How copy trading works

Copy trading is like a cheat code for trading, allowing an investor to trade like a seasoned pro.

If you've heard about copy trading and want to try it, read on for details about how it works, reputable trading platforms that support it, details on alternatives, and more.

What is copy trading?

Copy trading uses software to buy and sell on your behalf, copying the actions and positions of another, preferably seasoned and successful trader.

In the past — and even today — people interested in value investing followed Warren Buffett and invested in the same stocks he invested in. The goal was to replicate or mimic his portfolio on the presumption that what's good enough for Buffett is good enough for anyone else.

Copy trading brings that idea into the 21st century. Thanks to online trading platforms and sophisticated copy trading software, it's easy to follow and copy successful traders.

In effect, a beginner can trade like a professional with copy trading.

Who can copy trade?

Historically, institutional investors engaged in mirror trading, using analytical software for this purpose. They were trying to “mirror” successful investors’ strategies that worked well for them in the past.

Today, anyone — including new and inexperienced investors — can do it online, from anywhere in the world, including from the comfort of your own home.

There is one caveat though since, on some platforms, there is a minimum recommended investment to copy a trader. This is more common when copying a forex trader since they tend to use high frequency trading strategies that need a substantial amount of capital to generate a small profit per trade.

What is leveraged copy trading?

Leveraging is a strategy in which you, the investor, can multiply your buying power to have a position with more exposure to the market compared to the smaller amount of invested capital. In leveraged copy trading, you copy trade using borrowed money.

To put it another way, leveraged copy trading is simply copy trading with leveraged positions. Think of leveraged copy trading as copy trading on steroids. It is also a natural next step for those who have already tried copy trading but want to grow their profit faster.

Copy trading with leverage is not as widely available, presumably because copy trading is aimed at beginners and leverage increases risk. Those platforms that do support copy trading with leverage tend to be geared towards forex, crypto, and commodities trading.

Can copy trading generate passive income?

Yes, you can use copy trading to generate a passive income. However, there are considerations.

1. Principal trader performance. Trading platforms vet prospective principal traders with stringent checks. But even the best traders have off days. Be careful, choose wisely, and diversify so that you aren't dependent on just one trader's performance.
2. Capital investment. Copy trading with a small amount of money means it will take longer to generate a noticeable amount of profit.
3. Leverage. You could copy trade with leverage, but doing so opens you up to risk. Leverage can grow your account quickly, or cost you dearly.

Pros and cons

Alternatives

Copy trading may be the original, but it's not the last way to invest passively.

Trading bots

Trading bots are bots or software used to automate trade execution.

These bots or programs execute your orders according to criteria to yield specific results in their trades. The number of trading bots on the market is increasing steadily, as is their sophistication and popularity. Many bots use AI to decide on which trades to place. Most of them come with predefined rules that require virtually no setup, but some bots can be configured to your trading strategy's exact requirements. There are even self-hosted bots that you can run locally to execute complex trading strategies.

For more information, see our roundups of the best stock trading bots and best crypto trading bots.

Social trading

Social trading is crowdsourcing ideas for your trading activities.

Once you find and become a member of a social trading community, you can use that trading community as your investment and trading support system. A social trading community is a place to learn about trading, share ideas, and discuss trading strategies.

Social trading communities may be integrated as part of a trading platform, but many operate independently on a dedicated website, forum, or social media.

The most famous example of a social trading community is WallStreetBets, where participants discuss and speculate on stocks and trading options.

FAQs

How do I get started with copy trading?

Although the exact process may vary among different platforms, here are the basic steps to start copy trading.

1. Select a trading platform. There are some listed on this page.
2. Select asset class to copy trade. This can be shares, commodities, foreign exchange, or cryptocurrencies.
3. Open a trading account online. You'll need to provide personal and contact details.
4. Optional. Use a demo account for a dry run before diving in at the deep end.
5. Fund your account. How to do this — with bank transfers, crypto wallets, credit cards, etc. — depends on your chosen trading platform.
6. Research trader performance. Most popular platforms have their own way of displaying a trader's past performance.
7. Choose who to follow. Filter and shortlist traders that have a good fit with your investment and trading goals.
8. Decide on how much you want to invest using the copy trading strategy.

Once you choose who to follow, the copy trading platform automatically replicates your selected trader’s trading positions in your trading account. If you like the results, you may add more funds or reduce your exposure to 'non-performing' traders.

How to choose traders for copy trading?

You can judge the popularity and performance of traders on most copy trading platforms. Look at trader performance, follower numbers, risk levels, profitability, return on investment, and the total amount of funds they manage. Who you choose to follow is entirely up to you. But remember that the popularity of some traders displays the wisdom of crowds.

Whatever your decision, remember the basic wisdom for all investing: diversification pays. Avoid putting all your eggs into one basket. Keep your portfolio diversified and avoid investing too much in individual traders.

Follow several traders if you can. This is not as easy to do because some copy trading platforms limit the numbers of traders you can follow with a single account (more the reason to research copy trading platforms that offer a wide choice of asset classes and a wide range of traders to follow).

You can always increase amounts on traders that perform well and reduce exposure when traders do not perform to your expectations.