Introduction to copy trading in financial markets

Introduction to Copy Trading in Financial Markets and How to Trade




One of the most attractive systems in financial markets that has been widely welcomed by traders is copy trading. This system is designed to lower barriers to entry in volatile markets and simplify trade management. In this article, we aim to explore copy trading, its use in Forex, the crypto market, and prop firms, as well as its advantages, disadvantages, and other related topics.

 

What is Copy Trading in Digital Financial Markets?

 

 

In answering the question of what copy trading means, we can say that in this system, the trading positions of a professional and experienced trader are copied and executed automatically and proportionately in the account of the trader who is copying them. The process of Copy Trading creates a direct link between two or more independent accounts. In other words, when the lead trader initiates a trade, the broker or exchange's copy trading system copies that exact trade. Now, with the explanations provided, we can understand how copy trading works.

 

 

Copy Trading in Forex

 

The Forex market is one of the primary venues for copy trading accounts and systems. But what is copy trading in Forex? This process provides a framework that allows Forex traders to profit from currency pair volatility through a copy trading program without the absolute necessity of fundamental and technical analysis. Forex copy trading is conducted through brokers, who are responsible for verifying traders and displaying their track records in Forex copy trading.

For example, Gold (XAU/USD) copy trading is very popular among traders. Due to its high trading liquidity and extreme daily volatility, gold creates excellent opportunities for scalping. However, copy trading in the Forex and gold market also carries heavy risks, such as differences in leverage. Copy trading systems copy positions based on balance ratio; this means if our account leverage is lower than the lead trader's, our required margin increases significantly when copying gold trades. This can quickly lead to a stop-out in our account during high market volatility.

 

 

Copy Trading in the Crypto and Digital Currency Market

 

 

Crypto copy trading has grown significantly in recent years. Unlike Forex, the cryptocurrency market does not have weekend closures and is active 24/7. This continuous dynamism makes the need for crypto copy trading education twice as important. Digital currency copy trading is generally executed on crypto exchange platforms, where a crypto copy trader can simply connect their account to the best crypto copy trading account.

 

Copy Trading in Prop Firms

 

Prop Firms are companies that provide capital to talented traders for trading and share in the resulting profits. Prop copy trading or copy trading in prop firms has conditions that are sometimes different from personal accounts. Since the main goal of these companies is to evaluate the trader's individual skill, very strict rules have been set for copy trading. Our research shows that in most reputable prop firms, using copy trading is prohibited. However, some copy trading methods are allowed in prop firms; for instance, copy trading is only permitted between challenge accounts owned by the same individual.

 

Advantages and Disadvantages of Copy Trading in Financial Markets

 

Examining the advantages and disadvantages of copy trading shows that while it has many benefits, a lack of sufficient mastery can lead to disastrous risks. To understand whether copy trading is good or not, one must weigh its pros and cons.

 

Advantages of Copy Trading

 

• Time-saving and Reducing Barriers: Investors can benefit from others' experience without needing deep technical or fundamental analysis and do not need to monitor charts constantly.

 

• Reducing Emotional Interference: Emotional decision-making, such as fear and greed, which are the main factors for retail trader failure, is reduced because trades are executed automatically based on a pre-determined strategy.

 

 

• Diversification of Portfolio: An investor can split their capital among several traders with different strategies to minimize risk.

 

 

Disadvantages of Copy Trading

 

• Dependency on Another's Account: If we were to guess what the biggest risk of copy trading is, it would be this dependency. If the trader being copied experiences a drop in performance, mental pressure, or a sudden change in strategy, the loss is directly transferred to our account.

 

• Costs and Copy Trading Commissions: In addition to the profit share deducted by the lead trader, some brokers apply a hidden mark-up commission on copy trading accounts, which causes the spread and commission of these accounts to be slightly higher than normal trading accounts, and this should be noted.

 

 

• Systemic Risk and Potential Outage: If the broker or intermediary exchange has technical errors or problems, there is a possibility that this technical issue will affect copy trading.

