Copy trading isn’t a tool the company that opens your account can simply switch on if that company is regulated in the EU or the UK. Automatic copying with no action from you counts as portfolio management, a regulated investment service, according to both ESMA, the EU’s markets regulator, and the UK’s FCA (ESMA supervisory briefing, 30 March 2023, FCA copy trading page).
Key points
- Copy trading repeats another trader’s positions in your account, scaled to the money you set aside. The losses are copied as well, and they’re yours.
- Social trading lets you watch and discuss. Mirror trading follows a fixed strategy. A managed account (PAMM or MAM) has a manager trading pooled or linked money.
- You pay the usual trading costs on every copied trade, and often a performance fee or subscription as well.
- A leaderboard shows the traders who are still active and performing well. Those who lost their accounts have disappeared from it.
- If the company that opens your account is regulated in the EU or the UK, automatic copying without your action is treated as portfolio management, and portfolio management needs authorisation (ESMA supervisory briefing, FCA).
What is copy trading?
Copy trading links part of your account to another trader’s account, so their trades are then repeated in yours without you placing them. ESMA describes it as a service that involves trading your assets based on the trades of another trader (supervisory briefing, 30 March 2023). Whoever you follow is called the copied trader, the leader or the signal provider.
A copy trading account is a normal trading account with the copy function turned on. The funds stay in your name with your provider, and the copied trader can’t hold it or withdraw it. You hand over the decision about what to trade and when.
Forex copy trading is the most common kind, because currency trades are easy to scale up or down. Indices, commodities, shares and crypto are copied the same way. When the trades are CFDs, the copied positions follow the leverage and margin rules that apply at the company that opens your account. Those rules apply exactly as if you’d placed the trades yourself (leverage and margin).
How does copy trading work?
Illustrative figures: a made-up example, not a forecast or a quote.
Copy trading adjusts each trade the leader makes to match the size of your account. The figures shown are made up to illustrate the amounts.
- You choose a trader and an amount Say the leader’s account holds 20,000 and you set aside 1,000 to copy the leader. Your copy amount is one twentieth of the leader’s balance.
- The software scales each trade When the leader buys 2 lots of a currency pair, your account buys one twentieth of that: 0.1 lots. A lot is the standard trade size in forex. Some services let you pick a fixed size instead (pips and lots).
- Your order is filled separately Your order reaches the market a moment after the leader’s. If the price has moved by then, you get a slightly different price. That gap is slippage.
- Gains and losses follow the same ratio The leader loses 400 on the trade, or 2 % of their account. You lose about 20, also 2 % of your copy amount. Slippage may move your loss up or down.
- The copy stops when you stop it You can stop the link at any time. Most services allow you to set a loss limit that cuts it off automatically. Say you set the limit at 300. Copying halts when your 1,000 drops to 700, and the open trades close at the market price.
What copy trading costs
Copy trading costs you the normal charges on every trade and whatever the service adds for the copying. A company regulated in the EU or the UK has to tell you all of them before you start (costs and fees).
- Spread and commission
- Each copied trade pays the spread, the gap between the buy and sell price. Each copied trade also pays any commission and any overnight financing, the charge for holding a leveraged trade overnight. If a leader trades many times a day, these costs build up quickly in your account.
- Performance fee
- The copied trader or manager receives a share of your profit. This fee is usually charged only on new profit above your account’s previous peak, a rule called a high-water mark. Check whether the high-water mark rule applies and how often the fee is taken.
- Subscription or management fee
- Either a fixed amount each month or a percentage of the money you’ve set aside, charged whether the copying makes money or loses it.
How the copied trader is paid, and why it matters
The copied trader is often paid by the provider, and the way they’re paid shapes how they trade. ESMA lists the measures firms use to set that pay, such as the number and value of trades copied and the number of followers (supervisory briefing). Pay based on trade volume rewards trading often, and pay based on followers rewards whatever attracts them, which a striking recent return does better than a steady one.
A performance fee pulls the same way, because the trader shares in your gains but doesn’t pay back any of your losses. ESMA says that how copied traders are paid can create conflicts of interest, and it expects EU firms to manage and disclose those conflicts (supervisory briefing).
The risks of copy trading
The risks of copy trading are the risks of leveraged trading, along with a few that arise from following someone else.
- Leverage. A copied CFD trade is leveraged, so a small price move becomes a large move in your account.
- Drawdown. A drawdown is the fall from an account’s peak to its next low. A leader with a deep drawdown in their history can have another, and you may join just before it (risk management).
- Survivorship in leaderboards. A ranking shows the traders who have done well so far. Anyone who lost heavily has closed their account or fallen off the list, so the group on show looks more skilled than traders are on average.
