Everyone desires to make money in the financial market, but not everyone has the time, knowledge, or desire to trade independently. Some Forex brokers provide affordable and easy-to-use solutions for all types of clients. Copy-trading is one of the most attractive passive income options.
By simply using a unique social platform to copy positions, you can achieve expert-level profitability. These types of platforms are trendy, with millions of people joining.
This article will point out 8 essential tips you need to follow in choosing the right trader for copy-trading.
1. How reliable is the trader you copy?
The easiest way to identify good social traders is to investigate how much other followers rely on them. Check the amount of real currency (not demo account) invested by others to get signals from traders. More importantly, you may need to consider the profit these followers make by following the signal provider. This information is available on their profile page.
Generally speaking, if a trader has few copiers and followers, this is a bad sign, and you should avoid him. In addition, traders who copy the most do not mean they are good traders. Some of them just found a way to improve rankings through suspicious behavior, such as manually copying the activities of other good traders or creating various accounts and sticking to the account with the best luck.
2. What do negative returns say while copy-trading?
Negative returns are obviously wrong. In addition, very high returns may seem attractive, but be careful-annual returns of 70% or higher are not typical and may be caused by luck or high risk. Also, check the monthly returns to see if the performance is attributed to a particular month.
Also, be sure to check the trader’s profit chart. You want to go with someone whose profits continue to grow for a while.
3. What amount of trades have your trader accumulated?
When choosing the best social trader for copy-trading, another factor worth evaluating is the number of trades performed by the signal provider. For instance, many closed trades, like 100 or more, are a good indicator. High value can help assess that traders are experts and their success is not based on luck. Obviously, the trader’s strategy itself plays a big role.
More long-term traders tend to hold their positions for more extended periods, so a smaller number of trades can be justified.
4. What is a Risk score? Why is it important in Copy-trading?
Whether using a demo account or a real account, you should understand specific technical details related to copy-trading. One of them is the so-called risk score, which is calculated on a scale of 0 to 10 by most social trading platforms.
With the scale, you find traders with consistent risk scores and do not change much over time. However, in addition to having a constant risk score, ideally, the score should be as low as possible while still ensuring that you get the results you want.
As always, in investment and trading, there is an inverse relationship between risk and expected return.
Therefore, the recommended risk level is between 0 to 5, depending on how conservative your approach is.
The stop-loss function is another crucial principle of risk management. However, some traders tend to forget about it. Thus, be sure to pick the trader who uses stop-loss for copy-trading.
5. What role do open trades have in copy-trading?
Also, it is highly recommended to investigate their open trades. Their open trades should be found in the trader profile of your social trading platform provider.
Professional traders know when to accept a loss and effectively use the stop loss level before the failure becomes unbearable. You will find that traders with few open trades and a 60-80% win rate are more likely to perform well in the end than a signal provider with a 100% winning rate and more than ten open trades.
Some traders continue to lose open positions so as not to affect their statistics. Make sure you check their open positions. This might be a bad sign if there were many “red” a few weeks or months ago.
However, this may also be due to market conditions or having a long-term investment strategy.
Therefore, be sure to check the trader’s bundled assets under the “Portfolio” tab.
6. What can maximum loss and profit trade tell?
Retracement refers to how much money a trader loses before starting to profit again. It represents the decrease in your capital after a few losing trades. It is usually calculated by subtracting the relative trough of wealth from the close peak and expressing it as a percentage of the trading account.
Remember, the retracement is not the actual loss but the loss that your social traders see before they start profiting again while trading remains open. The actual loss is the loss seen at the end of the transaction.
7. What trading level does the trader you copy occupy?
Some social trading platforms rank traders by levels. Traders must meet certain conditions, such as controlling drawdowns, increasing actual funds invested, and ensuring continuous income. Generally speaking, the higher the level, the more sure that the trader is not a novice.
In addition, some platforms allow signal providers to use demo accounts for operations.
On a note, make sure you copy a trader operating with real money.
8. What is the average transaction size of your trader?
The average transaction size reflects the trader’s money management. If the amount they initiate a transaction is larger than the account balance, they may have taken a very high risk in the transaction.
Likewise, keeping the average transaction size low reflects flexibility. The overall performance of such a trader does not depend on a single transaction, so the risk is diversified. You may want to use an average transaction size of less than 10%.
Bottom Line
Knowing the basics of copy trading is very much beneficial for beginner traders. Thus, it still requires some analysis to choose the accurate trader for copy-trading.
However, note that the forex market is a risky industry. Copy-trading also comes with a lot of risks, so think twice before you step into the industry. We wish you a happy trading experience.
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