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What is Mirror Trading: Automated Investment Strategies

2021-12-16 05:08:06

The massive size and complexity of the crypto market can make crypto investing intimidating, especially for new investors. One way to take some of the FUD out of crypto investing is to start with mirror trading. Mirror trading allows the new investor to feel more secure in experimenting with crypto investing. Through this approach, an investor can see professional trading first-hand and learn how to become more efficient and profitable in trading cryptocurrencies.

mirror trading

What Is Mirror Trading?

Mirror trading refers to automatically “mirroring” or “mimicking” the trades of other traders, such as professional traders, exchanges, money managers, or financial institutions.

To establish a mirror trading account, an investor subscribes to the services of a trading service provider (like a crypto exchange). Trades within this mirror account will then be automatically executed based on a preselected and predefined investment strategy.

How Does Mirror Trading Work in Crypto?

To engage in mirror trading, you must first set up an account with a trading service provider. Typically, trading service providers offer various types of professional trading platforms, each with a different trading style or trading profile.

Next, you select an investment strategy from the platforms provided. For example, are you interested in capital preservation? Are you seeking a more aggressive investment strategy? Or, do you want to focus on a specific type of cryptocurrency (e.g., altcoins, stablecoins, or tokens)?

After selecting a strategy, you select a professional trader whose trading profile or trading objective aligns with your overall investment strategies and risk tolerance. For example, if you’re seeking a more conservative investment strategy, you’ll select a trading professional whose profile takes a more conservative approach. A professional trader’s profile may summarize the trader’s profitability, risk level, type of assets utilized, and/or the trader’s success rate.

Once you’ve finished this setup, your account will automatically duplicate or “mirror” the timing of the selected trading professional’s buying and selling activities. This is usually achieved through an algorithm that automatically processes trades in real time. Your account’s resulting performance will “mirror” the professional trader’s trading performance.

What Are Advantages of Crypto Mirror Trading?

  • Minimize emotional stress: New crypto investors may not be crypto native, and may not even be experienced in investment of any type. With crypto mirror trading, the new investor duplicates an experienced crypto investor’s market moves, minimizing the potential emotional stresses that new investors so often experience.
  • Gain investment confidence: Emotional strain can also be fueled by how young the crypto market is, having existed for only a little over a decade. Mirror trading allows a novice investor to gain investment confidence by learning from the trading strategies employed by seasoned and proven trading professionals. As just one example, novice investors will learn basic trading techniques, such as the execution of market orders, limit orders, and/or stop-orders.
  • Reduce market monitoring time: Mirror investing also reduces the need to continuously monitor the volatile crypto markets. Frequently, investors do not have the time or the patience to monitor the up and down price action of cryptocurrencies. Meanwhile, professional traders get paid to monitor the markets all day, every day.
    This is especially important when monitoring cryptocurrencies. For example, ordinary stock markets tend to be open during limited hours and weekdays, and also have holidays. The crypto market, however, is open 24/7 year-round. Therefore, with crypto investing, an engaged investor normally needs to keep monitoring activity around the clock. Mirror trading relieves investors of this continuous monitoring requirement, since the investors’ actions are executed automatically.
  • Check and track performance: Mirror trading services will normally have a published performance history or existing track record for an investor to review. A trading professional’s past performance can give you at least a general idea of anticipated returns. Of course, past performance is no guarantee of future success. This is particularly true given the volatile nature of cryptocurrencies.
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What Are Disadvantages of Crypto Mirror Trading?

