What Is Mirror Trading?

Malcolm Tatum

Mirror trading is a type of investment strategy that involves copying or mirroring the investment decisions made by a different investor. Typically, this approach allows investors to follow the lead of someone who is considered to be well-seasoned in the marketplace and has a reputation for consistently generating profits from their efforts. This approach has often been associated with the Forex market, and involves investors who are engaged in currency exchanges as a way of generating returns to copy or imitate the purchases and sales made by investors who tend to be very successful with this particular type of investing.

Man climbing a rope
Man climbing a rope

The general idea behind mirror trading is to secure access to the public records that document the trades made by someone who is considered to be a leading investor within the market. By examining those series of trades, it is possible to create a very similar series and hopefully produce results that are somewhat similar. This approach works often enough that a number of investors routinely use mirror trading as part of their ongoing market strategy.

While once limited to institutional investors with the resources to manage the process with relative ease, individual investors may also utilize the basic concept of mirror trading when making investment decisions. By working closely with a broker or dealer to identify what certain experienced investors are doing in the way of trades, it is possible to quickly set up similar trades. Assuming that the projections of that experienced investor prove to be accurate, this means the mirror or copycat investor is likely to make at least some money while also keeping the risk within a reasonable level.

It is important to note that mirror trading is not the same as automated trading. With the former, the investor still has the responsibility of evaluating the collected data and deciding to what degree to copy or follow the lead of the experienced investor. Automated trading calls for simply copying the same processes without making any real effort to qualify those activities based on factors such as the investment goals or the comfort level with risk that is exhibited by the copycat or mirror investor. In this sense, mirror trading does help provide a concise plan of action, but one that can be altered when and as necessary. This means that while this approach to investing does help to reduce emotional responses to certain opportunities, the mirror investor does retains the final determination of what to buy or sell, rather than simply allowing the process to occur automatically.

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