Finding a Copy Trading Strategy That’s Right for Me

What are your goals?

You probably have goals when it comes to investing, and copy trading shouldn’t be any different. Goals that people have might include:

·         Growing capital

·         Increasing Income

·         Receiving enough income to pay for groceries, gifts, specific bills or memberships

·         Earning income to cover basic living costs

·         Creating additional income to pay for marketing expenses on a business idea

·         Building up savings to pay for an annual holiday

·         Building up savings to buy yourself a gift

·         A long term plan for retirement income

Deciding on a goal can be a great way to get focused and even reverse engineer what you need to invest in order to achieve that goal. Having a goal in mind can also help when deciding on what copy trading strategy will be suitable for you.

Investing can be a great way to put money away and aim to grow that money over time. Separating your cash from your bank account into an investment can often make it far easier to save rather than spend, since you no longer look at that money as spendable cash. It becomes an investment, an asset that has the potential to bring you more earnings.

Choosing a Strategy

If you have a goal in mind, it may help you to decide on what features you want from a copy trading strategy, as mentioned in the above section. If not, that’s ok too, since this article may help you to better understand what features might be important to you as an investor and a copier. 

Things to consider include how much you have to invest, whether you will be adding funds on a regular basis to speed up your progress, how often you are considering withdrawing profits and of course your goals and how the strategy might help you reach those goals.

You can choose strategies in your copy trading dashboard, and each strategy has a range of statistics and information that can help you understand more about how the strategy functions and the returns to date.  

The Returns

Starting with a fairly obvious one, the returns need to be profitable. It isn’t like a company where the sentiment might turn around or a windfall of new customers is coming from somewhere, although the trader and their strategy could become profitable at a later date.

Copying a profitable strategy is a good start, since there is a proven track record. Of course, it doesn’t necessarily mean they will continue to be profitable, but it does mean they’ve been doing it so far.

A profitable strategy is one that has a positive net profit.

The Trades

Trading is often a method of sticking within statistical probabilities with the eventual grind upward in profit. This effectively means the outcomes are somewhat predictable for the trader looking for opportunities that offer an edge in the market and the ability to make positive returns over the long term.

One important number is the number of trades taken. If there are too few trades taken, the statistics and returns may not be replicable or a fair representation of potential future outcomes. It can also skew the win or loss percentage since there aren’t many trades taken overall, meaning the strategy could just be a on a lucky streak or losing streak for the moment.

That leads us to the win and loss percentage. This number means the number of trades that are wins versus losses and a higher number for the win percentage is better. Keep in mind, it doesn’t have to be higher to be a successful strategy. Which brings us to the next consideration.

Risk Reward Ratio is a hot topic in forex trading. It means how much risk is taken to get a certain amount of reward in each trade, then put into a ratio. For example, the risk reward ratio where the stop loss distance in price is equal to target profit distance from entry in price, making a ratio of 1:1.

If the target profit is double the size of the stop loss, the risk reward ratio would be 1:2, and if the target profit is 3 times bigger than the stop loss size, the ratio becomes 1:3. The risk reward ratio isn’t a statistic that is offered directly, however you can make an estimate by using the profit and loss graph.

The Profit and Loss Graph

While the risk reward ratio isn’t a specific statistic found in the statistics section, you can get a feel for the likely risk reward ratio of a strategy by looking at the graph showing the size of each profit or loss.

When there is a loss, the chart line depicting profit will decline.

When there is a profit, the chart line depicting profit will increase.

Judging by the graph, check to see if there are bigger moves up each time compared to the down movements. The graph will also show the overall flow of how the investment experience has been in the past. Seeing large swings up could mean high growth potential however when this is followed by large swings down it can be challenging to accept the losses. On the other hand, seeing a consistently rising profit chart, with incremental increases and small losses from time to time, could offer a far more peaceful way of trading and copying. While a good mindset is important for traders, it is also important for those who follow the strategy also, since you will be seeing your money rise and fall with each trade. Remember this when you are researching strategies, so that you can consider your risk tolerance if trades don’t go as planned.

Experience in the Market

Experience is critical when it comes to trading. Understanding the market’s nuances, how it functions and seeing what can happen in an array of real world conditions, like sell offs, disasters, crisis, inflation, bull runs, bear runs and more. An experienced trader may have a far better method of handling different market conditions and perhaps understand when the market conditions are shifting.

The written information provided to describe the strategy may help offer insights into the edge or what the strategy aims to do in the market. Additionally, the Age in days statistic can show how long the account has been active for. While a new account doesn’t necessarily mean the trader is inexperienced, an older account may have more statistics and data to make a more informed assessment, plus there is likely to have been different market conditions that the strategy has traded through. This means the information and statistics on the strategy has a more realistic representation of the investment expectations.

How it Plays Out

Trading is inherent with profitable and losing days, it is simply part of trading and that’s why risk management is so important.

Percentage Profitable Days

The next statistic to draw attention to is % Profitable Days and % Losing Days. It is good to know the frequency of days you would expect to end the day positive vs negative. When there are fewer % positive days profitable (assuming the strategy is profitable overall), it doesn’t mean the strategy is bad, however it could mean that waiting for a big winning trade is part of the strategy, while taking small losses on more days. This style of trading may not be suitable for someone that doesn’t like to see down days or wait for the chance of a big move in their favour.

More profitable days than losing days means that the percentage of days shown as profitable, is the percentage of days you would expect to see the account end higher in profit than the start of the day.

An example of this is, a 50% profitable vs 50% losing strategy, on 100 days of trading would mean 50 of the days were profitable and 50 were losing.