 

 

 

How to Earn Income with Copy Trading in Financial Markets

 

 

Copy trading education and earning income from copy trading represent a two-sided business model. On one hand, semi-professional or non-professional traders can earn profits by copying others' trades. On the other hand, professional traders can register as lead traders and receive a percentage of the profits earned in their copiers' accounts or a percentage of trading commissions as passive income. The process of how to perform copy trading and how to engage in it in financial markets generally includes the following steps:

 

1. Registration and Depositing Funds: Creating a trading account on a reputable copy trading platform and depositing initial funds.

 

2. Reviewing Lead Traders' Resumes: Filtering traders based on variables such as profitability stability, duration of activity, maximum drawdown, and number of active followers. It is better to choose a trader who has a significant amount of their own personal capital involved in that account so they do not exhibit gambling-like behavior.

3. Setting Copy Trading Parameters: Specifying the trade volume ratio, activating overall stop-loss on equity, and starting the automatic copy trading process. Below, we mention these parameters:
 

Fixed Lot:

Copying a specific volume (e.g., always 0.01 lot) regardless of the lead trader's volume.

 

Proportional Volume:

 

Automatic volume calculation based on the following formula:

$\frac{\text{Follower Balance}}{\text{Master Balance}}$

 

Full Size:

 

Opening exactly the same lot size as the lead trader (which is a disaster for small accounts).

 

Exclusive Tips for Copy Trading in the Forex Market

 

In the currency pair and gold market, investors must pay attention to variables such as the account type. Leverage in Forex is very important. For example, if the lead trader uses 1:500 leverage and the follower account has 1:100 leverage, positions might not execute due to lack of margin in the follower's account. Coordinating trade volume proportional to account balance is the most key point for preventing losses in Forex.

 

Exclusive Tips for Copy Trading in the Cryptocurrency Market

 

In the crypto market, copy trading is mainly performed in both spot and futures markets. In crypto futures copy trading, due to the existence of high leverage for trades, we recommend using copy trading settings to limit lead traders' leverage.

 

 

Various Strategies in Copy Trading

 

 

Implementing copy trading based on risk management strategies and how to divide risk is split into various methods, the choice of which directly impacts your account's survival:

 

• Proportional / Equity Ratio Strategy: This method is the most popular and logical strategy in copy trading. In this method, the system automatically calculates our trade volume based on the ratio of our capital to the lead trader's capital. For example, if the lead trader opens a 1-lot trade with a $10,000 account and our account is $1,000 (one-tenth of the lead trader's), the system opens our position with exactly 0.1 lots so that the risk percentage for both accounts is perfectly equal.

 

 

• Fixed Lot Strategy: In this method, regardless of the lead trader's volume or our account balance, all trades are opened with a fixed and commanded volume (e.g., always 0.01 or 0.1 lots). This method is very suitable for those who have strict control over their account's drawdown and want to neutralize the risk of the lead trader's volume volatility.

 

 

• Difference Between Copy Trading and Mirror Trading: It is very important to understand the difference between these two concepts. In copy trading, we directly copy the behavior, positions, and trading style of a real person; however, in Mirror Trading, which has an older and algorithmic structure, our account is connected to the automatic output of an Expert Advisor (EA) optimized by software companies to minimize errors resulting from human psychological weaknesses.

 

 

 

Copy Trading in MetaTrader 4 and 5

 

 

Copy trading education in MetaTrader is of double importance due to the prevalence of these two platforms among the trading community. Although both platforms are offered by the MQ company, the mechanism of copying trades in them can be examined separately.

 

 

Copy Trading Education in MetaTrader 4

 

 

Despite its age, MetaTrader 4 (MT4) is still the most popular Forex trading platform. The following steps are performed to activate copy trading in MT4:

1. Downloading and installing the MetaTrader 4 software and activating the relevant broker version and logging into the trading account.

