If you're tired of looking for the perfect strategy, and sick of your emotions getting in the way – exiting too early on your winners and not pulling the plug on the losers - it may be time to consider mirror trading. Having become extremely popular in the forex market, mirror trading is a way to mirror or mimic the ways of winning traders. Sounds simple and useful enough, but before a trader begins throwing real money at a live mirror trading strategy there are a few things that need to be considered.

Mirror Trading
Mirror trading is a method of trading in which a trader selects from a host of trading strategies and personally selects which of those strategies they wish to implement on their accounts. The program/method for the strategy is then placed/executed on the traders account, so the strategy is traded the way it is supposed to be traded. The trader will be able to potentially select some variables for the program, but the ultimate goal of mirror trading is take the emotion of a trading system and leave the potential profits (or losses) to a method that is objective. (Most investors buy high and sell low, but you can avoid this trap by using some simple strategies, How To Avoid Emotional Investing.)

A trader may feel anxious about this approach, and program trading and auto trading can lead to apprehension. Yet, mirror trading is much more transparent than the traditional "trading bots" which generally scare retail traders.

The Advantages
Mirror trading is far more transparent than other automated trading methods. Some of the advantages include:

  • The trader selects a strategy, from potentially hundreds, which closely aligns with their goals for his accounts, retirement or financial ambitions.
  • Live results can be seen from the strategy before it is even implemented. People who sell these automatic trading bots will rarely release up to date performance summaries of their programs. Mirror trading strategies generally show updated performance daily, so the trader knows how a strategy has actually performed before using it. (Learn more about electronic trading in our Electronic Trading Tutorial.)
  • The trader can see additional criteria including what currency pairs are traded, how many trades the program has entered and exited (very important, because we want to see performance over many trades, not just a handful), the winning and losing percentage, how long the program has been live, average win and average loss. One of the most important stats is the maximum drawdown (in pips). This is the largest loss a trader would have experienced while using the program. This needs to be weighed against average wins and win percentage, as well as the amount of capital a trader has available. Traders must avoid systems where the maximum drawdown could wipe them out, no matter how good the other statistics look.
  • Emotions are taken out of the equation. A trader does not concern himself with when to enter and exit.
  • Generally (this may vary by broker and trading platform), trades are made whether the trader' computer is off or on. Therefore, it is very important a trader is comfortable with the strategy (or strategies) that is selected. (Read What should I look for when choosing a forex trading platform?)
  • The trader can continue to make manual trades in addition to the automatic strategy which has been implemented.

When looking at the advantages, it becomes very important that the trader breaks down what each strategy can offer him, and what it can take away. This can only really be determined if there is a long history and a large amount of trades which have been completed by the strategy. The results must also be live, not on a demo account. And most importantly, the losing trades of a strategy must not wipe out an account, or even lose a large percentage of the account.

The Disadvantages
It seems like a dream to have a program make money while you sleep. But there disadvantageous a trader needs to be aware of.

  • Not all reported results are from live trading. It is up the trader to read carefully how the results were attained, and if all of the trades which the strategy had signaled are being reflected in the results.
  • Markets constantly change. If a forex pair has been in a range for a long period of time, and the pair begins to trend, the results may not reflect how the strategy will perform in a trending market. (If you are following a range-trading strategy, you're better off with pairs that do not include the U.S. dollar. Find out why in Range Trade Forex With Non-U.S. Dollar Pairs.)
  • Results are generally based on the strategist account. A trader must be aware that if he is trading a much smaller account, he could be wiped out completely. Some will actually use this as a limit on the amount of money at risk. Still, several losing trades in a row may wipe out a small account, but only put a dent in a large account.
  • The strategy continues to operate until you choose to end it. This means a trader must be vigilant in watching in their account and performance.
  • Closed positions do not reflect the absolute risk to the trader. For instance, the maximum loss may be -100 pips, yet at one point a trade may have been offside 200 or 300 pips, for example. How much a strategy is willing to allow a trade to go offside is extremely important. (Learn more in The Stop-Loss Order - Make Sure You Use It.)
  • Summary results shown for a strategy are often inaccurate for live trading. Go through the trade history of the program to see which trades have actually been traded live. Dollar figure gains often include hypothetical gains accumulated during the initial testing or initial launch phase of the program.

How to Implement a Mirror Trading Strategy
Not all brokers offer mirror trading, therefore, a trader must first find a reputable broker who offers the service and opens the appropriate account, which allows and functions with mirror trading programs. Third-party companies also exist, which work with many different supporting brokers to place automated trades in the traders account. Because of this a trader may be able to use their current trading account, and not have to open a new one. The account is funded, or a demo account is used. The trader will then look through the available mirror trading programs, review the results and then select the strategies which they want to be traded on their account. (Learn more about advanced strategy topics in the Investopedia Forex Walkthrough.)

The trader will need to authorize the broker (or third party) to place the trades for the strategy selected in their account (the whole process should not take more than a week). Confirmation will be provided that the trade signals will be traded on the account. The trader then selects how many lots they would like to trade on each trade signal, as well as how many lots they can have open at any time (risk control). The traders can then sit back and watch if the strategy performs as the statistics indicate. If not, the strategy can be taken off the account at any time.

The decision of whether or not to use a mirror trading strategy is an important one. After all, it is your money. Closely scrutinize all the statistics, and make sure it is appropriate for your risk tolerance and capital available. Setting up a mirror trading strategy and the appropriate account is relatively straightforward, and will generally take less than a week. Before trading, be aware that markets constantly shift and past performance is not always indicative of future results. (There's risk in every trade you take, but as long as you can measure risk, you can manage it, check out Understanding Forex Risk Management.)