  • Relatively small performance data set: There is not much historical pricing data for cryptocurrencies. Indeed, the seminal cryptocurrency Bitcoin was only recently introduced by way of a 2008 whitepaper. Mirror trading performance data therefore has existed for only a little more than ten years. Given this short time frame, investors do not have much data backing up how mirror trading would perform given certain market conditions, such as a lengthy bear market.
  • Potential liquidity issues: Having a large number of investors that duplicate or mirror a given professional trader might raise liquidity issues. For example, some types of cryptocurrencies may not be available in the necessary quantities to support the demand for a large number of mirror investors.
  • Gains are not guaranteed: In addition, with mirror trading, gains are mirrored. But losses are mirrored as well. Therefore, an investor should recognize that gains are not guaranteed. If the professional trader experiences losses, the mirror investor experiences losses as well.
  • No control over trades: With mirror trading, buying, and selling is automatic. Investors are not in immediate control of the positions being executed within their accounts. Trades are placed automatically, no matter the present state of the crypto marketplace. Therefore, investors must place a lot of trust in the professional trader whose trades are being “mirrored.”

How Is Mirror Trading Different from Copy Trading?

In copy trading, you identify a successful professional trader’s trades, and evaluate them to determine whether you want to copy them. Copy traders follow professional traders through social trading systems or social networks, such as crypto Twitter. Professional traders use these social platforms to describe and explain their investment ideas, philosophies, and trade placements.

Unlike mirror trading, copy trading allows you to have selective control over your investment decisions and the timing of your investment decisions. With copy trading, you identify what potential trades interest you, and then decide if and when you will place a similar trade. In contrast, mirror-trading trades are placed automatically, whether you agree or disagree with them.

Mirror trading might suit those who have little time to investigate trades and investment options. In contrast, copy trading might suit those who have time to review trades and perform a bit of research.

One advantage of copy trading is that you are not committed to following one particular trading professional. So copy trading allows you to experiment with different trading strategies offered by different trading professionals.

With mirror trading, trading flexibility is usually quite limited. You are generally locked in to the particular trading style of a selected professional for the term of your mirror trading account.

One potential disadvantage of copy trading versus mirror trading is the timing of trades. With mirror trading, your trades will take place automatically, in real time. With copy trading, you must first identify trades that you might copy, evaluate them, and then execute the trade. With the fast moving price actions of cryptocurrencies, this time lag could be a disadvantage.

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Is Mirror Trading Illegal?

No law specifically prohibiting mirror trading has been identified. Mirror trading is legal in the US as long as the investor uses a regulated broker or trading platform. However, some countries might have general crypto trading restrictions that could relate to mirror trading. For that reason, it’s safest to check your local regulations before you begin mirror trading.

In recent years, some stories of “fraudulent” mirror trading have emerged. Some of this negative press stems from the actions of the crypto firm Mirror Trading International (MTI). In 2017, it was reported that MTI was involved in a money laundering scandal. By association, some people came to believe that “mirror trading” meant fraudulent activities.

That same year, Deutsche Bank was fined $630 million by regulators for trades that were referred to as “mirror trades.” Again, these trades were related to laundering money through fraudulent activity – not “mirroring” the trades of an experienced trader.

What Is the Future of Crypto Mirror Trading?

Recently, the crypto market cap eclipsed an all-time high of over $3 trillion. And with some institutional investors projecting that Bitcoin may reach $1 million per coin, interest in crypto investing will continue to grow. This is especially true among the “do-it-yourself” investor crowd, particularly those experiencing FOMO. These are investors who make investment decisions by themselves, rather than consulting an investment professional. What helps drive these investors to seek their investment independence is the emergence of 0% commission trading options, such as mirror trading.

An “I can do this” attitude coupled with “free” trading platforms will likely increase demand for crypto mirror trading as digital assets become more accepted in the marketplace and as investment options.

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Mirror trading offers investment advantages to novice crypto investors. Before you engage in mirror trading, look into the related laws in your region. If it is not legally restricted where you live, identify a targeted mirror investment strategy. Then, research available investment options.

To inform your decision, study the performance metrics of each mirror trading service platform. Set out an investment budget and establish a mirror trading account. Then, since your mirrored investments are automatically placed, relax and let the mirror trading account automate your crypto investment decisions. And finally, review the profitability and performance of your chosen trading account. If you are not satisfied, review your other investment options and choose a different trading professional whose results you wish to mirror.

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