What is Mirror Trading? Everything You Need to Know

What is Mirror Trading?

Mirror trading is one of the most popular trading methods that is beneficial especially to beginner traders. It allows investors to copy and execute the trades of selected, experienced traders’ accounts. By copying and executing the traders of other, more experienced and successful traders, beginner investors can make the most of their investments.

Beginners often find it difficult to enter any financial market and invest their hard-earned money. Adding to that, putting in the time and effort to gain initial, fundamental knowledge about an asset class is an arduous process.

In these cases, mirror trading comes to the rescue by allowing beginners to copy the trading strategies of professional traders. This process not only saves time for research and analysis but also helps them make profits, which wouldn’t be possible otherwise.

While the concept of mirror trading has existed for over two decades, it is also applicable to the crypto market. However, in the crypto market, the concept is more popular as social trading, allowing investors to copy the trades of their community members.

How Does Mirror Trading Work?

Even though the mirror trading concept was introduced in the 2000s, and applied to only forex trading, it quickly gained traction in different types of markets. Besides, it was initially only available to institutional investors, but considering the viability of this process in digital trading, it opened doors for more opportunities.

Today, individual investors can also leverage this trading method to watch, learn, and copy the trading strategies of experienced traders. Most of the crypto exchange platforms and brokerages allow you to find out what expert traders are executing on their accounts and copy them.

On these trading platforms, you can choose an expert trader of your choice. You can choose one based on their previous history of executing successful trades. The trading platforms allow you to link your account to the expert or master account to mirror their trading strategies. Once the linking is done, all the trades executed by the master account will be copied and executed by your account.

The mirror trading functionality seems similar to copy trading, as they both involve copying the trades of another trader. However, they share some subtle differences, which we have covered in our copy trading vs mirror trading article.

Advantages of Mirror Trading

• Automated and Emotionless Trading

Mirror trading helps investors make the most of their investments by automatically mirroring the trading strategies of expert traders. It keeps the investors emotions at bay and helps them avoid momentary, impulsive investment decisions. This is what is needed when it comes to volatile markets like crypto.

• Potential for High Profits

Since investors follow expert traders with proven track record making successful trades, there is a high possibility of making profits with mirror trading. Often experienced traders have more knowledge and expertise, which can be leveraged by the beginners who copy their trades with the mirror trading method.

• Accessibility and Convenience

Even though it started with forex trading markets and institutional investors, mirror trading concept is now available in other financial markets as well. Anyone can access this method irrespective of their experience and knowledge about the industry. Besides, it is a hands-off approach to trading, eliminating the need for hours of research and analysis for beginner traders.

Disadvantages of Mirror Trading

• Risk assessment

Despite offering many benefits, mirror trading still shares some drawbacks. For instance, the risk tolerance, one of the important crypto trading strategies, might be different for expert traders and beginners. In these cases, investors with low risk tolerance copying expert traders with high risk tolerance can be a bad idea.

Adding to that, the crypto market prices are volatile and time sensitive. When a single trading strategy of a master account is executed by a large number of investors, its viability to yield profits can decrease and investors may end up with losses.

• No Active Participation

Crypto markets are too sensitive to market news, external factors, and investor sentiment. And, once an investor linked his trading account to that of a master account, they cannot actively involve and adjust the strategies. Their trading account follows the entire trading procedure of the master account. In the case of extreme crypto market conditions, this strategy might yield unfavorable results.

Is Mirror Trading Suitable for You?

Mirror trading is suitable for beginner traders who would like to test the water before going all in. They can invest small amounts following the trading strategies of expert traders, until they get necessary experience in trading. Additionally, traders who are too busy to research and analyze the market performance can also follow this method.

However, it is important to keep in mind that mirror trading is not completely risk-free. Thus, it is suitable for beginner traders who cannot spend time on researching and analyzing, and especially, who are risk tolerant.