Copy trading is more popular than ever amongst new and experienced traders because it has the potential to fast-track the path to achieving trading profits. The focus of this article is twofold: firstly, to understand how copy trading works, and secondly, to identify the conditions necessary for it to align with Islamic financial principles and be halal.
Introduction to Copy Trading
The term “copy trading” refers to automatically copying the trades from another trading account managed by an individual trader or a group of traders working as a team.
Because it’s usually an automatic process that runs in the background, I do not need to be at the screen for the service to work. For example, I can be asleep, at work, or in a different time zone from the copy trading service. Many services do not even require users to have the same brokers.
This flexibility makes copy trading accessible to anyone who wants it, which is a significant factor in its popularity.
Most copy trading services charge a flat subscription fee (e.g., $50 per month) to copy another account’s trades. This is different from managed account services, which typically charge performance fees based on account growth.
MetaTrader 5 offers one of the world’s most extensive copy trading services, providing access to thousands of copy trading accounts. Given the popularity of MetaTrader, it’s a great place to start researching copy trading.
How Can Copy Trading Become Halal?
Let’s conduct a Shariah analysis to understand how to choose copy trading services that meet the conditions to be Halal for their users.
- The copy trader must only trade Halal instruments. For example, most experts consider spot Forex to be halal under Shariah rules. However, specific equities (e.g., stocks in companies involved in Haram business activities, such as gambling, pork, or alcohol) and interest-bearing bonds are not Halal. Find out the list of instruments the service trades on your behalf and ensure you are satisfied that all of them are Halal.
- Avoid paying or receiving interest. Riba or interest is Haram under Shariah rules. With a regular trading account, interest payments most commonly happen in leveraged positions held “overnight,” i.e., past the rollover time. One way to prevent this issue is to use a copy trading service that closes positions before this time (e.g., intraday copy trading services) or use a Shariah trading account that does not charge interest-based overnight/rollover fees.
- Avoid short-selling commodities or equities. Most Shariah experts consider short-selling assets to be Haram (this does not extend to Forex, as it involves the exchange of two currencies). It would probably be unrealistic to find a copy trading service that only takes long positions on commodities or equities, so for practical purposes, it may be easier to avoid services that trade these asset classes.
- Avoid Gharar. In Islam, Gharar, which refers to excessive uncertainty or risk, should be avoided. To help comply with this principle, firstly, ensure that the copy trader incorporates risk control into their strategy, particularly by using stop-losses on trades and adhering to position sizing rules. Secondly, examine the copy trader’s track record to see if the drawdowns are reasonable (e.g., are there frequent periods where the account loses 25% or even 50% of its value? How long does it take to recover drawdowns?).
Copy Trading vs. Social Trading vs. Mirror Trading: Key Differences and Halal Consequences
Copy trading and mirror trading both enable the copying of trades from another account. The key difference is that copy trading is more flexible, allowing followers to adjust elements such as trade sizes, stop-losses, or even which trades to follow. On the other hand, mirror trading is a replica of the followed account without manual intervention, i.e., “a mirror” of the other account.
With mirror trading, some Islamic scholars have concerns about pure speculation without any human involvement, as it's not informed investing. Additionally, without flexibility, mirror trading may compel followers to hold trades that may not be halal, such as shorting commodities or incurring overnight or rollover fees. As a result, copy trading offers more halal options than mirror trading.
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Social trading: This involves using community-oriented content from other traders to exchange charts, analysis, and tools. Social trading does not require copying another account’s trades. Instead, it’s a way of implementing other people’s expertise for yourself, without their direct guidance. Most experts consider social trading by itself to be halal.
My Take
Copy trading has the potential to fast-track profits by using the expertise of other traders. However, I recommend spending time researching multiple copy trading services to ensure they meet your needs, such as profitability and being halal. Be proactive and contact the copy trading provider with any questions to ensure they are the right fit.
