Forex Copy Trading - The Definitive New Zealand Guide
Forex copy trading is a popular passive investment product alluring inexperienced investors in New Zealand and worldwide. Copy trading can offer the high profits (and risks) possible in the forex market, with the simplicity of allocating to a fund.
However, things are never as simple as they sound when it comes to financial markets. Our guide explains everything you need to know.
However, things are never as simple as they sound when it comes to financial markets. Our guide explains everything you need to know.
Updated 26 January 2022
Summary
Anyone can start copy trading as either a strategy provider or follower. Copy trading allows retail traders to copy the trading activities of other traders. The traders providing the strategy have a profile page displaying their trading history, past performance and other relevant details.
Copy trading is very popular in New Zealand, Australia, the United Kingdom and Europe. New Zealand has the fewest options for aspiring copy traders. This New Zealand copy trading guide explains the concept of copy trading, the risks involved, best practices to follow and which platforms provide the service.
Know this first:
In a nutshell:
Our guide explains:
Summary
- The democratisation of financial markets worldwide and the development of the retail online trading industry has brought numerous investment opportunities for the masses. Copy trading is one of the innovations that has made the forex market more accessible to the average person.
- The concept of copy trading is often compared to a hybrid of social media and investment platforms; it has been marketed heavily to amateur forex traders as an instrument to passively invest in the lucrative but incredibly demanding and risky forex market.
Anyone can start copy trading as either a strategy provider or follower. Copy trading allows retail traders to copy the trading activities of other traders. The traders providing the strategy have a profile page displaying their trading history, past performance and other relevant details.
Copy trading is very popular in New Zealand, Australia, the United Kingdom and Europe. New Zealand has the fewest options for aspiring copy traders. This New Zealand copy trading guide explains the concept of copy trading, the risks involved, best practices to follow and which platforms provide the service.
Know this first:
- Forex trading is incredibly risky, and financial markets regulators worldwide, including New Zealand’s Financial Markets Authority, regularly warn investors of the risks.
- Simply delegating your trading decisions to a third party does not alleviate the requirement to have a fundamental understanding of the financial markets and risk management principles.
- The strategy providers listed on forex trading platforms are not licensed financial advisors, nor are they legally obligated to act in your best interests.
- Almost anyone can become a forex strategy provider, regardless of their experience or track record. This potentially makes "experts" and "gurus" dangerous.
- Past performance is never a guarantee for future performance. Many copy trading experts have crashed and burned taking millions of dollars with them - we strongly suggest you remain cautious at all times.
In a nutshell:
- The copy trading model consists of a strategy provider and a strategy follower.
- Followers connect their trading accounts to copy the trades of the strategy provider and pay them a fee.
- There are dozens of copy trading platforms and brokers operating worldwide.
- Almost anyone can become a strategy provider without any prior experience. Copy trading platforms rarely verify strategy providers, absolving them of liability if they lose money. Therefore, leaving it down to the followers to determine the suitability of any strategy they copy.
Our guide explains:
What is copy trading?
Copy trading is an investment service where presumably experienced traders can enrol as a strategy provider and share their trading decisions with other traders who subscribe to follow their strategy. The follower pays the strategy provider a fee or a percentage of the profit earned to copy their transactions.
Strategy providers are usually skilled forex traders with years of experience and a proven track record, but not necessarily. Most copy trading platforms don’t verify their strategy providers, leaving it down to the followers to determine their capabilities based on their profile.
Copy trading is one of several variations of passive trading solutions, including social trading, mirror trading and managed accounts. Copy trading is arguably the most flexible passive trading solution.
Copy trading platforms automatically copy the strategy provider’s trades in the followers’ accounts. The follower can apply different risk management settings, distinguishing it from other passive trading solutions. Followers can start and stop copying at any time and adjust any settings on the fly. A common risk management tool is to adjust how much account balance is allocated to a strategy and apply a stop loss to the strategy to stop following when funds fall below a certain level.
Strategy providers are usually skilled forex traders with years of experience and a proven track record, but not necessarily. Most copy trading platforms don’t verify their strategy providers, leaving it down to the followers to determine their capabilities based on their profile.
