To decide which of these forms of trading suits best, one needs to understand the subtle differences between them.
To take Social Trading first; This is a form of investing in which investment decisions are influenced by the opinions, and the observation of the trading strategies, held by a peer group. Social traders will pool knowledge, research, trading strategies and experiences with the aim of mutually enhancing performance. Social trading may take the form of open discussion forums, the posting of the portfolios of top ranked traders along with the sharing of news feeds and research.
The advantage of social trading is the access to engage with a community of likeminded people which will provide access to an abundance of information and opinion. The disadvantage is that this information has not always been checked for its veracity and the value of the opinions will differ from source to source. Social trading does though maintain the traders autonomy in that the trader is the one who will make every investment decision.
Mirror trading on the other hand takes the individual investment decisions out of the hands of the investor. This form of investment involves the automated trading of assets based on algorithmic strategies rather than individual trades.
Investors will typically be asked to choose from a list of trading criteria, for example, investment goals, risk tolerance, and preferred asset classes and these will be used to select the suitable strategy for the investor to follow. So, mirror trading applies more general strategies from a number of top traders instead of outright duplicating trades from a single trader.
The obvious advantage to mirror trading is that it is automated so once the investor has successfully completed the set-up process and stated the investment criteria then the algorithms will do the rest. Also, the fact that the algorithms may use trading decisions from a number of sources adds diversification and thus theoretically reduces overall risk. The disadvantages are really with transparency as the logic around the algorithms is both complex and often not made public. The investor may thus have difficulty in understanding the strategies necessary to reach a high ROI.
Copy trading is similar to mirror trading in that it is fully automated. Copy trading however differs as it does not utilise algorithms but automatically applies the funds of the investor to the trading decisions of the strategies selected by the investor. The system is such that the copier (investor) chooses to copy a specified trader (strategy) and when the strategy applies X% of its funds to a trade then the system will automatically allocate the same X% of the investors allocated funds.
The advantages to copy trading are in the fact that it is totally automated and most providers make it simple to track the performance of traders/strategies so the selection process is transparent. This makes copy trading very attractive to investors who don't have enough time to watch the markets constantly or beginners who want to be involved whilst they build up their understanding of the markets. The disadvantage to copy trading is the risk, which exists in all managed investment, that the selected strategy fails to perform as it has in the past. Past performance may give an indication of the ability of the strategy but does not guarantee future performance.
Investors should always be aware of the regulatory umbrella that they trade under as invariably it is there to protect them. The regulation around the various forms of social or copy trading are quite complex and differ from regulator to regulator. Unsurprisingly the strictest regulations and the greatest investor protections are under the FCA. They consider any type of automated trading to be fund management and thus require platforms that offer such to be authorised by the FCA as fund managers therefore providing all the required protections to investors under the regulations for fund management. The FCA opinion can be seen at the following location:
When seeking an offering of any of these trading processes investors should make sure that the service is covered by the correct regulatory authorisations. This should be quite simple as authorised platforms are always keen to display their hard won authorisations. For example if one was to look at USG UK's new copy trading offering they are keen to note that not only is it a simple and efficient process with a versatile app for mobiles but also that both the platform and the copy trading provider are authorised by the FCA.
In conclusion these forms of trading are very attractive to either those starting on their trading journey that require a bit of guidance as they nail down the fundamentals, the more experienced trader who does not have the time to watch the markets constantly or those who just want to diversify by using investment decisions other than their own for a portion of their funds. As always though investors should have an eye to the regulation and at all times remember that past performance does not guarantee future performance.