March 17, 2021

Why you should not Mirror Trade

What Is Mirror Trading & How Does It Work?

Mirror trading can best be described as a trading methodology that allows traders to copy the trades of experienced traders. It involves copying and executing the same trades as the supposed expert traders, and all of these (speaking of copy or mirror trading) happens in real-time.

While the idea of copying or mimicking other traders’ strategies and executing them in your trading account may seem incredible and feel like the best thing in the world, it is not.
Some traders have argued that mirror trading prevents them from making emotional decisions. Since it’s an automated process, they don’t have to worry about missing out on trade opportunities in the market.

But then, its disadvantages outweigh whatever advantages people attribute to it. For instance, whoever or whatever trading platform you are copying your trades from are trading based on a plan/strategy that craters to their risk tolerance, investment goal, investment goal, and the type of asset that suits their investment goal.

On the other hand, you (the mirror trader) are simply duplicating whatever they are doing at their end without much information about what informed their decision to take specific trades and how to manage risks or exit a trade if things don’t go as planned. It is more like flying blindly, and it won’t take long until one runs into a brick wall.

What are the pros of mirror trading?

As we mentioned earlier, reduced emotion is arguably the most popular benefit of mirror trading. And one can easily understand why. Mirror trading can be beneficial to new-day traders who struggle to put their feet on the ground in trading.

While mirror trading takes most of the burden and worries about market fluctuations off your shoulders, it’s not a full-proof strategy. To become a profitable day trader, you must learn to execute trades on your terms.
It would be best if you decided what trades or financial instruments/assets you want to invest in and develop a strategy that reflects your trading persona, especially your risk appetite and how much capital you will enter the market with.

This brings us to the million-buck question;

What are the limitations of mirror trading?

It is almost impossible to discuss the limitations of day trading without touching on why you should not mirror trade. Mind you, there are a handful of people who claim mirror trading is working for them—underscore the word handful.
If only a handful of people say that mirror trading is working for them, it is an indicator of the potential risks involved in mirror trading.

The top reason why you shouldn’t mirror trade.

While some brokers or self-acclaimed pro-traders may offer some form of explanation to make you think their strategy is profitable, that’s not always the case — it’s always not the case.
As you may already know, trading is based on continuing development and backtesting of strategies that will reflect the ever-changing events in the market. As such, one has to master the principles of technical and fundamental analysis to keep abreast of market trends.

What does that tell you?

It points to the fact that mirror trading strategies only produce seasonal results. How?
They (speaking of mirror trading strategies) only provide profitable results during certain market conditions. As you may already know, before one can regard a strategy as profitable, it must have performed exceptionally over a period of time (say 12 months) with a specific maximum drawdown limit.

Over the years, finding a mirror trading strategy that checks all of these boxes is like finding a needle in a haystack. It’s not unusual for a mirror trading strategy to keep up with a trending market and miss its target when the market enters into a range.

That means that you will have to constantly evaluate the robustness of a mirror trading strategy to test its profitability. But, considering how fast the market trend can change, how much time can you afford to test all the mirror trading strategies that come your way?

Risk assessment

Virtually every day trader wants to see his/her trades headed their way and hopefully close on the “blue side.” While mirror trading strategies can deliver winning trades, you are always in the dark about the risks involved.
Recall that mirror trading is an automated process, and some brokers or mirror trading platforms don’t need you to be there to trade with your account. Here is an example to paint a clearer picture.
A mirror trading strategy may seem profitable initially and register up to 300% ROI over a period of time. Which is seems great. Right?

If you take a second look and perform more analysis, you may have to endure up to 80% drawdown on your capital to achieve such a result. Now, these are the risks that trail aligning yourself with another trader’s move — mirror trading.

But that’s not all.

Another reason why you should not mirror trade or tie your trades to another trader’s account is that no day trader is successful 100% of the time, and they could switch their trading plan at any time.

For example, a trader may stick to a particular trading plan until the journey starts to get bumpy and they abandon ship. Sometimes, they become emotional and start making rash decisions like increasing lot sizes and turning their backs on their trading plan. As a result, putting a strain on your trading account and running it aground if you hold on for too long.

In conclusion

Having highlighted the complicated nature of mirror trading, you should know by now that there is more to trading than mirroring or copying trades. It would be best if you were in control of your capital and how much risk you can take at any time.
There are several other trading strategies out there that will yield more potential profits than mirror trading. First, however, you have to invest more time and effort in learning and gaining experience. And that’s the essence of day trading education.

Instead of leaving your account at the mercy of another trader, you can take charge and get your account where you want without constantly losing sleep over the decision someone is making at the other end of your screen.