How Mirror Trading Can Protect Your Portfolio

November 1, 2021

There are many different strategies that can be used when it comes to trading in the current day and age, and one approach that is becoming more popular is mirror trading. As the name indicates, this involves mirroring the trades of someone else, i.e. an experienced trading professional. This is a great option for beginners who do not have a lot of experience. However, you do need to make sure you mirror the right professional and that you do correctly to ensure that this approach is a success.

What is mirror trading?

There is only one place to begin, and this is by explaining what mirror trading is. This is a concept that was first introduced early in the 2000s in the foreign exchange market, and it took a few years for the equity market to then follow suit.

Mirror trading essentially means that you are going to replicate the trades in your account by linking it to an account that is managed by someone else – a person that you believe to be a shrewd and successful investor. Therefore, every time this investor makes a trade in her or his account, it is then “mirrored” or duplicated in your own account. 

The choice of the investor you are going to follow and link your account to will depend on the brokerage offering this service and the options that they have available. Nevertheless, so long as you choose with care, this can be a safe and effective way of making a profit, especially as your account is linked to automatically follow the trades made.

Mirror trading is not copycat investing

We often see that the terms mirror trading and copycat investing are used interchangeably. However, it is vital to recognize that they are not the same thing. There are key differences between the two options. With copycat investing, you are attempting to duplicate the investing ideas of reputable investment managers, yet there is no physical link between the two accounts, meaning there is nothing automated setup. 

Another key difference is the time lag. It can take weeks between the time a money manager disposes or acquires a stock, and when this data is made public for a copycat investor. This can make it even more challenging because, by the time you discover the information, the opportunity may have gone. The time lag with mirror trading, on the other hand, is pretty much non-existent. This is because the trade order from the mirror account and the portfolio manager account orders are grouped together and they will go to the exchange in a single batch.

Final words on mirror trading and protecting your portfolio 

By strictly following and replicating the trades of other established traders, non-professional traders will automatically be practicing safe trading, by using technical entry points, accurate stop-losses, and realistic take profit goals. Mirror trading, when done correctly, can minimize the risks associated with trading, provided all safe trading practices are followed.

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