What Is Copy Trading and Should You Do It?

What if you could invest like an experienced trader without making every buy and sell decision yourself? That’s the idea behind copy trading, a strategy that allows investors to automatically replicate another person’s trades through an online platform. While the approach can simplify investing and provide access to experienced market participants, it’s important to understand both the opportunities and the risks before deciding whether copy trading is right for you.

If you’re not sure what investments you should make then consider working with a financial advisor who can manage your investments to match your long-term goals.

What Is Copy Trading?

Copy trading is an investment strategy that allows individuals to automatically replicate the trades of another investor, often through an online brokerage or social trading platform. Once a user selects a trader to follow, the platform mirrors that trader’s buy and sell orders in the user’s account, typically in proportion to the amount of money allocated. This enables investors to participate in the same trading strategy without placing each trade manually.

Copy trading is often marketed to newer investors who want exposure to the financial markets but may lack the time or experience to research and execute trades on their own. It is also used by investors seeking access to different trading styles, asset classes or global markets. While it can simplify the investment process, users are still responsible for choosing which traders to follow and managing their overall portfolio.

Depending on the platform, copy trading may be available for a variety of investments, including stocks, exchange-traded funds (ETFs), foreign currencies (forex), cryptocurrencies, commodities and contracts for difference (CFDs). The types of assets available vary by platform, as do the fees, trading rules and investor protections that apply.

Although copy trading allows investors to follow experienced traders, it does not eliminate investment risk. The trader being copied may experience losses, change strategies or take on more risk than expected, and those outcomes are generally reflected in the follower’s account. For that reason, investors should review a trader’s performance history, risk profile and investment approach before deciding to allocate funds.

Advantages of Copy Trading

Copy trading creates an opportunity to leverage someone else’s investment knowledge and experience. You don’t have to analyze stock market movements or trends to decide which stocks to buy, sell or hold. You can simply follow a pro-investor. Say you’ve picked someone who consistently generates high returns in their portfolio. As a result, copying them would theoretically allow you to do the same.

Copy trading is largely passive. You’re leaving the hard work of choosing investments up to someone else. You can earn returns in your portfolio without having to invest hours researching the market. Diversification and risk management are also done since the pro trader is the one directing investment decisions.

In terms of how to choose an investor to emulate, there are a few criteria to consider:

• How long they’ve been trading
• Investment track record
• The number of open positions
• Typical holding time for investments
• Preferred types of investments

You should also look at what you want to do with your portfolio. For example, if seek more alternative investments, you may copy someone who focuses on hedge funds, commodities or FOREX. On the other hand, if your goal is to match the performance of the market rather than beat it, you might lean toward a professional investor who prefers an index strategy.

Disadvantages of Copy Trading

There are arguments for copy trading but it may not be right for every investor. There are a few important things to keep in mind before you get started with this strategy that may be negative to you.

First, your success hinges on which investor’s movements you follow. No investor is perfect when it comes to knowing when to buy or sell or where to invest. Consequently, copy trading involves a certain amount of risk. You’re hoping the pro trader strategy delivers maximum returns. But there are no guarantees.

This is where you have to spend some time researching traders. Learn more about how they operate and whether their methods align with your goals. Picking a trader at random could backfire if their strategy is completely different from what you’ve done with your portfolio

Copy trading could also be expensive if you’re paying commissions for frequent trades. If you’re using a copy trading platform to manage your portfolio for you, then you may also pay management or administrative fees to the platform. If you’re concerned about keeping fees low, then carefully consider the costs before trading.

Mirror Trading: A Copy Trading Alternative

Mirror trading is similar to copy trading but it’s not exactly the same. You could think of it as “copy trading lite.” With this strategy, instead of replicating an investor’s movements trade for trade, you’re mirroring their overall investment style.

So, say you’re interested in investing for value. In that case, you might choose to mirror Warren Buffett’s investment style. You may not necessarily buy every investment he makes or every investment he recommends. But you’d base your investing decisions on the same principles he follows.

Mirror trading still allows you to benefit from the expertise and knowledge of another investor. But you may not hold the same investments they do. Instead, you apply a strategy that’s been successful for them to your own portfolio. Hopefully, you’ll achieve a similar measure of success.

Bottom Line

Copy trading can make investing more accessible by allowing individuals to automatically mirror the strategies of more experienced traders. However, following another investor does not eliminate market risk, and past performance is no guarantee of future results. Before using copy trading, it’s important to understand how the platform works, evaluate the traders you may follow and ensure the strategy aligns with your investment goals, risk tolerance and overall financial plan.

Investment Tips

• Consider talking to your financial advisor about the pros and cons of copy trading and whether it’s something that might be worth trying. Your advisor can help you decide what copy trading can or can’t do for you and whether mirror trading might be a better option. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you’re looking into a copy trading platform, take time to learn which securities you can invest in. For example, some platforms may allow you to copy trades for a range of investments while others might limit you to FOREX or commodities.

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