Introduction to Copy Trading in Financial Markets and How to Trade

An introduction to copy trading in financial markets and how to trade with it


One of the most attractive systems in financial markets, and one that has been widely embraced by traders, is copy trading. This system was designed to lower the barriers to entering volatile markets and make managing trades easier. In this article, we look at copy trading and its use in forex, the crypto market and prop firms, as well as the advantages and disadvantages of copy trading and other related topics.
 

What does copy trading mean in digital financial markets?

 

 

To answer the question of what copy trading means, we can say that in this system, the trading positions of a professional, experienced trader are copied and executed fully automatically, in a set proportion, in the trading account of the trader who copies them. The copy trading process (Copy Trading) creates a direct link between two or more independent user accounts. In other words, when the main trader places a trade, the system of the broker or exchange offering copy trading copies exactly the same trade. With the explanation above, we can now understand how copy trading works.

 

 

Copy trading in forex

 

The forex market is one of the main venues for copy trading accounts and copy trading systems. But what is copy trading in forex? This process provides a setting in which forex traders, without necessarily needing fundamental or technical analysis, can profit from currency pair fluctuations in forex through a copy trading program. Forex trade copying is done through brokers, which are responsible for vetting traders and displaying their track records in forex copy trading.

For example, gold copy trading (XAU/USD) is very popular among traders. Because of its high trading liquidity and sharp daily swings, gold creates excellent opportunities for swing trading. However, copy trading in the forex and gold markets also carries heavy risks, such as leverage mismatches. However, gold and forex copy trading carries hidden risks such as differences in leverage. Copy trading systems copy positions based on the balance ratio; that is, if our account's leverage is lower than the lead trader's, when copying gold trades, the used margin (Required Margin) of our account rises sharply. In sharp market swings, this can quickly wipe out our account balance (Stop-out).

 

 

Copy trading in the crypto and digital currency market

 

 

Crypto copy trading has grown considerably in recent years. Unlike forex, the cryptocurrency market has no weekly close and is active around the clock (24/7). This constant activity makes learning crypto copy trading twice as important. Crypto copy trading generally runs on cryptocurrency exchanges, where a crypto copy trader can easily connect their account to the best crypto copy trading account.

 

Copy trading in prop firms

 

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

 

Advantages and disadvantages of copy trading in financial markets

 

A look at the pros and cons of copy trading shows that copy trading has many advantages, but a lack of sufficient expertise can lead to disastrous risks. To understand whether copy trading is good or not, you have to weigh its advantages and disadvantages.

 

Advantages of copy trading

 

• Saving time and lowering barriers: Without needing deep technical analysis or fundamental analysis, investors can benefit from others' experience and don't need to monitor charts constantly.

 

• Less emotional interference: Emotional decision-making such as fear and greed, which is the main cause of failure among retail traders, is reduced, because trades are executed automatically based on a predefined strategy.

 

 

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

 

 

Disadvantages of copy trading

 

• Dependence on someone else's account: If we had to guess the biggest risk of copy trading, it would be this dependence. If the trader whose account is being copied suffers a drop in performance, psychological pressure or a sudden change in strategy, the loss is passed directly to our account. 

 

• Copy trading costs and fees: In addition to the profit share (Profit Share) taken by the lead trader, some brokers apply a hidden mark-up (Mark-up) fee on copy trading accounts, which makes the spread and commission on these accounts somewhat higher than on regular trading accounts, and this should be kept in mind.

 

 

• System risk and possible outages: If the intermediary broker or exchange has technical faults or problems, there is a chance that those technical issues will affect copy trading.

 

 

How to earn money with copy trading in financial markets

 

 

Learning copy trading and earning from copy trading reflects a two-sided business model. On one side, semi-professional or non-professional traders can make a profit by copying others' trades. On the other side, professional traders can register as lead traders and receive a percentage of the profit generated in their copiers' accounts or a percentage of the trading commission as passive income. The process of how to do copy trading in financial markets generally includes the following steps:

 

1. Registration and depositing funds: Creating a trading account on a reputable copy trading platform and making an initial deposit

 

2. Reviewing lead traders' track records: Filtering traders by variables such as profit consistency, length of activity, maximum drawdown and number of active followers. It's better to choose a trader who has a significant amount of their own capital in that account, so they don't behave like a gambler.

3. Setting copy trading parameters: Setting the trade volume ratio, activating an overall stop loss on the balance, and starting the automatic copy trading process. Below we cover these parameters:
 

Fixed volume (Fixed Lot):

Copying a set volume (for example, always $0.01$ lot) regardless of the lead trader's volume

 

Volume proportional to capital (Proportional):

 

Automatic volume calculation based on the following formula:

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

 

Copying the exact volume (Full Size):

 

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

 

Specific tips for copy trading in the forex market

 

In the currency pair and gold markets, investors should pay attention to variables such as the trading account type. Leverage, or trading leverage, is very important in forex. For example, if the lead trader uses 1:500 leverage and the follower account has 1:100 leverage, positions may not be executed due to insufficient margin in the follower account. Matching trade volume to the account balance is the most important way to prevent losses in forex.

