The Concept of Copy Trading

Copy trading was largely a spin-off of both the social trading system and the automated trading systems. In other words, some practices from both systems were merged into what has emerged as today’s copy trading system.

Many traders are still confused as to whether social trading and copy trading are one and the same thing. While there is a lot of similarity between both systems, there is actually a major difference: copy trading does not involve the human interaction that goes on in social trading platforms. The Follower traders are basically copying what is being done by the Copied Traders and getting their trades directly replicated on their trading accounts in an automated fashion.

You may also ask: what differentiates the system of copy trading from the automated trading robots? The difference is that when using automated robots, you are simply paying for a provider to implement the strategies or systems they are selling on your platforms. You do not have a choice: what they provide is what you get. With copy trading, you have a portal which features hundreds of traders whose systems and trade strategies you are at liberty to choose from. You have the power of choice.

 

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Who are the Major Players in the Copy Trading Ecosystem?

The copy trading ecosystem is dominated by the following players:

  1. The Copied Traders: A copy trading ecosystem relies heavily on the presence of experienced and profitable traders known as the Copied Traders. They are basically the traders who are featured on the copy trading Leaderboards. In order to qualify as a Copied Trader, you must have an extensive history (at least 1 year) of profitable trading. Lately, some copy trade platforms have started to implement a Risk Score system, which determines how risky a Copied Trader’s system will be to Followers. Copied Traders with systems that are deemed too risky will be deleted from the Leaderboard.
  2. The Copy Trade Platform Providers: These are the companies which provide the copy trade portals that enable Leaders and Followers to interact. These companies can either be third party providers or can be the forex/binary options brokers themselves. Third party providers work with a group of brokers to provide this service. There is no advantage in using one over the other in the real sense. Whatever the case, ensure that the brokers used are regulated brokers with a good track record.
  3. The Followers: The Followers are the traders who copy the trades generated by the Copied Traders. The Followers are given the freedom to choose whatever trader or system to copy which suits their objectives. However, it is essential that Followers understand the parameters that are used in making a selection of the right Copied Traders.

 

How the Copy Trade System in Forex Works

The Call/Put trade type is the commonest trade type used in binary options copy trading systems. Copy trading systems in forex usually do not feature pending orders; they feature market orders (Buy/Sell). Trades are usually copied onto the accounts of the Followers using an automated process. The system is responsible for copying all trade parameters (including the Stop Loss and Trade Profit). The integrity of this process depends on sound programming techniques and maintenance of the platforms.

The copy trading portal is programmed with a front end and a back end. The Copied Traders, Followers and Copy Trade Platform Administrators will have different views of the control panel, with different levels of permissions to access their interfaces. Followers will be able to see a list of the Copied Traders they are following and adjust settings such as capital allocation, risk management settings, etc. Administrators have the ability to manage the accessibility of the Copied Traders and Followers, as well as other system settings.

 

The entire system is hosted on web servers, which are built with secure technology such as SSL technology to protect the database of users (Copied Traders and Followers alike).

 

The front end is visible to both Copied Traders and Followers. The front end provides Copied Traders with the opportunity to put up their profile and their account information, so that their performance stats can be compiled for viewing by Followers. The front end also provides Copied Traders with information on how many Followers are copying their trades, and how much money they have earned from this activity. The front end also provides Followers with the tools to search for the Leaders/Copied Traders and evaluate their statistics. Adjustment of settings such as the capital allocated can also be made here.

Then there is the back end of the copy trade software. This is the engine room of the entire process. Trades from Copied Traders are automatically matched to their Followers using the infrastructural backbone of the back end.

 

The Process

At this stage, it is assumed that the trader has opened the trading account, signed up with the copy trade platform and is ready to start copying trades. It is also assumed that there are loads of potential Copied Traders whose portfolios are visible for viewing by the Followers.

Step 1

The copy trade process starts with the Follower scanning the profiles of several Copied Traders who are listed on the Leaderboard. The Follower (whom we shall name John Trader), picks a trader from the Leaderboard, whose trades are to be copied automatically. We shall call this copied trader Brad Leader.

Step 2

Brad Leader is about to execute a long trade on the EUR/USD at price of 1.1123, with Stop Loss (SL) at 1.1083 and Take Profit (TP) at 1.1183. He also wishes to execute a Put trade on the USDJPY at 110.84, with a 15-minute expiration.

As soon as Brad Leader clicks on his computer buttons to execute these trades, the information is fed in a matter of milliseconds to back end of the copy trade portal. This features a control panel which displays all the trade parameters as have been defined by Brad Leader in his forex and binary options trades. By the code provided by programmers, these parameters are fed into the interface and blasted out to the trading accounts of all Followers such as John Trader who follow Brad Leader’s system.

Step 3

John Trader then sees the trades being implemented on his trader account automatically, with all parameters intact.

 

Conclusion

The process by which copy trading works to take trades from Copied Traders to Followers is what has been described above. This process is repeated for every single trade information exchanged between the Copied Trader and Follower within the copy trading ecosystem of the provider/broker. The strength of the system servers as well as the latency within the system will ultimately determine the speeds at which these transactions occur.