Amongst the trading platforms, that online trading offers, mirror or copy trading is a one of the most widely used trading strategy. This refers to copying what other experienced or successful traders are doing. It is the design of Tradency and now there a number of websites who offer links that provide these facilities. It offers both manual as well as automated trading.
Selection of successful trading strategy: this is the key to mirror trading. Traders new or experienced can select certain strategies amongst a host of them that a website offers. The main thing to keep in mind is chalking out what are the traders’ needs and what are his goals. Once he has this decided he can select pre existing strategies that best fit his requirements. He can also manually make a trading strategy by getting some online training and a market sense.
New to the trade: this is a good way for novice traders to start and gain experience. This offers a chance for them to follow and apply what expert traders are doing. It also provides insight to know how to predict price direction and price action. As traders observe, apply and analyze these strategies, they develop a feel for the forex market. For this they need to be patient and stick to their strategy guns and not pull out too early.
Risk management: this mirror trading also involves potential risk as the market moves up and down or remains flat. Traders and investors need to have a risk management plan in place so that they know when to pull the plug on a certain transaction. These require smart stop loss orders that are planned and just need to be implemented.
Diversify the trading strategies: this is asset allocation in simpler words. It means that a trader avoids putting all his capital or investing only on one system or strategy. He should select multiple systems so that if one underperforms he is able to recover with the others or at least not lose all in one transaction.
Doubling up: this happens when traders or investors tend to double up in an effort to diversify. This means that they conduct transaction on similar currency pair, for example the USD will be the same for both currency pairs. This means that a trader will increase his risk of losing on both transactions if the USD was to show low price action.
Effective leverage ratio: in mirror trading, using low leverage gives better returns and it decreases that chance of a crash. Keeping the ratio at 5:1 or the maximum 10:1 is wiser than extremely high leverage as it backfires in the long run.
Overall, mirror trading is a good avenue for novice traders who want to make small amounts of money and learn the rules of the trade. Emotional forex traders and investors also benefit from this as they can operate an automated mirror strategy.