This article was written by Gary Comey, Managing Director at Blackwave.
Copy trading offers a unique opportunity for talented traders to display their talents to the world in a way that was only previously available to anointed traders of the big investment banks etc. It has broken down barriers and exposed a whole variety of trading strategies that were previously hidden.
This of course comes with consequences too. Lowering the barriers to entry doesn’t just let talented traders through. Anyone with even a demo trading account can now offer themselves as a money manager and this is a problem for clients who are unaware of the things to look for and the questions to ask.
1. Account Type
- Needless to say the account type should be a real trading account. If the trader is unwilling to risk his/her funds, then why should you. Some copy accounts are demo but they are usually marked well.
- What leverage is the trader using and what leverage is yours? Ideally the leverage is as close as possible. If the trader has 500:1 leverage and you are trading with 50:1 then your margin requirement for each trade is ten times greater than his. Will your available funds cover that?
- If the trader is trading with $200,000 and you are trading with $200 forget it! You may as well set your money on fire as you will surely hit a margin call with the most modest of drawdowns. Similarly, if the situation is reversed do you want to invest your $200,000 copying a trader who is only risking say $2,000? Technically you can.
- What is the currency of the account you are copying versus your currency? Does the copier make an adjustment to your position size to take account of that?
- Make sure you are looking at ‘live’ statistics. There are some good websites that offer statistics but make sure they have been updated at least every 24 hours. If not then forget it, you are going in blind.
- Longevity. This is a big one. How long has the traders account been trading? A week, a month, a year, five years. If it is less than six months to a year then how do you know that the trader does not just blow up his account every few months, then delete the statistics and start again? A good measure of this is the ability to have a year or more of trading statistics to point to.
- Check the monthly growth rates. What good is it if the account is up 500% but 490% of that was in month one and now the trader is playing it safe with his phenomenal statistics and giving you a false impression of what is possible.
- What is the maximum draw down? 10%, 50%? If it has been as high as 70% probably best to avoid this strategy as a similar drawdown in the future may blow up your account.
- Some systems are showing you equity growth whereas others show you cash and equity but give predominance to cash growth. Know the difference because if the trader is overleveraged the cash may be moving higher by hundreds of percent while equity is going down meaning your ‘growth’ is essentially an illusion unless and until the equity position reverses.
4. MT4 Hosing and VPS
A trader may not be in your time-zone or may be using an EA that will trade 24 hours a day and so your account needs to be turned on to receive the signal to trade even when you are in bed or your computer is turned off. To solve this problem many copiers incorporate hosting or a virtual private server into their offering so you do not have to solve this problem but just check. If you are paying to receive the signal you need to make sure that you are.
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Some copiers will let you leverage the results multiplied by 1,2,3,4 times etc. Try to resist this temptation. If the trader thought he would get away with those position sizes he would probably be doing it himself. If you leverage a trader x 4 and he hits a 25% drawdown your account is blown up while his goes on trading. Some people think they are protecting themselves by using the maximum drawdown the trader has ever had to make a guess on how safe it is to leverage, but remember you are just guessing, the past maximum draw down is not set in stone. There could be a bigger one in the future.
If you can abide by these rules when copying you have no guarantee of success but you have avoided a huge quantity of the beginner’s mistakes. If you are a trader thinking of getting into the business, then perhaps this has been food for thought and gives you some hints about what your customers will be looking for.