Mirror Trading in Foreign Exchange

Mirror trading is a methodology of trade selection used primarily in forex markets. It is a strategy that allows investors to copy the trades of experienced and successful forex investors and implement the same trades, in almost real time, in their own accounts.

Mirror trading allows traders or investors to mimic others by implementing the same trades that others do in the trader's own account.

Mirror trading can be done in both forex and stock markets, though it is much more common in forex trading.Mirror trading has become a more acceptable alternative for traders and investors to consider as information and transparency tools have increased in quality.

Mirror trading was initially only available to institutional clients but has since been made available to retail investors through various means.

Since its inception in the mid- to late-2000s, mirror trading has inspired other similar strategies, such as copy trading and social trading.

Before proceeding further, let us understand some important terms.

Social Trading

Social trading is a form of investing that allows investors to observe the trading behavior of their peers and expert traders. The primary objective is to follow their investment strategies using copy trading or mirror trading. Social trading requires little or no knowledge about financial markets.

Copy Trading

Copy trading allows investor to directly copy the positions taken by another trader. investor decides the amount he wishes to invest and simply copies everything they do automatically in real-time – when that trader makes a trade, investor’s account will make that same trade as well.

Nature of Mirror Trading

Its automated nature can help prevent investors from making emotion-based trading decisions.

Mirror traders in the forex markets will often use a brokerage's trading platform to examine the histories and details of various trading strategies. In the stock market, they may use broker services such as Interactive Broker's Interactive Advisors or a third-party site such as collective2.com for example.

After researching performance characteristics, the trader then chooses an algorithmic trading strategy from the available options based on their investment goals, risk tolerance, investment capital, and desired assets to invest in.

For example, if a trader has a minimal risk tolerance, they may choose to mirror a strategy that has a low maximum drawdown. When strategy developers execute their trades, these trades are duplicated in mirror traders' accounts using automated software that operates with the intention of replicating similar results.

Benefits of Mirror Trading

Reduces Emotions

Because mirror trading determines when a trade gets opened, closed or amended, it removes the stress of making trading decisions. This is particularly helpful for new investors who may initially find the forex market overwhelming. Instead of worrying about the market’s day-to-day fluctuations, an investor can simply check the performance of their mirror trading account at the end of each week and determine if they want to continue using the strategy. Benefits of Mirror Trading

Verified Results

Forex brokers that offer mirror trading usually examine, test and validate the trading results of strategies they upload to their platform that helps filter out losing trades. For instance, before a new strategy is accepted, a broker may require it to have a 12-month track record of profitability with a specific maximum drawdown limit. When selecting a forex broker that offers mirror trading, investors should ask how a strategy's results have been verified to ensure it has undergone rigorous testing.