Three Major Advantages, and Disadvantages, of Mirror Trading

December 1, 2020
blog primexbt mirror - Three Major Advantages, and Disadvantages, of Mirror Trading

The world of trading is often seen as a big and intimidating one. There are so many different commodities, currencies,  and cryptocurrencies to trade that it can be difficult to know where to even start. Once you have chosen your specific market, it is even more daunting to know how to start and what strategy to use. 

The scary part about trading is that when you are still new and beginning, you are going to make mistakes, but these mistakes will cost you — and they will cost you real money. Having an inexperienced strategy that you are not too strong with means you will probably lose more than you make. 

This means pushing through the hard times to get better — but it does not necessarily have to be like that. In all the trading strategies out there, there is one that is aimed at newbies who want to watch, and learn, how to get better and make money at the same time — this is known as mirror trading. 

Mirror trading is a method of trading when a trader — usually a newbie — sets up a strategy that is modeled off successful and experienced traders to mirror them on their own accounts. Essentially, the new trader is copying the moves of the experienced trader and reaping the rewards. 

This strategy only came about in the last 20 or so years and has been more applicable with the growth of digital trading. This strategy selects high-performing accounts ona platform to mirror and whenever they carry out a trade, this is also executed in your account.

There are a number of advantages to this type of reading, especially for people new in the market or to trading in general, but it is also helpful to avoid emotional trades and to help traders watch and learn when to make good calls on the market. 

There are of course some disadvantages to mirror trading as well, and we will be going through three of the big pens, as well as three of the big advantages, so you can make your own decision on if mirror trading is for you. 

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What is mirror trading?

As briefly mentioned above, mirror trading is essentially hard-copying a successful trader’s moves on a certain market in your chosen mirror trading platform. Most digital platforms today allow you to see who is trading what, and how well they are doing, so mirror trading plays into that.

When you decide to mirror trade you are essentially aligning yourself to the movies that another trader makes. This means that your account ties into their trades and executes the same trades. This allows you to decide the type of trader you like as well, be they risk adverse or high risk. 

When the chosen trader executes their trades, these trades are duplicated in mirror traders’ accounts using automated software that operates 24/5 with the intention of replicating similar results. 

How mirror trading works

Mirror trading only emerged in the early 2000s, and was only originally made available to institutional traders, but the growth of trading and the digital realm of trading has opened this up and made mirror trading simple for all users. 

Mirror trading is easily enacted with digital trading as there is automated software that can allow traders to set up the mirror on their chosen expert trader. This means that once this strategy is chosen, and the trader selected, the mirror trader needs simply sit back and watch the trades operate without any input from themselves. 

Mirror trading is often lumped together with copycat trading, and social trading — while these are all quite similar in essence, there are distinct differences. This is the only one that uses actual mirror trading  software, or mirror trading systems to copy the trade in real time for the mirror traders while the other two are much looser and based on following advice more than direct mirroring. 

Advantages and Disadvantages of mirror trading

It should be clear now why mirror trading can be an advantage to a trader, it requires very little work or research, and this is also good for new traders who don’t want to lose money while learning the ropes. However, there are also disadvantages that need to be considered. 

Mirror trading is not a magic bullet of trading, it has its limitations as the effectiveness of the trader being mirrored can wear out and losses can occur, this can also lead to higher risk that as originally meant to be avoided. 

Advantages

#1: Free Experience: Arguably the biggest advantage to mirror trading is that it puts a new trader in a position where they are making the same trades as someone with potentially years of experience in the same market. There is a lot to learn in trading, and a lot of mistakes and lost money to be made, this is why experience counts. 

Experience cannot usually be bought or faked, but with mirror trading it can. This strategy means that there is experience behind the trades, and it is also a learning experience for the new trader as they watch when trades are made, and how, and why. 

#2: Low effort and cost: Even if a trader has the experience behind them, they might not have the time or inclination to trade on another market or might be otherwise occupied. This trading strategy allows for a trader to simply find their right trader to mirror and then all the work is done for them.

More so, when a trader wants their portfolio run in this manner a covestor’s portfolio managers charge between 0.5% and 2% of assets per year. The lower end of the range compares favorably with the average 1.21% average annual expense ratio for mutual funds. Using this strategy rather than a traditional broker means fees are generally kept lower.

#3: No emotional trader: One of the biggest issues that traders face is mastering their emotions. Watching the charts too closely can lead to trades that break with strategy and are led by the heart. These often lead to losses. 

However, with mirror trading all emotion is taken out of the equation and laid at the hands of a more experienced and successful trader who is probably more adept at sticking to their strategy and mastering their emotions. 

Disadvantages

#1: Not much history: This style of trading has only been around for 20 years, and although this sounds like a lign time, this is not enough to get a bread enough picture of its success because of the limited performance history.

The vast majority of performance records start after 2009, when the bull run commenced, so investors have no idea how these presumed experts will fare in a severe bear market.

#2: Losing touch: The idea of mirror investing means finding a trader that suits what you want to achieve, it also is about finding a successful one in your chosen style pattern. However, traders’ style might start to change away from what you first liked, or your own choices might change. 

More so, traders are never successful 100 percent of the time. They might catch your eye to start with but down the line they could lose their touch while losing you money.

#3: Not the magic bullet: Even the most successful traders are not always right, and go through bad patches. The majority of professional investors and mutual fund managers are unable to beat the market on a consistent basis, what are the chances anyone else can?

There are a number of other strategies that can be more successful than mirror trading in the long run, but they will require more time and effort, and experience. 

Mirror trading on PrimeXBT

As mirror trading is only effective on good digital trading platforms, a setup like PrimeXBT’s suits this perfectly. PrimeXBT offers mirror trading services on a range of different markets, from cryptocurrency, commodities and forex, and allows traders to monitor all the most successful traders and lock into their strategies. 

PrimeXBT’s mirror trading is easy to use ,well presented, and effective across the different markets making it one of the best ways to enter a new area of trading without experience, but with chances for profits. Sign up here to give it a try.

Conclusion

Mirror trading is something that has emerged for the new digital age of trading. It is a strategy that only really works in digital trading, but also one that suits this digital age. Traders of today like quick results, easy trades, and low effort — as well as new markets. 

To meet the demands of these traders mirror trading suits. It is a good way to enter a new market, with low effort, and a way to learn without imparting emotional trading. However, it is not the secret weapon to guarantee the best results.

Mirror trading has its place in the trading ecosystem, but it also has times where it is probably the wrong choice. It is more about finding out what suits you, and when.

 

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