If you've just started investing, there's a decent chance the following thought may have crossed your mind.
Why should you waste the time and effort developing your own (probably subpar) trading strategy when you could instead just use the strategy of a better, more experienced trader?
That, in a nutshell, is the idea behind copy trading.
Also known as social trading, copy trading has become an increasingly popular strategy among investors due to the rise in low-cost, online trading apps and the growing role of social media in retail investing.
What is copy trading?
Copy trading does exactly what it says on the tin - it lets you copy the trades of other investors with the goal of profiting off their strategy.
Born out of mirror trades in 2005, where traders would copy automated trades, copy trading lets inexperienced investors potentially benefit off the trades of more experienced investors.
Many online trading platforms like eToro now also offer copy trading as a standalone feature.
How does copy trading work?
When you sign up to a copy trading platform, you'll be able to scroll through various investors that you can copy.
You should try to pick a trader that matches your personal risk tolerance and time frame.
After finding the right person to copy, you will need to select an amount to initially invest and how much you want to add when the person you're copying takes out a new position. After that, most of the process happens automatically on the broker's side.
Most popular copy trading platforms are set up to automate your copy trades, which means they will be processed as soon as the copied trader executes their own trade.
When choosing a copy trading strategy, you'll need to choose from a variety of features, including the following:
Trade entry. When the person you are copying takes up a new position, you can set your portfolio to automatically buy into the new position.
Take profits. Some brokers will allow you to set your portfolio up to automatically sell should it grow by a certain percentage. This will allow you to guarantee profits.
Stop loss. Should the portfolio fall, you can set it up to automatically sell, protecting yourself against losses. However, this will mean you're guaranteed to lose because you will sell when the price falls.
An alternative to copy trading through a broker is copy trading through a subscription or revenue-sharing model.
In this instance, you can sign up to a subscription and get share ideas sent to you, usually on a monthly basis. This again takes the guesswork out of investing. However, this process is a more manual one where you will need to physically buy and sell all the shares yourself.
You also have the option of manually tracking the strategy of a successful trader or investment company and trying to copy their approach through your own portfolio.
For example, say Warren Buffett's Berkshire Hathaway report that they have bought Apple shares. You could do the same with your portfolio and then readjust over time based on their announcements.
Who offers copy trading in Australia in 2024?
There are quite a few brokers and platforms that offer dedicated copy trading features:
eToro. Copy trade shares, CFDs, forex and crypto using its CopyTrader feature.
ZuluTrade. Trade forex, cryptos, commodities and indices through its CopyTrading feature.
AvaTrade. AvaTrade offers copy trading on forex, CFD and cryptocurrency products through its DupliTrade feature.
Pepperstone. You can copy trade CFDs using your Pepperstone MT4 or MT5 account.
Axi. A copy trading app that lets you link your MT4 account and trade 140 forex pairs, precious metals, commodities, indices and cryptocurrencies.
What is the best copy trading platform in Australia?
Because of the risky nature of trading, there's no one catch-all copy trading platform that is going to work best for everyone.
What might be the best trader or platform one week may then underperform the next week.
While eToro continues to be a popular choice for retail investors looking to try copy trading, the best approach to picking a copy trading platform would be to consider the following:
What are the fees?
Trading fees can quietly have a huge impact on your overall profitability. While you'll almost certainly need to pay trading fees, some platforms may charge additional fees for using the copy trading feature. Look for platforms offering competitive fee structures.
Does the trader or platform have a strong track record?
Instead of simply copy trading the trader with the best current performance, you should first look to see how they have performed over a longer timeframe.
Past performance is no guarantee of future performance, so you want to find a trader who has demonstrated the ability to remain profitable over time. Around 80% of day traders lose money1, so it's important you do your due diligence when picking someone to copy trade.
Does the trader match my risk profile?
Before you start investing, you should have a firm idea of your overall goals and approach, and this should extend to copy trading. For example, if you're investing for the long-term, it doesn't really make sense to copy trade another investor with a more aggressive, short-term outlook.
Who should you copy trade?
Deciding on who to copy is one of the most important considerations when it comes to copy trading, due to their performance ultimately determining your financial position.
While you might be tempted to choose a trader who seems to have the best current performance, it's important to look a little deeper.
Ultimately, you should try to find a trader who has a long track record of solid results, while also finding someone that aligns with your personal investing time frames, values and risk tolerance.
Is copy trading legal?
Yes, copying other investors' trades is legal and is a legitimate way for investors to make money. As discussed above, many trading platforms now offer a dedicated copy trading feature to make it easier for investors looking to try copy trading (and traders happy to offer their strategies to be copied).
In Australia, there are no laws that prohibit copy trading, and it's perfectly legal to offer copy trading services, provided the platform is regulated with the Australian Securities & Investments Commission (ASIC).
You should steer clear of any copy trading platform that isn't ASIC-registered.
Our expert says: Is copy trading a good idea?
"Copy trading may be worthwhile for beginners looking to learn more about different investing strategies, but it's probably not a suitable long-term approach. Most traders lose money over the long term, and copy trading is likely to be no exception."
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
Frequently asked questions
Yes, it is possible to make money from copy trading, however it's not really as foolproof as it potentially sounds.
The returns advertised for certain traders won't necessarily be the returns you receive if you sign up to copy their trades. Many platforms will reduce (or remove) the trading fees of traders who offer their strategy for copy trading. This can help improve their trading returns, but will not be an accurate representation of the potential return you would make were you to copy their trades (because you'll need to pay fees).
It may sound obvious, but in order to make money from copy trading, you'll also have to copy a profitable trader. Not only that, but they'll need to remain a profitable trader over time.
Say you find a trader who has managed a return of 70% over the last 12 months and decide to copy trade them. There's no guarantee that they'll achieve similar returns over the next 12 months, and may in fact lose money instead.
There's no set minimum you'll need to start copy trading, especially if you're trying to manually copy a trader's strategy instead of using a copy trading platform. If you are using a platform that offers a standalone copy trading feature, there may be a minimum investment limit. For example, eToro requires you to invest a minimum of $200 in order to use copy trading.
This will depend on the platform you use to copy trade. While some platforms will offer copy trading services for free, others may charge a fee. But regardless of which platform you use, you'll almost certainly still need to pay the standard trading fees when copying trades.
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To make sure you get accurate and helpful information, this guide has been edited by David Gregory as part of our fact-checking process.
Cameron Micallef was an investment and utilities writer for Finder. He previously worked on titles including Smart Property Investment, nestegg and Investor Daily, reporting across superannuation, property and investments. Cameron has a Bachelor of Communication and Media Studies/ Commerce from the University of Wollongong. Outside of work Cameron is passionate about all things sports and travel. See full bio
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