This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
Copy trading is a strategy where a trader selects a specific strategy, a portfolio, or a trader to copy, and the platform replicates the selected approach in the copier's account. The difference between copy trading and social trading is the level of involvement: social trading involves following a trader's actions, while copy trading involves following a predefined strategy or portfolio.
The approach is most useful for traders who have found a strategy that works but do not have the time or the discipline to execute it themselves. The copier delegates the execution to the platform, and the platform handles the timing, the sizing, and the risk management of the copied positions.
How copy trading differs from social trading
Copy trading is about copying a strategy or a portfolio, not a trader. The strategy is defined by the strategy provider (another trader on the platform), and the platform replicates the strategy's positions in the copier's account. The strategy provider is not actively managing the copier's positions; the platform is doing the replication based on the strategy's rules.
The key difference is the flexibility. A social trading follower copies every position the followed trader takes, and the follower cannot customise the copy. A copy trading copier can adjust the copy ratio, the risk level, and the asset classes to match the copier's profile.
The second difference is the transparency. A social trading follower sees the trader's metrics but not the trader's reasoning. A copy trading copier sees the strategy's rules, the strategy's track record, and the strategy's risk metrics, and the copier can evaluate the strategy on its own merits.
How to choose a strategy to copy
The first criterion is the strategy's track record. The track record should be at least 12 months long, with a consistent return profile and a manageable drawdown. A strategy with a 6-month bull market track record and a 50% drawdown is not a strategy that has been tested in different market conditions.
The second criterion is the strategy's transparency. The strategy provider should disclose the strategy's rules, the asset classes, the leverage, the stop levels, and the risk management approach. A strategy that does not disclose the rules is a black box, and the copier is taking the provider's credibility on faith.
The third criterion is the copier's own risk profile. A strategy with a 30% annual return and a 20% drawdown is a different risk profile from a strategy with a 15% annual return and a 5% drawdown. The copier should choose a strategy that matches the copier's tolerance for loss, not the strategy with the highest return.
The costs of copy trading
The cost of copy trading is the sum of the strategy provider's fee, the platform's fee, and the broker's commission on the copied trades. The strategy provider's fee is typically a percentage of the return (10-30% of profits) or a fixed monthly fee. The platform's fee is typically a spread on the trades or a flat monthly fee.
The fees can eat a significant portion of the return. A strategy that produces a 20% annual return, with a 20% performance fee, a 1% platform fee, and standard broker commissions, may leave the copier with a 14-15% net return after fees and commissions. The copier should calculate the all-in fee before committing a meaningful amount.
The fees also include the spread on the copier's trades. The platform may execute the copy trades at a wider spread than the copier would get by executing the same trades manually. The spread is a hidden cost that is charged on every trade, and the spread compounds with the number of trades the strategy makes.
The risks of copy trading
The first risk is the strategy provider's incentive. The strategy provider is paid a performance fee, and the performance fee creates an incentive to take more risk than the copier would take on their own. A strategy provider who is paid 20% of the profits and 0% of the losses is incentivised to take asymmetric bets.
The second risk is the platform's reliability. If the platform goes offline during a volatile session, the copier's positions are not updated, and the copier may miss a critical trade. The platform's uptime record is a useful metric.
The third risk is the regulation. Copy trading is regulated differently in different jurisdictions. Some regulators require the strategy provider to be registered as an investment advisor, and some regulators prohibit copy trading altogether. The copier should check the regulatory status of the strategy provider and the platform before committing funds.
Common questions about copy trading
Can I stop copying a strategy at any time? Yes, most platforms allow the copier to stop copying at any time. The existing positions remain in the copier's account and must be managed by the copier manually.
What happens if the strategy provider stops trading? The copy is usually paused until the provider resumes or the platform removes the strategy. The copier's existing positions remain open, and the copier must manage them manually.
Is copy trading regulated? Copy trading is regulated in some jurisdictions (the UK, the EU, Australia) and unregulated in others. The copier should check the regulatory status of the platform and the strategy provider before committing funds.
Related resources
Where to start
If you are evaluating copy trading as a strategy, the most useful features to compare are the strategy provider's track record, the fee structure, the platform's regulatory status, and the available strategies. Our broker comparison lists the brokers that offer copy trading and the available features, which together tell you what the platform looks like before you select your first strategy.