Mirror trading may sound like a strategy, but it’s not: it’s actually a way to find strategies with the potential to generate profits. This technique emerged in the world of trading stocks in the early noughties, and has become popular among cryptocurrency traders too. You can use mirror trading to copy others’ strategies automatically, taking advantage of traders with more experience for your own gain.
Understanding Mirror Trading
Traders may select a strategy according to the potential for profit, the success rate of the person from whom you’re copying, the low level of risk, and the assets involved. Mirror trading is an effective way to make up for a lack of crypto trading experience, which is one reason it’s continued to gain momentum.
Crypto mirror trading hinges on social trading platforms, on which traders can take strategies from one another. But it’s crucial to remember that the cryptocurrency market is different to the stock exchange, and these contrasts can affect how well your mirror trading works.
What are the Disadvantages of Using Mirror Trading for Cryptocurrencies?
As you may know, the cryptocurrency market is highly volatile. Most strategies crypto traders employ tend to be time sensitive and can become less effective if a high number of people try to leverage them. When strategies become mirrored too often, their value drops significantly — leading the majority of traders relying on them to lose out.
Another issue is asset liquidity, as certain altcoins could be unavailable in the amounts required to accommodate all the trades generated by mirror trading. However, some mirrored strategies can be effective for traders with the analytical skills to identify them before trying them for themselves.
As cryptocurrency traders with less experience tend to use mirror trading more than others, though, they may not have the knowledge required to analyze strategies properly. They tend to depend on characteristics supplied by the traders behind the strategies for guidance.
What are the Advantages of Using Mirror Trading for Cryptocurrencies?
As crypto traders don’t need to create a strategy independently, mirror trading eliminates various risk factors that can be present in traditional trading. For example, emotions won’t impede the trader’s ability to make a rational decision.
Traders don’t need to follow the cryptocurrency market, either. Instead, they only have to check the performance of any strategy they choose to mirror and determine if they’re happy with the results. A strategy maker provides the essential parameters, such as profitability and risk factors, so traders don’t have to calculate anything beyond managing their own money.
However, there is an exception to this: quick changes in market trends. These can affect the balance of aforementioned factors. When strategies are verified as posing a low risk within a stable market and go on to be profitable, traders can expect a solid return on their investment. Yet, an identical strategy could achieve a different outcome in an alternative market.
Strategy makers can adjust to market changes, but traders mirroring the strategy would probably prefer to jump to another strategy that suits the different market conditions better.
In the cryptocurrency market, mirror trading can be beneficial, though it poses a number of issues not present on the stock market. It’s crucial to bear a strategy’s viability in existing market conditions in mind before choosing, specifically the asset liquidity and risk factor.
Novice traders may find the above a challenge, though having access to a strategy-maker’s characteristics can help beginners start their career if they feel unprepared to rely on their own strategies. It’s not a risk-free solution, though, and brings no promises of success.