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Unlike mirror trading, a method that allows traders to copy specific strategies, copy trading links a portion of the copying trader's funds to the account of the copied investor. Any trading action made thenceforth by the copied investor, such as opening a position, assigning Stop Loss and Take Profit orders, or closing a position, are also executed in the copying trader's account according to the proportion between the copied investor's account and the copying trader's allotted copy trading funds.
The copying trader usually retains the ability to disconnect copied trades and manage them themselves. They can also close the copy relationship altogether.
Copy trading has led to the development of a new type of investment portfolio, which some industry insiders call "people-based" portfolios. People-based portfolios differ from traditional investment portfolios in that the investment funds are invested in other investors, rather than traditional market-based instruments.
Different copy trading platforms employ different copy trading logics. These usually vary in regards to the minimum copy trading amounts, the minimum amount for a copied trade, and the way money in/out operations on behalf of the copied trader are reflected in the proportions between the copied-copying accounts.
Some platforms also enable traders to place Stop Loss orders on the entire copy trading relationship, allowing traders to control the risk of their copy trading activity based on the individual copied investors
Compared to Social Trading
Various financial trading operators offer copy trading capabilities as part of a larger social trading platform. Social trading usually includes the ability to connect with other investors using the platform in social ways (comments, likes, link sharing etc.) as well as find potential copy trading candidates by viewing investors' performance statistics.
Some platforms also provide ways to sort and rank traders according to certain performance parameters, thus making it easier for traders to find potential investors to copy.
Potential Regulatory Issues
In the United Kingdom the Financial Conduct Authority (FCA) has raised concerns regarding copy trading as they deem the firms offer copy trading to be effectively unregulated investment managers. As such, the FCA has sent letters to those companies providing copy trading services notifying them of their intention to classify them as investment managers.
A 2012 MIT funded study directed by Dr. Yaniv Altshuler, showed that traders on the eToro social investment network who benefited from "guided copying", i.e. copying a suggested investor, fared 6-10% better than traders who were trading manually, and 4% better than traders who were copy trading random investors of their choice.
As of 2013, Dr. Altshuler has been collaborating with Professor Alex "Sandy" Pentland of MIT on a study that aims to find a "sustainable" social trading mechanism in the aim of fine tuning traders' ability to benefit from copy trading.
Since 2010, it has become an increasingly popular feature among online financial trading brokers as a way to enable less experienced traders to benefit from the trading decisions of investors whom they deem successful. Prominent copy trading providers include Share4you, Darwinex, eToro, FX Copy, ZuluTrade, Ditto Trade, Tradeo, Bretton Prime and many more.
There is also a new type of technology used which is similar to copy trading. This new technology is referred as Crowd Trading and it applies the concept of group intelligence to Online Trading.