Copy trading is one of several variations of passive trading solutions, including social trading, mirror trading and managed accounts. Copy trading is arguably the most flexible passive trading solution.
Copy trading platforms automatically copy the strategy provider’s trades in the followers’ accounts. The follower can apply different risk management settings, distinguishing it from other passive trading solutions. Followers can start and stop copying at any time and adjust any settings on the fly. A common risk management tool is to adjust how much account balance is allocated to a strategy and apply a stop loss to the strategy to stop following when funds fall below a certain level.
Types of passive trading solutions
Besides copy trading, which is thoroughly described in this guide, there is mirror trading, managed forex accounts and social trading.
Social trading is a form of investing that means making investment decisions based on information received from social media. As for mirror trading, it involves automated trading of assets by using algorithmic trading strategies. Social trading has become especially popular over the past ten years, amid the rise of social media popularity.
Mirror trading is similar to copy trading, except it has all the flexibility removed. The mirror trading model essentially clones the trades from the strategy provider’s account to the follower’s account. Therefore, there is no opportunity to adjust order sizes or modify the strategy in any way.
Managed forex accounts are where an investor’s funds are managed by another trader and have the social elements removed.
Social trading is a form of investing that means making investment decisions based on information received from social media. As for mirror trading, it involves automated trading of assets by using algorithmic trading strategies. Social trading has become especially popular over the past ten years, amid the rise of social media popularity.
Mirror trading is similar to copy trading, except it has all the flexibility removed. The mirror trading model essentially clones the trades from the strategy provider’s account to the follower’s account. Therefore, there is no opportunity to adjust order sizes or modify the strategy in any way.
Managed forex accounts are where an investor’s funds are managed by another trader and have the social elements removed.
How does copy trading work?
Copy trading is typically marketed to less experienced and time-restricted traders as a solution to start profiting from the forex market without prior experience or devoting the hours of education, research and analysis needed to trade.
While it’s true that less time is needed to evaluate a trading strategy rather than actively trade, experience is still required to evaluate strategies and manage risk. Choosing the right strategy provider is essential to making money by copying other traders.
Copy trading can either be a service offered by a broker, providing a dedicated copy trading environment to their customers or a third-party platform that connects to different brokers and trading platforms like MetaTrader 4, MetaTrader 5 or cTrader.
How copy trading works is a trader who feels they have a successful strategy worth offering to others will choose to become a strategy provider. Most copy trading platforms do not verify a strategy providers’ track record or impose a warming-up period.
The copy trading platform hosts a strategy profile page showing strategy providers’ trading performance and useful statistics. A strategy profile will show graphs, charts, tables and statistics. The information you can expect to find includes:
The platform lists all the strategies, essentially creating a catalogue, which followers can search using various filters. Followers can use the available information to assess whether a strategy is worth copying.
Once a suitable strategy is found, the follower can set the ratio of the strategy provider they wish to copy or funds they want to allocate. Followers can start, stop, increase or decrease allocations anytime they want to.
While buying indicators to generate signals might work, you won’t know until you start risking your money. A better solution is to learn and understand the indicators you’re using and develop your own strategy, rather than hoping someone else has done the work for you.
While signal generating indicators don’t come with a strong recommendation, there are numerous use cases for buying third-party indicators for your trading platform. For example, you could get indicators to automatically plot pivot points or support and resistance levels or show currency pair correlations or the volume profile.
While it’s true that less time is needed to evaluate a trading strategy rather than actively trade, experience is still required to evaluate strategies and manage risk. Choosing the right strategy provider is essential to making money by copying other traders.
Copy trading can either be a service offered by a broker, providing a dedicated copy trading environment to their customers or a third-party platform that connects to different brokers and trading platforms like MetaTrader 4, MetaTrader 5 or cTrader.
How copy trading works is a trader who feels they have a successful strategy worth offering to others will choose to become a strategy provider. Most copy trading platforms do not verify a strategy providers’ track record or impose a warming-up period.
