What Is Copy Trading? How It Works, Risks and Choosing Providers
Copy trading looks easy, but are you unsure whether you can really leave it to someone else?
In short, understand how it works and the risks, and set your criteria for choosing a provider and your loss limit before you start.
This article covers how it works, differences from similar services, costs, how to choose, risks, tax and how it relates to cashback.
Key takeaways
- Copy trading automatically copies a provider's trades into your own account.
- Past results do not guarantee future profits, and watch for execution price gaps and changes in a provider's approach.
- Check providers by track record, max DD and number of trades, and decide your maximum loss limit first.
In short: choosing well and setting a limit are the keys
- It automatically copies another person's trades into your own account
- Past results do not guarantee future profits
- Check providers by period, maximum drawdown, number of trades and so on
- Decide your maximum loss limit before you start copying
How copy trading works
Copy trading automatically replicates the trades of a signal provider (strategy provider) into a follower's account. Followers get trades placed without analyzing the market themselves.
The provider places the orders, and the funds stay in the follower's own account. This is the big difference from arrangements where you hand over your funds.
- 1
Find a provider
From a broker's or service's list, look at results and trade details to pick candidates.
- 2
Set the copy conditions
Decide the copy ratio and the maximum loss you will accept, then start.
- 3
Trades are copied automatically
The provider's entries, closes and stop-losses are reflected in the follower's account, too.
- 4
Check results regularly
If results change, consider reviewing your settings or stopping the copy.
Differences from similar services
Similar mechanisms include social trading, PAMM and MAM, and EAs (automated trading). They differ in where the funds are kept and who makes the decisions.
| Type | Where funds are kept | Who decides trades | Features |
|---|---|---|---|
| Copy trading | Your own account | The provider (copying is automatic) | You decide the copy ratio and when to stop |
| Social trading | Your own account | You (using others' trades as reference) | Mostly viewing, and copying is often manual |
| PAMM / MAM | Deposited into the manager's account | The manager | Profit and loss are split by the share of funds you deposited |
| EA (automated trading) | Your own account | A program | You choose the logic and do the settings yourself |
Availability and specifications differ by broker. Before using it, check the details on the official page.
Costs of copy trading
The types and levels of cost differ by broker and provider. Always check the official page before you start copying.
- Performance fee: a set share of profits paid to the provider when you make a profit
- Volume fee: paid to the provider according to trading volume
- Spread: a cost on each trade, the same as in normal trading
- Fixed costs such as monthly fees: may apply depending on the service
Ratio settings and deciding the maximum loss
With copying, you decide how the provider's trade size is reflected in your account. The two typical methods are fixed lot and fund-proportional.
| Method | Idea | Suited to | Note |
|---|---|---|---|
| Fixed lot | Copies at a set lot size regardless of the provider's trade | When you want loss amounts to be easy to predict | The lot size does not change automatically as your funds rise or fall |
| Fund-proportional | Changes the lot size to match the fund ratio with the provider | When you want a profit and loss ratio close to the provider's | If the provider's funds are small, the lot size is small too |
If you can set a maximum loss, first decide what percentage of your account funds you will accept. A setting that stops copying automatically at the limit makes it harder for losses to spread.
The idea of how much to risk on one trade is also covered in a related column. Available setting features differ by broker.
How to choose a provider
Six indicators to check
| Indicator | What to look at |
|---|---|
| Track record length | Is it too short? Does it include periods when market conditions changed? |
| Maximum drawdown (max DD) | How much, as a percentage, have the funds ever fallen? |
| Number of trades | Is it so low that the results could be by chance? |
| Average holding time | Is the trading speed one you can accept? |
| Trading capital | Were the results built on an extremely small amount of funds? |
| Use of stop-losses | Does the provider trade with stop-losses in place? |
Warning signs
- Results just jumped, and the period is short
- Large unrealized losses held through averaging down or Martingale
- A large max DD, with a time when funds fell sharply
- So few trades that you cannot rule out chance
Popularity can concentrate on providers with good results, and the number of copiers may grow. Many people split their funds rather than concentrating on one.
Risks of copy trading
- Past results do not guarantee future profits
- Execution prices can differ between the provider and the follower
- If the provider's account type differs from yours, results change
- The provider may change their logic or stop trading
- In a sudden market move, losses may exceed what you expected
Do not leave it entirely to others
Copying runs automatically, but responsibility for gains and losses is yours. Use it on the premise that you check results and decide when to stop yourself.
A difference in execution price is called slippage. Because trades are copied with a time lag from the provider, small differences can appear.
Thinking about tax
For Japanese residents, copied trades are your own trades. Gains and losses may be subject to reporting as your income. This section is written for Japanese residents.
How copy trading relates to cashback
Many cashback systems calculate returns from trading volume. Whether volume generated by copying is eligible differs by broker and account type.
Return amounts are not yet confirmed, and we will post them on each broker's page at launch. Avoid raising your copy ratio for the sake of returns.
Enter your win rate and profit-to-loss ratio to check the expectancy of your trading. It is also a guide when you look at a provider's results.
Calculate expectancyFAQ
Q.What is copy trading?
It is a mechanism that automatically copies another person's (a signal provider's) trades into your own account. The funds stay in your account, and you decide the copy ratio and when to stop. Availability differs by broker.
Q.Will I definitely make money with copy trading?
Not necessarily. Past results do not guarantee the future, and losses can occur. Set a maximum loss limit and use it on the premise that you check results and decide when to stop yourself.
Q.What should I look at when choosing a provider?
Check the track record length, maximum drawdown, number of trades, average holding time and trading capital. Be careful right after results suddenly jumped, or with a style that holds large unrealized losses.
Q.Do I need to report taxes on copied trades?
For Japanese residents, you may need to report them as your own trades. Details such as how fees are treated depend on your situation, so check with the National Tax Agency of Japan or a tax accountant.
This article is for information purposes only and is not investment advice. Conditions may change, so please check each broker's official page for the latest information. Offshore FX and CFD trading carries a risk of losses exceeding your principal.