- Hidden risk-taking. Some strategies win small amounts most of the time but lose a great deal now and then. Adding to losing trades is the usual example of hidden risk-taking (averaging down).
- Slippage between leader and follower. The leader gets filled first and you come later, while many followers’ orders hit the market at the same time. Your results will trail theirs, most of all in fast markets and on short-term trades.
How regulators treat copy trading
Regulators in the EU and the UK class copy trading as a regulated investment service. Their rules apply if the company that opens your account is regulated there. The EU’s investment rules have no separate category for copying, so ESMA looks at what the firm actually does for you. On 30 March 2023 ESMA published a supervisory briefing telling national regulators how to supervise firms that offer copy trading (ESMA news item). The briefing isn’t binding, and according to ESMA it creates no new policy (supervisory briefing).
ESMA’s test is whether you have to act before each trade. A firm that places trades automatically with no further action from you is providing portfolio management. That stays true if you only get a time window to cancel, or if you can set a leverage limit or a stop-loss. If you must approve each trade, the service may be investment advice or it may be plain order handling. ESMA adds that a firm with a direct link to the copied traders is highly unlikely to be offering execution only (supervisory briefing).
Portfolio management at an EU company comes with duties. The firm has to check that the service suits you, through a test called suitability covering your knowledge, your finances and your aims. ESMA expects the firm to select the copied traders, watch their trading and set limits on it, so that copied trades stay within what suits each client. Marketing has to be fair, clear and not misleading, and past performance shouldn’t be the most prominent part of it (supervisory briefing).
For companies regulated in the UK, the FCA takes the same approach. It treats copy trading where the account holder gives no manual input as portfolio management. A UK firm that offers this for regulated instruments needs the FCA’s permission to manage investments. Setting your own limits, such as the amount you’re prepared to lose, doesn’t change that. The service isn’t portfolio management when you have to act before each trade is placed, though other rules can still apply (FCA copy trading page).
What to check before you copy a trader
Before you copy a trader, the checks fall into two groups: the provider and the track record.
- Which company holds your account, who regulates it, and whether its permission covers managing investments. You can find these details on the regulator’s register (choosing a provider).
- How long the track record runs, and whether it comes from a real-money account. A few good months say very little (trading strategies).
- The deepest drawdown in the record, read alongside the return. A high return paired with a deep drawdown means high risk.
- Whether you can set a loss limit on the copy and what happens to open trades when that limit is reached.
Risk warning
Copying a trader doesn’t remove the risk of loss
Copying a trader means someone else makes the choices, but you still carry the risk of loss. Most retail CFD accounts lose money. National regulators found that between 74 % and 89 % of retail accounts lost money, and ESMA reported those findings (ESMA press release, 27 March 2018). Past results from a trader you copy don’t show what will happen next, and nobody refunds a copied loss.
Copy trading questions
Common questions about copy trading, each answered briefly.
What is a copy trade?
A copy trade is a trade that opens in your account automatically because a trader you follow opened the same trade in theirs. Its size is scaled to the money you have set aside for copying. It closes when the leader closes theirs, when you close it yourself or when you stop copying.
What is a copy trading account?
A copy trading account is a normal trading account, connected to another trader’s account using the provider’s copy software. The money remains in your name, and the copied trader can’t withdraw it.
What is a managed account?
A managed account lets you hand over the authority to trade your money to another person. In forex, two common types are PAMM and MAM accounts. A PAMM pools investors’ money, while a MAM connects separate accounts to a single manager. For a company in the EU or the UK, managing other people’s investments counts as a regulated activity (ESMA supervisory briefing, FCA).
Is copy trading legal?
Copy trading is legal at a company regulated in the EU or the UK, as long as that company is authorised to offer it. Both ESMA and the FCA treat automatic copying as portfolio management, so the firm needs permission for that service (ESMA supervisory briefing, FCA). A global company follows the rules of the country where it’s licensed.
Is copy trading profitable?
Copy trading can make or lose you money, and there’s no published figure to show copiers do better than other retail traders. You face the same market risk as the trader you copy, and you pay trading costs and often a performance fee too. A strong past record is no promise of future results.
Sources
The original documents this page cites, in the order they first appear.
- European Securities and Markets Authority, ESMA
- Financial Conduct Authority, FCA
- Supervisory briefing on supervisory expectations in relation to firms offering copy trading services (ESMA35-42-1428), ESMA, 2023-03-30
- Copy trading, FCA
- ESMA provides guidance for supervision of copy trading services, ESMA, 2023-03-30
- ESMA agrees to prohibit binary options and restrict CFDs to protect retail investors, ESMA, 2018-03-27