What is copy trading and how does it work?

What is copy trading?

Pretty much what it says on the tin. Copy trading is a type of technology that lets ordinary investors copy the trades of other investors. This can be a game changer for those just starting out with investing and trading because it means you can mimic the moves of experts (or more experienced traders) if you’re not comfortable placing your own trades.

In theory, you automatically replicate the actions of other investors, imitating their every move without lifting a finger. You follow them, they make trades, you automatically copy those trades; and hopefully, if they’re successful, so are you. However, the opposite is also true – their failures become your failures too. There’s no such thing as a free lunch, even if you happen to have the same lunchbox as your neighbour.

How does copy trading work?

In most cases, copy trading works by using a separate piece of software alongside your existing trading platform or brokerage. However, some trading platforms now have integrated software that allows you to browse and copy other trades. The basic premise is that by copying the trades of someone with more experience, you can improve your chances of being successful, but that’s not always the case.

Essentially, when you decide to copy someone, you can opt to automatically copy what they do (whether that’s buying or selling). Usually, you don’t have to copy the same monetary amount, just the type of trade. For example, if they’re placing a buy trade with £10,000 you can copy it with a much smaller sum of say, £100 for example. Always check this though so that you don’t end up investing more than you’re comfortable with.

Certain platforms will also let you choose whether to copy all trades or just a portion, but that can complicate things as trading often relies on the assumption that some moves won’t work out. So if you cherry pick your trade to copy, you could end up just copying all the losing trades from that investor.

Best copy trading platforms in the UK

Finding the best copy trading platform to use is going to depend largely on your preferred investing strategy and which interface you like using for copying trades.

There are several brokerages operating in the UK to choose from that offer copy trading. Each can differ in terms of complexity and other features, here are some popular examples of copy trading platforms:

• Etoro. This is probably the most accessible copy trading platform for most UK investors because the interface is straightforward to use, the platform is relatively beginner-friendly, and you can use its patented CopyTrader feature from $200. You can read more in our in-depth etoro review or watch our eToro video review.
• Pepperstone. You need to have an MT4 or MT5 Pepperstone account and then you can download a separate app, link it to your account and pick your signal provider (trader) to copy their moves.
• AvaTrade. With this forex and contracts for difference (CFD) brokerage, you can attempt to copy a trader’s success (or share their losses) by using the AvaSocial app to copy trades and create groups to share ideas and interact with other traders. You can also integrate the ZuluTrade software (detailed next).
• ZuluTrade. The platform allows you to follow and copy trades from top global traders, dubbing itself a “social intelligence platform” where you can mirror the trading positions of its “leaders”. You can integrate ZuluTrade’s software into a number of other trading platforms too, like AvaTrade for example.
• Axi. The Axi copy trading app focuses purely on – you guessed it – copy trading. Axi is an app that allows copiers to mimic the trades of other investors (sometimes called providers, signal providers or master traders). You will need to have an existing MT4 trading account to link up with the Axi app before you can start copying trades.

Alternative ways to make money from copy trading

With most of the platforms that allow copy trading, you can also opt to become a copied trader. So, you can attempt to build up a following and get other investors to copy your trades.

You’re probably not going to want to do this until you’ve got plenty of experience under your belt and a proven track record of successful trades (otherwise no one is going to want to copy you, obviously). But, if you do reach this stage, you can get paid commissions and bonuses based on your trading performance (and sometimes the size of your following).

How to start copy trading

Here’s a straightforward step-by-step guide if you’re considering copying the trades of other investors:

• Choose a platform. You’ll need to decide whether you want a trading platform like eToro where everything is integrated, or if you want to use a standalone trading brokerage and integrate a piece of copy trading software yourself.
• Set up your account. Once you’ve found your preferred platform, you’ll have to open a trading account and pass some verification checks.
• Deposit funds. After you’ve been verified and your account is up and running, you’ll need to deposit funds into your account to use for copying trades.
• Research traders to copy. It’s worth taking some time to find the trader (or traders) you want to copy and do plenty of research to see if their investing style is something that you’re comfortable with. Don’t just pick a trader with the highest historical returns, because this might not suit your investment risk profile or goals.
• Start copying trades. Each platform is different but you should be able to arrange to automatically copy the trades of your chosen investor (signal provider). With some brokerages, you can also carry out manual or semi-automatic position copies.
• Monitor and adjust. Even though you’re copying someone else, you shouldn’t just “set and forget” with this method of investing. It’s really important that you take plenty of time to monitor things and make changes when necessary.

Is copy trading a good idea?

Finder expert George Sweeney answers

It depends. Copy trading can be a useful tactic if you’re dead set on wanting to trade but have minimal experience. However, it’s still an investing method that sits on the higher end of the risk spectrum. Typically, beginners and less-experienced investors shouldn’t really be looking to trade at all. It’s often better to aim for steady growth with strategies that are more long-term focused.