If the profitable days % was 70%, the profitable days out of 100 would be 70, while the losing days would be 30 out of 100.

Trading Streaks

Winning and losing streaks are a statistic that would be good to look at to understand how many losing trades you might expect in a row based on the trading history. It’s good to know the likely streak so that when you are copying a strategy, you can understand if it is in line with expectations or not. When a losing streak is in line with expectations, but the strategy is profitable overall then it will be easier to handle.

On the bright side, higher profitable positions streaks would be great as the strategy continues to perform.

Drawdowns

Similar to losing streaks, drawdowns show the maximum amount of money lost on the account in percentage terms in the trading history. For example, if the account started at $100 and the Max Drawdown was 10%, the account would have lost $10 as a maximum, potentially across multiple trades over multiple days, weeks or months. Knowing the max drawdown can help understand if your risk tolerance is suitable for this type of strategy and may help to understand the risk management policies the Strategy is working within.

The max daily loss shows the amount of maximum loss in any one day as a dollar figure. This helps understand the biggest on the account to date, in any one day. This can help better understand how the risk of the account might suit your risk tolerance.

The Bigger Picture

Monthly return (%) shown underneath the Return graph, provides insight into the monthly returns of the strategy, following by the return for that year. The monthly returns can offer insight into the consistency and seasonality of a trading system.

Understanding the monthly returns can also help you determine if the strategy might be suitable for your goals. If you are looking for an ongoing income that is somewhat sustainable, the monthly returns would ideally be quite stable and consistent. For people wanting capital growth and are patient, the monthly returns may be less important.

If there are years of data and track record available, the monthly returns may even offer a seasonality insight into what part of the year (what months) the strategy performs well in.

Case Studies

Big Hitter

John is looking to make big gains and is happy to wait it out without withdrawing any funds over time. He wants big growth, not incremental gains, since he has an income and simply wants to have more capital to work with in the long term.

The ideal strategy he is looking for has high return and he isn’t too concerned about the maximum drawdown provided the gains are the end result. He checks the losing streak and maximum drawdown, it’s high but not high enough to stop the high returns the strategy is producing.

Since John doesn’t check the account as he is busy running his own business, he isn’t looking at the losing streaks or watching the trades play out, meaning he is ok with knowing that sometimes the trades go against him and sometimes there are losing streaks.

Survivalist Sam

Sam has a desire to start doing his own thing, freelancing for some contacts in his industry. He is seeking a more relaxed lifestyle, more freedom and less pressure. Sam has run a reverse engineered equation on his required income, and is looking to achieve an approximate monthly return of around 2% per month. Based on his calculations, he wants to be earning around $2,000 USD per month and he knows how much he needs to invest, if he finds the right strategy.

Survivalist Sam starts searching the strategies that offer a fairly consistent return each month, with limited losing days, so that he can reduce stress on his freelance income. He checks the monthly returns column as a first point of call to see if the strategy is consistent enough. He then checks the maximum drawdown and maximum losing streak to reduce the chance of dropping into negative in any one month.

Total profit isn’t the highlight for Sam, he is wanting consistency and income to support a lifestyle that makes him happier.  

Grow Slow Gertrude

Gertrude holds a relatively safe 9 – 5 job and wants to leverage her consistent income by copying a strategy and dollar cost averaging into the strategy over time. Her goal is to save a few hundred dollars each month and put it into the strategy to grow and compound the returns long term.

Compared to John and Sam, Gertrude’s approach is to look for something in between. Watching too many losses in a row or a big drawdown will not be comfortable for Gertrude, as the hourly rate flashes before her eyes when she sees a loss. While she is ok to see a negative month here and there, the strategy must of course be profitable overall and have a relatively low drawdown and losing streak. Since she isn’t chasing big wins, the profitable streak isn’t a consideration and will simply be bonus when they occur.

By depositing funds on a consistent basis, Gertrude is able to see her account growing by deposits and also profits as the strategy performs. The compounding effect can take hold and since there’s no need to make withdrawals, Gertrude is enjoying watching the account grow over time without piling too much cash in all at once.

This approach is far more comfortable for Gertrude, as a risk averse employee looking to increase wealth in a slow and steady manner.

Summary and Guide

Set goals – Your goals will ultimately define what types of statistics you are looking for in a strategy. Keeping your goals in mind may help you to determine if a strategy suits you or not.

Filter by Returns – Checking that returns are being made is the first step to finding a profitable trading strategy. It’s then time to dive a little deeper and see if it fits your needs.

Check the Trades – Learning more about the trades such as how many have been made and how often they are trading is a good step, to ensure the profits aren’t all earned in one or two potentially lucky trades.

Zoom in on the Graph – Seeing if the profit and loss graph is smooth and mostly upward, or fitting your goals is an important step. If the graph rises and falls sharply, it could be a real challenge to experience the ups and downs as a copier.

Experience – If the above concepts check out, it might be worth reading a little more about what the Strategy Provider has to say in the description. It may help you understand why or how profits are being earned, allowing you to be more comfortable with copying it. Checking the age of the account could also help in understanding the statistics overall.

Streaks – Checking the profitable and losing streaks can be a good way to work out if you are comfortable with the style of trading. If there are many losing trades in a row, it may be hard to stay patient waiting for the winning trade to come through.

Drawdowns – Drawdowns are part of risk management. Keeping a low drawdown means keeping control of the swings in profit and loss of the account. Knowing the maximum drawdown and maximum losses is important so you understand what might be likely in the future in terms of expected losses as part of operating the trading account.

Monthly Returns – Monthly returns are a good way to visually see what you might expect each month or quarter, depending on your goals it may help you select a strategy or continue searching for a more suitable option.