The copy trading platform hosts a strategy profile page showing strategy providers’ trading performance and useful statistics. A strategy profile will show graphs, charts, tables and statistics. The information you can expect to find includes:
- The return on investment over various periods, such as daily, weekly, monthly, yearly, etc.
- Account balance and equity changes over various periods
- A breakdown of instruments traded
- The number of winning and losing trades, often broken down by trading instrument, day of the week and direction (long or short)
- The average duration of positions
- The average profit or loss per trade
- The account age
- Details of open positions and full trading history
- The fees charged by the strategy provider
- A description from the strategy provider
- The fees to follow the strategy
- The number of other traders following and funds allocated to the strategy
The platform lists all the strategies, essentially creating a catalogue, which followers can search using various filters. Followers can use the available information to assess whether a strategy is worth copying.
Once a suitable strategy is found, the follower can set the ratio of the strategy provider they wish to copy or funds they want to allocate. Followers can start, stop, increase or decrease allocations anytime they want to.
While buying indicators to generate signals might work, you won’t know until you start risking your money. A better solution is to learn and understand the indicators you’re using and develop your own strategy, rather than hoping someone else has done the work for you.
While signal generating indicators don’t come with a strong recommendation, there are numerous use cases for buying third-party indicators for your trading platform. For example, you could get indicators to automatically plot pivot points or support and resistance levels or show currency pair correlations or the volume profile.
Who is copy trading for?
Brokers often tout copy trading as a great way for inexperienced traders to dive headfirst into the forex market; we disagree with message and believe copy trading can be a good place for traders to dip their toes with caution. Before you go any further, it's important to know the basics:
- You need to understand the basics - When exploring a copy trading platform for viable strategies to follow, you’re essentially evaluating other traders and their capabilities. If you don’t know the first thing about trading, how can you evaluate other traders?
- Newbies typically choose strategies based on the highest returns on investment in the shortest time and overlook many other important factors, such as drawdown, Sharpe ratio and consistency.
- While copy trading isn’t suitable for absolute beginners, it can be helpful for learning and observing how others trade. For example, newcomers can use copy trading as an opportunity to learn by watching and evaluating other traders and seeing how different market conditions influence their behaviour and decisions.
- Copy trading can be viable for moderately experienced traders who understand the theory behind trading but struggle with the psychological demands of trading or the time-consuming nature of market analysis.
- Copy trading can also be suitable for traders or investors with experience in other financial markets, such as stocks or commodities and are interested in broadening their portfolio to include forex.
- Because copy trading is frequently marketed as the easy or lazy way to get exposure to the forex market, it’s a common misconception that it is only for beginners who do not know how to trade. However, active forex traders might see the value in copy trading as they can follow other traders while following their own strategy.
Copy trading risks
While copy trading is a compelling opportunity to passively speculate on the forex market, there are many pitfalls and disadvantages. Copy trading is prone to all the same risks as self-directed forex trading, plus some others which must be understood and considered when choosing strategies.
Drawdown:
Account blow up:
Fee harvesting:
Slippage:
Drawdown:
- Like any type of investment, it’s rare to start generating profit from the moment funds are immediately allocated. All investments swing up and down, which is known as retracing.
- As an example, consider buying shares in Apple for US$180 on Monday; the price might fall to US$178 on Tuesday but rise to US$182 on Wednesday. On Tuesday, you’d be losing US$2 per share, but providing you don’t close the position, it’s not technically a loss; this is known as drawdown.
- Even if you follow a trader with a historically profitable strategy, from the moment you may begin copying the strategy it can begin underperforming; as a result, you will end up losing money too. However, the strategy provider and earlier followers remain profitable because of the previous profitable trades that occurred before you began copying.
- Drawdown is a normal aspect of investing, and if you stop copying before the strategy has an opportunity to bounce back, you’ll experience losses. Hence, understanding risk management is required even if you just want to copy successful traders.
Account blow up:
- While drawdown is normal, it’s possible that strategy providers completely blow up their trading accounts. Many amateur traders are drawn to strategies with high returns on investment over the shortest periods while overlooking everything else. Typically, only aggressive and risky trading strategies yield high returns quickly.
- Some strategy providers use risky strategies to gain ROI and quickly reach the top of the leaderboard. Eventually, these types of providers are very likely to go bust.
