Copy trading is a popular investment strategy in which traders follow the strategies of other successful traders or investors. This is known as a “people-based” portfolio, as traders are investing in other traders rather than making trades themselves.
To copy trades the right way, traders connect a portion of their portfolio to a single trader, rather than investing all of their money with that trader. This allows for diversification and helps to mitigate risk by not putting all of one’s eggs in one basket. It is generally recommended to invest a relatively small amount of your portfolio in a single trader when using this strategy.
How to Choose the Right Copy Trading Strategy
There are several factors to consider when choosing which trader or investors to follow in a copy trading strategy. Here are six key criteria to consider:
Equity growth: Look for traders who have consistently grown their equity over time, as this may indicate a successful and consistent trading strategy.
Level of risk: Different traders have different risk tolerances and strategies, so it’s important to consider whether a trader’s level of risk is appropriate for your own risk tolerance and investment goals.
Maximum drawdown: This is the maximum amount that a trader’s equity has declined from its peak to its lowest point. A trader with a smaller maximum drawdown may be less risky, but also may have lower potential returns.
Performance charts: Review a trader’s performance charts to get a sense of their past performance and to identify any trends or patterns.
Profile description: Many copy trading platforms provide a profile description for each trader, which can include useful information such as their trading experience, strategy, and risk management approach.
Other data: Some platforms may provide additional data, such as the types of instruments a trader trades, their average trade duration, and their success rate. This can help you understand a trader’s approach and how they may fit with your own investment goals.
What you should look for When Scouting for a Good Trader for Copy Trading
Mentioned below is a list of things you should keep an eye out for in order to choose a good trader.
Gauge their Confidence
Confidence is an important factor to consider when choosing a signal provider to follow in a copy trading strategy. One way to gauge a trader’s confidence is to look for those who trade with a real account and risk their own money. This can indicate that they are willing to take calculated risks and are confident in their trading abilities.
Monitor their Performance
It’s also important to evaluate a trader’s performance chart to see if any negative months were due to strategic decisions or mistakes. This can help you understand a trader’s approach and risk management style. It may also be helpful to review a trader’s profile description or ask for more information about their trading strategy and risk management approach. This can help you make an informed decision about whether to follow a particular trader’s signals.
The Followers Can give you a Good Idea
The number of followers a trader has can be a useful indicator of their success and can be a factor to consider when choosing a signal provider to follow in a copy trading strategy. A trader with a lot of followers may be more likely to have a successful track record and may be worth considering as a signal provider.
However, it’s important to consider other factors in addition to the number of followers when choosing a signal provider. For example, you must ensure that the followers are trading with real money, as this can provide a more accurate representation of a trader’s success. It would also help to review a trader’s performance charts, profile description, and other data to get a more comprehensive understanding of their trading approach and risk management style.
Take a Look at the Drawdown
Drawdown is a measure of the amount of loss that an account has experienced over a period of time. In Forex trading, drawdown is calculated as the difference between the account balance and the equity balance, with equity being the net value of the account. When the equity balance falls below the account balance, the account is in a state of drawdown.
Remember to follow a trader’s historical drawdown when choosing a signal provider to follow in a copy trading strategy, as it can provide insight into the level of risk a trader is willing to take and the potential for loss. In most cases, traders with a high historical drawdown may be more risky and could result in greater potential losses for those following their signals. On the other hand, a trader with a lower historical drawdown may be less risky, but may also have lower potential returns.
It’s also worth considering whether the drawdown was due to a particular strategy or approach, as this may indicate how a trader responds to market conditions and whether they are able to adapt to changing conditions.
Some Other Tips Worth Considering
Here are some additional tips for successful copy trading:
- Diversify your portfolio by copying more than one trader. This can help spread your risk and increase the chances of positive returns.
- Consider following traders with different trading strategies to further diversify your portfolio.
- If you tend to generally close most trades within a short time frame, consider following day traders who typically close their trades within 24 or 12 hours.
- Pay attention to how traders react after and even during a bad trade. If they stick to their tried-and-tested system and show good risk management skills, they may be worth continuing to follow.
- If a trader changes their trading behavior or has underperformed, consider cutting your losses and moving on to other traders who may be more successful. It’s important to regularly review the performance of the traders you are following and make adjustments as needed to ensure that your portfolio is aligned with your investment goals.