2. Entering the Signals tab and viewing the list of signal providers along with their performance information.

3. Choosing the desired signal (Subscribe) and starting the trade subscription.

4. Activating options related to copy trading in the Options section.

5. Final confirmation and automatic execution of trades.

 

Copy Trading Education in MetaTrader 5

 

MetaTrader 5 (MT5) is the more advanced and optimized version of MetaTrader. The steps for copy trading in MetaTrader 5 are as follows:

1. Downloading and installing MetaTrader 5 software.

2. Entering the Signals tab and choosing the desired signal provider and starting the trade subscription.

3. Selecting the desired signal (Subscribe) and starting the trade subscription.

4. Starting the copy trading process while maintaining continuous oversight.

 

 

Using Bots for Copy Trading

 

 

Many traders prefer using a copy trade bot and copy trading software over the platform's internal tools for higher speed and customization of settings. One such bot for copy trading is FX Blue Personal Trade Copier. This tool allows users to copy trades between different versions of MetaTrader 4 and 5 running on a single computer or Virtual Private Server (VPS) with negligible latency. Notable features of local copying bots include:

 

• Cross-Platform Connectivity: Easily copying orders from a sender MT4 account to a receiver MT5 account and vice-versa.
• Advanced Filters: Synchronizing and copying specific symbols, automatically changing position volumes based on account equity, and reversing trade direction.
• Receiving Email Alerts: Ability to receive email alerts when copy trading is active.

 

 

Best Copy Trading Sites

 

To begin activity in this field, choosing the best copy trading site and the most reputable copy trading platform is the first and vital step. Below, copy trading sites are divided into two categories: foreign platforms and Iranian platforms, based on accessibility for Iranian users.

 

Foreign Copy Trading Platforms

 

Although these platforms are recognized as accepted authorities globally, unfortunately, due to international sanctions, they do not provide direct services to residents of Iran, and identity verification is mandatory on them.

 

• eToro Platform: One of the world's best copy trading platforms. In addition to currency pairs, eToro provides the ability to copy trades for gold, stocks, and cryptocurrencies and has high security.
• Bybit Exchange: The top global platform for cryptocurrency copy trading. Bybit, with its useful tools and high leverage, is the first choice for crypto traders outside Iran.

 

 

Iranian Copy Trading Platforms

 

None of the Iranian platforms offer copy trading services. However, the options listed below are considered the best copy trading platforms for Iranians due to not sanctioning Iranian users, having Persian support, and the possibility of Rial deposits and withdrawals:

 

• Alpari Broker: Providing PAMM and copy trading for Iranian traders.
• AMarkets Broker: Copy trading with a completely transparent environment and useful tools.
• LiteFinance Broker: Ability to copy Forex trades with small capital.
• LBank Exchange: A foreign cryptocurrency exchange with copy trading capabilities for Iranians.
• CoinEx Exchange: An excellent option to start copy trading with the possibility of identity verification for Iranians.

 

 

Who is Copy Trading Suitable For?

 

 

Deciding who copy trading is suitable for requires self-knowledge and considering investment goals. This trading method does not necessarily lead to profitability, but it has high potential for specific groups:

 

 

• Busy Investors: Individuals who want to be present in financial markets but lack sufficient time for daily monitoring of charts due to work commitments.
• Beginner Traders Aiming for Income (Not Education): Users who have not yet reached a deep understanding of technical or fundamental analysis can use copy trading as a tool to generate income. However, we must note that copy trading is not a suitable tool for learning how to trade, as platforms do not show us the details and philosophy behind the lead trader's entry into positions, and we only observe the opening and closing of orders.
• Diversifying Assets: Traders who want to allocate part of their portfolio to different trading strategies so that the overall risk of their assets is spread out.

Emotional Individuals: Those who, due to lack of psychological stability during manual trading, engage in suicidal behaviors like taking revenge on the market, can entrust the execution of trades to the systematic discipline of a stable trader using a copy trading system.