That being said, if you want to trade and are just starting out, copying the moves of traders with much more experience and a track record that you can see for yourself is potentially a better plan of action. Just keep in mind that copying traders who’ve been successful in the past isn’t a guarantee of future success or a simple way to make loads of money (otherwise everyone would be doing it). There’s plenty of risk involved and this has to be weighed up against the possibility of any profit.

Is copy trading profitable?

It can be. For example, data and statistics from ZuluTrade show that uninterrupted copy trading (mimicking a trader’s move exactly without tinkering or making adjustments) can have a success rate of between 73% and 79%. This is pretty much a complete flip of the odds of retail investors who trade manually, who have roughly a 70% chance of losing money.

However, this means you’ll need to copy the exact moves and there is still a fairly significant chance you can lose money. One interesting component is that shorter timeframes seem to perform better than longer timeframes (for example, 3 months of trading has a higher success rate than 12 months). So the longer you spend trading (rather than long-term investing), the more the odds of coming out on top swing against you.

Advantages of copy trading

Here’s a quick look at the possible benefits of copy trading:

• Minimal expertise. You can start copying trades with little or no investing experience (although this isn’t advisable). But it can lower the barrier to entry for those looking to start trading.
• Diversification opportunities. Most platforms will let you copy traders investing in a range of assets and markets, so you could potentially diversify your approach by following and copying a variety of traders.
• Saves time. By spending some up front time researching the trader(s) to copy, you might be able to save yourself time that you would have spent researching trades to make yourself. However, using short-cuts with investing can sometimes lead to an unhappy ending.

Disadvantages of copy trading

These are some of the important drawbacks you need to consider:

• Use of derivatives. Copy trading usually involves derivatives, which are basically synthetic assets rather than real assets and can come with additional risks and complexities.
• Dangers of leverage. Some traders use leverage (borrowed money) to maximise positions, which can also magnify any potential losses.
• Lack of control. If you’re copying someone else, by design you don’t really get to give any input on the trades being made, even if you think something is a particularly bad or risky idea.
• Losing money. If you copy another trader, their losses are your losses. Their goal will be to make money, but unfortunately, there are no guarantees when it comes to investing or trading.
• Additional fees. Some platforms like eToro let you use its CopyTrader feature for free, but there can be additional fees involved (on top of regular trading fees, spreads, and platform fees) when using these copy tools.

Pros and cons of copy trading

Bottom line

Copy trading can be an interesting way to dip your toes into the trading waters even if you’ve a relatively shallow pool of investing knowledge. It allows you to piggyback off more experienced traders and potentially make profits while you continue to learn.

However, this is still a risky investing strategy, that not only comes with market risk but also the danger of picking a poor trader. Past performance doesn’t dictate future results and even the best traders won’t consistently make winning trades over long periods of time. So make sure you’re fully aware of the risks and do plenty of research before diving in.

Frequently asked questions

• Is copy trading legal in the UK?

  Yes, copy trading is legal in the UK as long as the platform is regulated by the Financial Conduct Authority (FCA).

• Can I lose money with copy trading?

  Yes, as with any investment, there’s a risk of losing money. If the trader you’re copying makes bad decisions or trades, you can lose some or all of your money. This form of trading can still be a lot riskier than long-term buy-and-old strategies.

• Do I need a lot of money to start copy trading?

  Not necessarily. Some platforms like eToro allow you to start copying trades from just $200 but minimum amounts can vary.

• What is forex copy trading?

  This is exactly the same as any other type of copy trading, the only difference is that it will focus purely on currencies (also known as forex trading).

• What is crypto copy trading?

  This is exactly the same as any other type of copy trading, the only difference is that it will focus purely on cryptocurrencies. Fewer platforms may offer this as a tradeable asset and it’s important to note that crypto trading can be even more volatile than trading more established financial assets and markets.

• Can I stop copying a trader anytime?

  Yes, platforms should allow you to stop copying a trader at any time and withdraw your funds. However, the action may not be instant and you may not be able to cancel a trade that’s already been placed.

• How does copy trading work with eToro?

  On eToro’s platform, you can browse its range of traders and even sort and filter by performance or risk. There is the option for eToro to help narrow things down and match you with traders to copy after you answer a few questions. Using eToro’s CopyTrader feature is fairly straightforward and you can start with $200. It’s free to use and you can start or stop copying whenever you want.

• Are copy trading platforms safe?

  If you use a platform regulated by the FCA, your funds may be protected up to £85,000 with Financial Services Compensation Scheme (FSCS) protection. However, this only covers your cash deposit should the brokerage go bust. If you copy a trader and they have a bad streak, you could lose all your money and there’s no protection for this, it’s on you.

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.