Copy trading has become a popular approach to the forex market in recent years. The principle of copy trading is simple to understand. A copy trading platform offers a social networking base where experienced traders offer their accounts to be copied by amateur traders using the copy trading service. If the main trader makes a profit, the copy trader profits as well. If the former faces a loss, the latter too faces a loss. Although the principle is simple to understand, the mechanism working behind the copy trading process is quite difficult. Risk is inherent in all kinds of trading, including copy trading. Hence, there are certain criteria that must be followed in order to choose the best trader to copy trades from.
Number of Followers Copying The Main Trader
This is a simple way in determining the efficiency of a trader. Similar to social media, having a large number of followers might suggest a trader is someone you should mimic. Why would there be so many followers if the copy traders weren’t making money by imitating the trader? Exactly! You must determine whether the vast majority of followers are actual live accounts or not because many broker systems permit copy trading on demo accounts as well.
Drawdown
Drawdown is a measure of the maximum loss that a trading strategy or account has experienced over a period of time. It is important for traders to look at the drawdown in the profile of a trader they are copying trades from because it can provide insight into the risk of the strategy and the potential for loss. A high drawdown can indicate a high level of risk, while a low drawdown can indicate a lower level of risk.
Risk Appetite
Copy trading carries almost the same levels of risk as regular trading. When choosing a master trading to copy, the trader must cross check whether both of their risk appetite is same or not. If the main trader is risking 2% of his account having capital of $5,000,000, it does not at all mean you can risk 2% of your account having capital of $50,000.
Real Track Record
Look for traders who have a track record of more than 12 months. If the trader has a track record of 6 months, or less than 1 year, it can be highly probable that they blow up their accounts frequently, and start over with a fresh track record again. Finding traders with more experience is preferable since their performance may be evaluated regardless of whether the market has been bullish or bearish during the previous year.
Historical Performance
The ideal trader to emulate must produce steady returns as opposed to erratic ones. Examine the historical statistics graph to quickly spot this. It is a great indicator to see the performance of the trader. Instead of looking for a trader who is profitable for the initial six months and then loses the following six, the objective should be to find one who consistently generates monthly gains.
Because price swings are frequently minor but frequent and need continual attention, forex copy trading is a common method. No matter your level of experience, copy trading is a winning long-term trading strategy that everyone may employ. However, it might be devastating if a trader chooses the incorrect trader to imitate from. Thus, while selecting a trader for copy trading, the aforementioned advice must be taken into consideration.