 

Specific tips for copy trading in the cryptocurrency market

 

In the crypto market, copy trading is mainly done in two markets: spot and futures. In crypto futures copy trading, given the high leverage available for trades, we recommend using copy trading settings to limit lead traders' leverage.

 

Different strategies in copy trading

 

 

Based on money management strategies and how risk is divided, copy trading implementation falls into different methods, and your choice directly affects the survival of your account:

 

• Proportional volume strategy (Proportional / Equity Ratio): This method is the most popular and most 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 a volume of exactly 0.1 lot so that the risk percentage of both accounts is exactly the same.

 

 

• Fixed Lot strategy: In this method, regardless of the trade size of the lead trader or our account balance, all trades are opened with a fixed, preset size (for example, always $0.01$ or $0.1$ lot). This method is well suited to those who keep tight control over their account's drawdown and want to neutralize the risk of the lead trader's size fluctuations.

 

 

• The difference between copy trading and Mirror Trading: Understanding the difference between these two concepts is very important. In copy trading, we directly copy the behavior, positions and trading style of a real (human) trader; but in Mirror Trading, which has an older, algorithmic structure, our account is connected to the automated output of an expert advisor or trading robot (EA) optimized by software companies, so that errors caused by human psychological weakness are minimized.

 

 

 

Copy trading in MetaTrader 4 and 5

 

 

Learning copy trading in MetaTrader is doubly important because these two platforms are so widespread among traders. Although both platforms are provided by MQ, the trade copying mechanism in each can be examined separately.

 

 

How to copy trade in MetaTrader 4

 

 

The MetaTrader 4 (MT4) software, despite being old, is still the most popular forex trading platform. To enable copy trading in MT4, follow these steps:

1. Download and install MetaTrader 4, activate the version of your chosen broker and log in to your trading account

2. Go to the Signals tab and view the list of signal providers along with their performance information

3. Choose the signal you want (Subscribe) and start subscribing to its trades  

4. Enable the copy trading options in the Options section

5. Give final confirmation and have trades executed automatically

 

How to copy trade in MetaTrader 5

 

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

1. Download and install MetaTrader 5 

2. Go to the Signals tab, choose the signal provider you want and start subscribing to its trades 

3. Choose the signal you want (Subscribe) and start subscribing to its trades

4. Start the copy trading process while monitoring it continuously

 

 

Using a robot for copy trading

 

 

Many traders prefer using a copy trading robot and copy trading software over the platforms' built-in tools for greater speed and customizable settings. One robot for copy trading is the FX Blue Personal Trade Copier software. This tool lets users copy trades with very little delay between different MetaTrader 4 and 5 instances running on one computer or a virtual private server (VPS). The key features of local copier robots are:

 

• Cross-platform connection: Easily copy orders from an MT4 sender account to an MT5 receiver account and vice versa
• Advanced filters: Matching and copying specific symbols, automatically adjusting position sizes based on account balances, and reversing trade direction.
• Email alerts: Option to receive email alerts while copy trading is active

 

 

Best copy trading sites

 

To start out in this field, choosing the best copy trading site and the most reliable copy trading platform is the first and most crucial step. Below, copy trading sites are divided into two groups, foreign platforms and Iranian platforms, based on access for Iranian users.

 

Foreign copy trading platforms

 

Although these platforms are recognized as acceptable references worldwide, unfortunately, due to international sanctions rules, they do not provide services directly to residents of Iran, and identity verification is mandatory on them.

 

• eToro platform: One of the best copy trading platforms in the world. In addition to currency pairs, eToro lets you copy trades in gold, stocks and cryptocurrencies, and it offers high security.
• Bybit exchange: The top copy trading platform for cryptocurrencies globally. By offering practical tools and high leverage, Bybit is the first choice of crypto traders outside Iran.

 

 

Iranian copy trading platforms

 

None of the Iranian platforms offer a copy trading service. However, the options below, because they do not sanction Iranian users, offer Persian support and allow deposits and withdrawals in Rial, are considered the best copy trading platforms for Iranians:

 

• Alpari broker: Offers PAMM and copy trading for Iranian traders
• AMarkets broker: Copy trading in a fully transparent environment with practical tools
• LiteFinance broker: Forex copy trading possible with small capital
• LBank exchange: A foreign crypto exchange offering copy trading for Iranians
• CoinEx exchange: A great option for starting copy trading, with identity verification available for Iranians

 

 

Who is copy trading suitable for?

 

 

Deciding who copy trading is suitable for, or who it suits best, requires self-awareness and considering your investment goals. This trading method does not necessarily lead to profit, but it has high potential for certain groups:

 

 

• Busy investors: People who want to be active in the financial markets but, due to work commitments, lack enough time to monitor charts daily.
• Beginner traders aiming to earn income (not to learn): Users who have not yet gained a deep understanding of technical or fundamental analysis can use copy trading as an income tool. However, we should note that copy trading is not a good tool for learning to trade, because platforms do not show us the details and reasoning behind the lead trader's entries; we only see orders being opened and closed.
• Diversifying assets: Traders who want to allocate part of their portfolio to different trading strategies to spread the overall risk of their assets.

Emotional people: Those who, due to psychological instability, fall into self-destructive behaviors such as revenge trading when trading manually can use a copy trading system to hand trade execution over to the systematic discipline of a stable trader.

 

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