- For example, in March 2021, cTrader Copy hosted a strategy with $10 million of follower funds allocated that boasted an average monthly of 200% ROI over 18 months. That account eventually blew up, losing the followers the entire $10 million while earning the strategy provider $1 million in collected fees. The icing on the cake of this story is that the strategy provider only invested $15. As such, we urge you to be very cautious.
Fee harvesting:
- Because some strategy providers earn profits from transaction fees, they are incentivised to trade more frequently to collect more fees from their followers. The bias to trade more frequently causes them to trade less efficiently and take on too much risk.
- There have been situations in the past where strategy providers generate a large following and then trigger an algorithm to rapidly open and close as many positions as possible to generate as many transaction fees as possible until the accounts following go bust.
Slippage:
- As some copy trading platforms are broker-neutral, there is a risk of slippage. Slippage refers to the difference between the price the strategy provider's transactions are executed at and the price at which your orders are executed.
- Bid and ask prices often vary between brokers and because of latency. Therefore, your performance may deviate from the strategy providers if your entry and exit prices are higher or lower than the strategy provider.
Copy trading platforms in New Zealand
Copy trading is available in New Zealand through several platforms offering traders the opportunity to enlist as a strategy provider or discover attractive strategies to copy. Most copy trading platforms follow the same concept. Still, there are some nuances to consider, such as their pricing model, range of trading instruments, number of interesting strategies to follow and scope of information provided to help you make informed decisions.
Here are some of the most popular copy trading platforms in New Zealand:
Here are some of the most popular copy trading platforms in New Zealand:
- eToro (but not available in NZ)
- Myfxbook
- ZuluTrade
- cTrader Copy
eToro
eToro is one of the largest and best-known social trading platforms, with more than 20 million users worldwide. The company is often credited for being the pioneer of social trading, launching its social trading platform in 2010.
The company is a brokerage and provides a discretionary trading platform for self-directed traders and strategy providers to manage their orders and CopyTrader, the company’s copy trading platform. Although copy trading is typically centred around forex trading, eToro offers copy trading on instruments spanning numerous asset classes, including forex, stocks, commodities, cryptocurrencies, etc.
Currently, eToro only providers a limited scope of services in New Zealand and does not provide copy trading whatsoever.
eToro has produced some great ads in the past, promoting copy trading, zero commissions stock trading and cryptocurrency trading. If you’ve got five minutes to spare and want to see some examples of stellar marketing, follow the links to watch the ads on YouTube.
The company is a brokerage and provides a discretionary trading platform for self-directed traders and strategy providers to manage their orders and CopyTrader, the company’s copy trading platform. Although copy trading is typically centred around forex trading, eToro offers copy trading on instruments spanning numerous asset classes, including forex, stocks, commodities, cryptocurrencies, etc.
Currently, eToro only providers a limited scope of services in New Zealand and does not provide copy trading whatsoever.
eToro has produced some great ads in the past, promoting copy trading, zero commissions stock trading and cryptocurrency trading. If you’ve got five minutes to spare and want to see some examples of stellar marketing, follow the links to watch the ads on YouTube.
Myfxbook
Myfxbook is a popular resource forex traders use to assist their trading. The website provides numerous tools, such as an economic calendar, currency pair correlations, forex heat map, broker spreads and fees comparisons. Most notably, it provides a service to share verified trading performance.
Myfxbook connects to well-known trading platforms like MetaTrader 4, MetaTrader 5 and cTrader. Traders with accounts on any of those platforms can connect it with Myfxbook, which processes their trading history and generates a profile page that can be shared with peers or potential investors who may want to follow their strategy passively. Successful traders trying to demonstrate their trading capabilities often share their Myfxbook strategy profile, which has a high level of trust in the forex trading community because data is extracted directly from the trading server, unlike screenshots that can be easily manipulated.
Unlike eToro, Myfxbook is not a broker. Rather, it’s a broker-neutral platform integrated directly with trading platforms. Many brokers, such as Blackbull Markets, promote Myfxbook as a copy trading solution to their clients. Myfxbook supports numerous asset classes, including forex and CFDs on cryptocurrencies, indices, energies, precious metals and other asset classes. The instruments supported depend on the broker you are using.
