Mirror trading is not a trading strategy so much as it is a means of choosing one. Created in the early 2000s for stock exchange markets, it allows a trader to automatically copy strategies of more experienced traders, strategy makers.
What is Mirror Trading?
One can choose a strategy based on its profitability, risk, assets utilized and the success rate of the trader using it, so that lack of experience is compensated by following an already successful strategy.
Since its invention, mirror trading has gained popularity, and the rising crypto market has adopted it along with other features of conventional trading.
In the cryptocurrency market, mirror trading comes in the form of social trading platforms, where traders can draw from the community as well as copy each other’s strategies in the same way as one would in stock mirror trading.
While it is applicable and useful, one must keep in mind a number of differences between the crypto market and the stock exchange market, which impacts the functioning of mirror trading.
Risks of mirror trading in crypto markets
The crypto asset market is extremely volatile, and many trading strategies are not only time sensitive, but also suffer when large numbers of traders attempt them. If such a strategy is mirrored by many users, its value is diminished and most of the people who engage in it will end up at a loss.
Liquidity of assets is also an issue: some altcoins may be unavailable in the necessary quantities for the number of traders that mirror trading brings along.
While these issues are important, there are strategies that can work effectively when mirrored, and if a trader’s analysis is good enough to identify those, they can use mirror trading to their benefit.
However, for less experienced traders, who are the prime audience for mirror trading in the conventional market, this may present an issue. They may not possess the skill necessary to evaluate strategies on their own and will, therefore, have to rely on the characteristics provided by strategy makers themselves.
Benefits of mirroring experienced crypto traders
As the crypto trader is not required to come up with a strategy themselves, there are a number of risk factors presented in regular trading that are eliminated in mirror trading. For instance, one does not need to worry about the possibility of making emotional decisions.
In fact, the trader no longer needs to follow the market, only check the outcome of the strategy they are mirroring and decide whether or not it is satisfactory. All necessary parameters are provided by the strategy maker, including risk factor and profitability, meaning the trader needs to make no calculations except for general money management.
The only exception would be a swift change in market trends, which can change the balance of the factors mentioned above. If a strategy is verified as having low risk in a stable market and yields profit, the trader can expect a good return, but the same strategy in a different market may have entirely different properties.
While the strategy maker will adjust to the market change, the trader mirroring them may want to switch to a strategy that has the desired characteristics in the new market situation.
Mirror trading can be a useful tool in the crypto market, but comes with issues that have not been seen on stock exchanges. When using mirror trading, one must keep in mind the viability of the strategy one is choosing in the current market situation, paying particularly close attention to the risk factor and liquidity of the asset that is being traded.
For inexperienced traders, this can prove to be a challenge, although the fact that strategy makers describe all the characteristics of their strategies means that mirror trading can also kickstart a trading career for someone not yet ready to go out on their own, especially when choosing straightforward, low-risk strategies with common assets.
This is by no means a risk-free tool, but and is no guarantee of success, and it is likely less useful for large gains than for small ones.