account Reviews

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Joined APSense since, December 17th, 2012, From Guernsey, United Kingdom.

Created on May 14th 2021 08:28. Viewed 255 times.

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