Signal Start is a sister site to Myfxbook, which operates the copy trading service. While Myfxbook is a free-to-use service, Signal Start charges US$25 per month to use the service, and an additional subscription fee is paid to the strategy providers.
Myfxbook connects to well-known trading platforms like MetaTrader 4, MetaTrader 5 and cTrader. Traders with accounts on any of those platforms can connect it with Myfxbook, which processes their trading history and generates a profile page that can be shared with peers or potential investors who may want to follow their strategy passively. Successful traders trying to demonstrate their trading capabilities often share their Myfxbook strategy profile, which has a high level of trust in the forex trading community because data is extracted directly from the trading server, unlike screenshots that can be easily manipulated.
Unlike eToro, Myfxbook is not a broker. Rather, it’s a broker-neutral platform integrated directly with trading platforms. Many brokers, such as Blackbull Markets, promote Myfxbook as a copy trading solution to their clients. Myfxbook supports numerous asset classes, including forex and CFDs on cryptocurrencies, indices, energies, precious metals and other asset classes. The instruments supported depend on the broker you are using.
Signal Start is a sister site to Myfxbook, which operates the copy trading service. While Myfxbook is a free-to-use service, Signal Start charges US$25 per month to use the service, and an additional subscription fee is paid to the strategy providers.
ZuluTrade
ZuluTrade is another popular copy trading platform in the forex trading community. The company differs slightly from the two previous examples since it’s both a brokerage, like eToro and supports users from multiple brokers, like Myfxbook.
Strategy providers and followers can open an account directly with ZuluTrade or with several supported brokers, including New Zealand’s Blackbull Markets.
ZuluTrade combines copy trading and social networking features, strategy providers the opportunity to share updates to the community and followers the opportunity to leave feedback and discuss ideas.
One of the unique features ZuluTrade offers is an insight into the real profits followers have earned by copying a particular strategy. The platform also lets you see which strategies different members are following.
Strategy providers and followers can open an account directly with ZuluTrade or with several supported brokers, including New Zealand’s Blackbull Markets.
ZuluTrade combines copy trading and social networking features, strategy providers the opportunity to share updates to the community and followers the opportunity to leave feedback and discuss ideas.
One of the unique features ZuluTrade offers is an insight into the real profits followers have earned by copying a particular strategy. The platform also lets you see which strategies different members are following.
cTrader Copy
cTrader Copy is the native copy trading feature. The copy trading feature is part of the cTrader Web, iOS and Android versions of the trading platform. cTrader Copy can be optionally used by any broker offering the cTrader platform. While a few don’t, many cTrader brokers enable the copy trading feature. cTrader Copy is another example of a broker-neutral platform supporting copy trading where the strategy provider and follower can have accounts from different brokers.
One of the great features of cTrader Copy is it allows you to engage with the copy trading community using demo accounts, allowing you to build experience without risking your hard-earned money.
The only cTrader broker licensed in New Zealand is Jarden, which unfortunately doesn’t offer cTrader Copy.
One of the great features of cTrader Copy is it allows you to engage with the copy trading community using demo accounts, allowing you to build experience without risking your hard-earned money.
The only cTrader broker licensed in New Zealand is Jarden, which unfortunately doesn’t offer cTrader Copy.
How strategy providers make money
Strategy providers are incentivised to share their trading strategy by earning fees or commissions. Several types of fees are used in copy trading, and the model varies depending on the underlying copy trading platform:
1. Performance fees with high watermark
The most common and fairest way strategy providers can earn commissions is by charging performance fees with a high watermark. Performance fees are calculated as a percentage of the profit the strategy provider creates for the follower.
Because a profitable strategy will still experience drawdown, the high watermark prevents a follower from paying twice for the same performance.
For example, suppose the following:
2. Transaction fees
In some cases, providers can charge a volume commission for every single trade that is copied, regardless of whether the outcome is profitable. The idea behind this fee is that the provider profits from their work rather than their success.
