What is Copy Trading in Forex? The Ultimate Guide

Forex trading offers opportunities for individuals to make money by buying and selling different currencies. While there are risks involved in forex trading, the potential for high profits makes it an attractive investment strategy. However, not everyone has the knowledge and skills required to become a successful forex trader. That's where copy trading comes in. In this ultimate guide, we will explore what copy trading is, how it works, its benefits and risks, the top copy trading platforms, and how to choose the right provider.

Definition of Copy Trading in Forex

Copy trading is a new technique for forex trading that enables novice investors to easily follow and copy the trading strategies of experienced traders. The basic principle is simple: traders with the expertise and experience share their trading strategies on a copy trading platform. Members looking to invest their money can then view the strategies and copy them, essentially trading just as the experienced traders do. The trades are executed automatically, making it effortless for investors to achieve success.

How Copy Trading Works in Forex

Copy trading works by allowing traders to share their trading strategies on a copy trading platform. Investors can then browse through the available strategies, filter them by different criteria such as risk level, and choose the one that suits their investment goals. Once a trader selects a particular strategy to follow, the trades are automatically executed in the investor's account. The investor doesn't have to do anything other than to monitor their account and assess the results of the copy trading.

The Aspects of Copy Trading

The copy trading process can be classified into three essential aspects;

  1. Choosing a copy trading platform
  2. Selecting a trader to follow
  3. Monitoring and making adjustments

Copy trading platforms are services that enable traders to share their trading strategies with other platform members. These platforms provide members with an easy-to-use interface for selecting trading strategies and setting up their investment portfolios. Some popular copy trading platforms include ZuluTrade, eToro, and Ayondo.

Once a member has chosen a copy trading platform, they need to select a trader to follow. It's important to evaluate the trader's past performance and consider if their trading style and risk management approach align with your investment goals.

After selecting the trader to follow, investors must monitor their account regularly. As the market changes, traders may tweak their trading strategies, and investors must adjust their portfolios accordingly.

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Benefits of Copy Trading in Forex

One of the significant benefits of copy trading in forex is that it enables novice investors with limited knowledge of the markets to participate in the industry and make money. Here are some other benefits of copy trading:

  1. Reduced learning curve: Copy trading platforms can eliminate the long learning curve associated with trading forex. Novice investors can follow the strategies of experienced traders, learn from the strategies' performance, and gradually develop an understanding of forex trading.
  2. Diversification of investment portfolios: Copy trading allows for diversification of investment portfolios across various traders and strategies.
  3. Access to experienced traders: Investors can follow traders whose strategies meet their investment goals, benefitting from the expertise of experienced investors.
  4. Automatic execution: Investors don't have to keep track of market movements or execute traders manually. As long as they have a good understanding of their trading goals and risk appetite, the investing platform will take care of executing the trades automatically.

Risks Associated with Copy Trading in Forex

Now that we've covered the benefits of copy trading, it's essential to consider the risks involved in the practice. Here are some of the risks of copy trading in forex:

  1. Automated trade management: Copy trading platforms offer automated trade management, meaning that trades are executed without the need for investor intervention. This can lead to losses since investors aren't considering market trends, changes, or sudden volatility.
  2. Following the wrong trader: Copy trading platforms offer many trading strategies to their members. However, some traders may not have a successful track record or employ risky strategies. Investors that choose to follow them incur a significant investment risk.
  3. Over-reliance on copy trading platforms: Since copy trading platforms automate trades, some users may become over-reliant on the service, leading to neglect of other investment strategies.
  4. Slow reaction to market changes: Copy trading platforms don't react to market changes quickly enough, leading to slow execution of trades, which can be costly.
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Top Copy Trading Platforms for Forex

Some reputable copy trading platforms that offer forex trading include:

  1. eToro
  2. ZuluTrade
  3. Ayondo
  4. MyDigiTrade

How to Choose a Copy Trading Provider in Forex

Choosing a copy trading provider can be challenging, given the many options in the market. Here are some factors to consider when selecting a copy trading provider:

  1. Regulation: Choose a regulated copy trading provider that offers investor protection
  2. Reputation: Look for a provider with a proven track record and good reputation in the industry.
  3. Fees: Consider the fees charged by the provider and whether they align with your investment goals. Some providers charge high fees or hidden costs, leading to reduced profits.
  4. Quality of Traders: Analyze the traders' past performance, strategies, and risk management approach to determine whether they are suitable for your investment goals.
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Copy Trading vs. Manual Trading in Forex

Copy trading and manual trading are two different approaches to forex trading. Each approach has its advantages and disadvantages. Here's a comparison between copy trading and manual trading:

Copy Trading

  1. Reduced Learning Curve
  2. Access to Experienced Traders
  3. Automatic Execution
  4. Diversification of Investment Portfolios
  1. Automation of Trades
  2. Over-reliance on copy trading platforms
  3. Following the Wrong Traders

Manual Trading

  1. Control over Trades
  2. Flexibility in Decision Making
  3. Adaptability to Market Dynamics
  1. High Learning Curve
  2. Time and Research-Intensive
  3. Limits on Diversification

Successful Strategies for Copy Trading in Forex

Here are some tips for successful copy trading:

  1. Evaluate the traders' past performance and their portfolio's risk management approach.
  2. Diversify your portfolio across several traders and trading strategies.
  3. Monitor your account regularly to keep track of changes in the market or the traders' strategies.
  4. Choose a regulated copy trading provider that offers investor protection.
  5. Maintain a good understanding of your investment goals and risk appetite.
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Legal and Regulatory Considerations for Copy Trading in Forex

Investors doing copy trading in forex must comply with various regulations and legal requirements. Forex is a highly regulated industry, and investors must select copy trading providers that adhere to regulatory frameworks. Regulatory bodies such as the Financial Conduct Authority (FCA) in the UK or the Securities and Exchange Commission (SEC) in the US, for instance, are responsible for enforcing forex trading regulations. Before selecting a copy trading provider, investors must research the appropriate legal and regulatory framework to ensure compliance.

Real-Life Examples of Successful Copy Trading in Forex

Copy trading platforms have led to success for many investors. eToro, for example, provides a social investment network that allows investors to follow other traders. One such trader is Jay Edward Smith, a former cook who started trading forex in 2012. Edwards' investment portfolio had an overall return of 795% between March 2013 and March 2020, averaging a return of 35% annually. Today, Edward has more than 7000 investors on the eToro platform who copy his trades. This example demonstrates the potential for successful copy trading in forex.

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Copy trading has revolutionized the forex trading industry. Investors now have access to experienced traders and trading strategies that allow them to make profits even without an extensive learning curve. While copy trading comes with risks, with good research and account monitoring, investors can achieve success and diversify their investment portfolios. By following the tips and strategies outlined in this ultimate guide, investors can select the ideal copy trading provider to suit their investment goals and level of risk tolerance.