Oscar Wilde wrote that: ‘Imitation is the sincerest form of flattery…’ That just might be true when it comes to investing.

There has been a huge rise in social trading in recent years, with platforms offering features such as eToro’s CopyTrader™, giving you the power to see what real investors are doing in real time. This window into the moves of Popular Investors allows you to monitor and mimic their strategies. 

In particular, two key strategies within social trading have become increasingly popular copycat investing and copy trading. They sound similar, right? But are they actually the same?

This guide will help you understand just what copycat investing and copy trading are, the differences between the two and the pros and cons of each.

Table of Contents

What is copycat investing?

What is copy trading?

So what is the difference?

What are the pros and cons of copycat investing and copy trading?

The time factor

Unexpected shifts in trading ideology

What is copycat investing?

Copycat investing is when you copy the moves of successful investors. It is also sometimes known as coattail investing.
what is copycat investing
As a trader, you might have great depth of knowledge, be committed to doing research and have a list of Google alerts a mile long, so you can stay on top of every piece of cryptocurrency trading news, shifts in the forex market and stock movements. Regardless, there is always something to be learned from the knowledge, experience and resources of some of the best investors in the world. 

As the sharing of, and access to, information has increased in recent years, so has copycat investing. It has never been easier for everyday investors and traders to see what the best and brightest in the world are doing in terms of buying, selling and holding. One great example often used when discussing copycat investing is people aping the moves of the great Warren Buffet, perhaps the most famous investor of all time, and his Berkshire Hathaway. The company’s investment returns have routinely been beating the S&P 500 index for decades.

The biggest investors in the world must share their positions with regulatory commissions every three months. These reports are available to the public, so everyday punters know what these big-time players are doing. While in its most basic form, copycat investing is a strategy performed manually from publicly available data, there are many more options available today. It has become even easier to keep tabs on moves, with sites and online services monitoring the moves of successful mutual fund managers and other profitable traders. 

For example, if there is a mutual fund that performs well consistently, and you know that fund’s manager has been increasing a position in a solar panel production company, or in sustainable energy overall, you could tailor your investments to follow those moves.

The opportunity to mimic the moves of billionaires such as Buffet and high-flying mutual fund managers is an enticing prospect for the average trader. Copycat investing can be easy to do, with platforms such as eToro offering fully transparent trading activity. Whether through an algorithm or manually scoping out Popular Investors, transparent trading activity means you can see when traders are opening or closing long-term positions — and for what price. While there is a lot of information available on the Internet, understanding where top-performing traders are buying or selling can be a helpful guide for your own investments. 

What is copy trading?

What is copy trading

Copy trading is like copycat investing or ‘mirror trading’, but goes a step further. With copy trading, you link the moves of your account to the moves of a successful investor. Copy trading is a relatively new strategy, rising in popularity in the early 2000s in the forex currency trading market. It has expanded since to other markets but is still mostly used for forex trading.

While you do not have to invest the same dollar amount as these major investors, you can take the same positions proportional to your account balance and portfolio. This is one of the factors that helps build an investing system that automates your trading. The variables include your portfolio balance, investment goals, risk tolerance, and more – basically the questions you need to ask yourself when setting up any sort of investment strategy. 

So, as a hypothetical example, let’s say you have signed up to our CopyTrader™ service that links your account to mimic the moves of a Popular Investor. Whenever this Popular Investor buys or sells a currency, your account will make the same trade in accordance with the system you have created.

The eToro CopyTrader™ service is revolutionary in the trading industry with search results offering a range of filters from gain and risk score to country of origin, as well as showcasing profiles with recent stats, bios, trading strategy, and other helpful information. 

Whether you are a beginner or have been investing for years, copy trading strategies are ideal for time-poor investors looking to make rapid movements in the market.

So what is the difference?

Copycat investing and copy trading are certainly similar. Both can be great tools for investors, as they provide access to ideas from some of the best, brightest and most successful traders in the world. But there is one major difference that sets them apart.

With copycat investing, you are taking knowledge of a trader’s moves and then deciding to use that knowledge to make decisions, oftentimes copying their moves. If you see Warren Buffet has decided to invest in Tesla, you can copy him and invest in Tesla if you would like.

However, with copy trading, you take that decision-making out of the equation by automating the process in advance in accordance with your account’s algorithm. When somebody makes a move, you make the move. This makes it a more set-and-forget, passive method of investing.

So, which is better? That depends on the type of investor you are and what is most important to you.

What are the pros and cons of copycat investing and copy trading?

Want to figure out if copycat investing or copy trading are right for you? Here are some of the pros and cons of each.

Pros and cons of copycat investing and copy trading

The human element

With copycat investing, you take information (most often the investment moves of successful traders or managers) and then decide how much of your own capital to invest according to that information. In the process, you still make conscious decisions regarding how to seek out the information (more on that in a second), whether or not to invest and how much to invest.

Copy trading takes this human element out of it. You set your parameters, link your account’s moves to the moves of another investor and let it do its thing. Until you change your account settings, these investments will happen automatically. That means no research and no decisions about whether or not to invest.

Because of this, copy trading can benefit those who find themselves getting into trouble making emotional decisions, chasing losses and acting outside their strategy. However, this lack of decision-making power can also be a drawback to copy trading. The copy relationship you have set up is on autopilot, which takes some of the interest, and perhaps human-based logic, out of the picture.

The effort level

Getting back to the research aspect for a second, copycat investing generally requires more effort than copy trading. Even if you follow social media accounts that dole out advice or have go-to sources of market news and analysis, you still must physically input the trades via your favourite platform. 

Copy trading requires no such effort. When moves are made elsewhere, they are made automatically in your account as well.

The time factor

The time aspect does not only pertain to monitoring the best market news and analysis and punching in trades. In regular trading, inexperienced traders can often miss opportunities by acting too slowly. While experienced traders have the confidence and knowledge to take opportunities, newer traders can hesitate for too long. It also relates to the time lag between experts’ moves and your own. With markets moving so rapidly, the ability to copy trade off an experienced investor can help you make the most of great price points, as the market fluctuates and copy trade moves are made on your behalf almost immediately.

Unexpected shifts in trading ideology

When you practice copy trading, you might not be as precise about keeping tabs on the actions of the investor you are tailing. This can mean you do not pick up as quickly when that trader switches up his or her investment strategy. What if they decide to start investing in things you don’t agree with, such as coal, oil or tobacco? Or what if they change their overall strategy to riskier investments? While your copy trading settings can protect you to a certain extent, you still might end up with some resource allocation you are not thrilled with.

On eToro, Popular Investors are obligated to notify their copiers when they change strategy, so you are protected from sudden swings of strategy. The more active component of copycat trading gives you the choice of whether or not to follow along.

Copycat investing and copy trading are two powerful tools that can help you get the most out of your investing, especially if you consider yourself a novice. Social trading can be incredibly beneficial to bridge a knowledge or time gap, while still being active in the market. With eToro’s CopyTrader™, you can use a variety of parameters, including location, markets invested in, success rate, and more, to find investors on whom to model your investment strategy. Check it out today!