3. Subscription fees
Some copy trading platforms let strategy providers pay a fixed monthly subscription regardless of profits, losses or how much money is allocated to follow the strategy. This model ensures strategy providers earn a fixed amount per customer. Subscriptions fees are usually in the range of NZ$25 to NZ$150 per month.
4. Management fees
As an alternative to subscription fees, some platforms let providers charge management fees. A management fee is a percentage of the funds allocated to a strategy and ensures the providers have an income even if they don’t constantly place trades.
Management fees are typically expressed as a percentage per annum and charged monthly based on the average daily funds.
5. Minimum investment
Although not technically a fee, it still impacts the fees. Some strategy providers might choose to have a minimum investment barrier to ensure only followers that allocate enough funds to generate meaningful fees can copy their strategy.
1. Performance fees with high watermark
The most common and fairest way strategy providers can earn commissions is by charging performance fees with a high watermark. Performance fees are calculated as a percentage of the profit the strategy provider creates for the follower.
Because a profitable strategy will still experience drawdown, the high watermark prevents a follower from paying twice for the same performance.
For example, suppose the following:
- A strategy provider charges a 30% performance fee; in January, the follower earns $100, so they pay a $30 performance fee; the high watermark is set at $100.
- In February, the follower loses $50. In that case, they won’t pay a performance fee. In March, the follower earns $100, bringing the total profit to $150, which is just $50 above the high watermark; therefore, they’ll pay the strategy provider $15.
2. Transaction fees
In some cases, providers can charge a volume commission for every single trade that is copied, regardless of whether the outcome is profitable. The idea behind this fee is that the provider profits from their work rather than their success.
3. Subscription fees
Some copy trading platforms let strategy providers pay a fixed monthly subscription regardless of profits, losses or how much money is allocated to follow the strategy. This model ensures strategy providers earn a fixed amount per customer. Subscriptions fees are usually in the range of NZ$25 to NZ$150 per month.
4. Management fees
As an alternative to subscription fees, some platforms let providers charge management fees. A management fee is a percentage of the funds allocated to a strategy and ensures the providers have an income even if they don’t constantly place trades.
Management fees are typically expressed as a percentage per annum and charged monthly based on the average daily funds.
5. Minimum investment
Although not technically a fee, it still impacts the fees. Some strategy providers might choose to have a minimum investment barrier to ensure only followers that allocate enough funds to generate meaningful fees can copy their strategy.
Frequently asked questions
Do strategy providers need to be licensed?
Copy trading is loosely regulated and remains ambiguous. Although the copy trading concept has similarities with portfolio management and investment advice, strategy providers aren’t required to be licensed. Typically, the brokers providing copy trading services require permission for the portfolio management activity, an ancillary service to the core licensed activities. Ultimately brokers are responsible for holding customer funds and executing their transactions.
However, copy trading platforms like Myfxbook and cTrader Copy are not required to be licensed as they define themselves as technology solutions, shifting the regulatory obligations to the broker.
However, copy trading platforms like Myfxbook and cTrader Copy are not required to be licensed as they define themselves as technology solutions, shifting the regulatory obligations to the broker.
Is copy trading regulated in New Zealand?
While other financial markets regulators, such as the UK Financial Conduct Authority, European Securities and Markets Authority, the US Securities and Exchange Commission and the Australian Securities & Investment Commission, have all raised their concerns about copy trading. However, up to now, the New Zealand Financial Market Authority has not expressed an opinion on copy trading. Copy trading is not explicitly regulated, meaning brokers do not need to seek additional permissions to provide the service.
Do I need any investment experience to follow other traders?
Yes, forex traders that use copy trading should have some investment knowledge and experience. It would be best to have experience related to the forex market. Even though you are not trading yourself, you still have to evaluate the strategies you copy.
You will also have to make other decisions that require insights into the financial markets. Such as choosing the broker you want to trade with, the assets you want to copy, deciding how many strategies to follow, how much to allocate to each strategy.
You will also have to make other decisions that require insights into the financial markets. Such as choosing the broker you want to trade with, the assets you want to copy, deciding how many strategies to follow, how much to allocate to each strategy.
