CopyTrading, what's fantastic about this trading strategy is that if you pick the right traders, you earn money on autopilot. So first, consider a few things before choosing the right Trader to add to your investment portfolio. Next, there's a list of topics and some real examples on ZuluTrade and eToro, the two copytrading champions.
Disclaimer: The traders we will display here serve as an example; this article is merely informational; it does not constitute financial advice.
Criteria in Choosing a Trader to Copy
Copy trading is so popular these days that it's given birth to the phrase "people-based" portfolio, which refers to traders who invest in other traders or investors rather than perform trades themselves. The basic principle is copying all the trades a particular trader executes. You win when they win. You lose when they lose.
However, one of the biggest challenges of copy trading is choosing who to copy because there are many signal/strategy providers on one platform and many factors to consider.
CopyTrading platforms will provide you with a set of indicators to analyze. Still, three leading indicators rule them all: performance, assets under management and minimum investment, along with other ancillary ones.
Step 0: check out a trader's profile description; you'll find some pertinent data you can use to identify the best Trader to copy. In particular, how they market their trading strategy and how professional they seem.
Performance
The first criterion for picking a trader to copy is a positive, consistent performance. Negative returns are wrong; we all know that. CopyTrading platforms have automatic systems that display the highest-performance traders over different timeframes. However, beware of high returns that may seem appealing but are not usual and are most likely down to luck or ultra-high risk. Also, check out the monthly returns to understand if the performance is due to a specific month. Your aim should be to copy someone who has consistently risen in profit for a long time.
For example, a trading account called Fire GC from Australia uses ZuluTrade as the CopyTrading platform and IC Markets as its Trading one.
At eToro, the other CopyTrading giant, Jeppe Kirk Bonde, is one of the historical top performers on the platform.
As you can see, this account has consistently risen over time. Performance is the most fundamental, straightforward indicator when choosing a trader to copy. Also, Although a successful Trader doesn't have to be a proven track record of ten years, it is still a good indicator if a Trader has spent a few seasons in the financial markets.
Assets Under Management (AUM)
The AUM rank reflects the signal provider's popularity more reasonably. It shows how much copiers trust that particular Trader with their real money. However, having one copier with a significant investment might also be a bad sign since it could be a friend or family of that Trader.
For example, check out the Trader superfx10, which holds one of the most significant AUM and the number of investors at ZuluTrade.
Minimum Investment
Although every platform has a minimum deposit requirement, this topic is different from what this topic means.
A recommended Minimum Investment for optimal CopyTrading is based on a Trader's recommended settings. For example, if a trader opens and partially closes a trade, and a copier invests a minimum amount, the gains might not reflect the results correctly. Although you might still be positive, it could result in a lower percentage.
Therefore, you may still follow a trader with less capital than the recommended amount; however, this may create discrepancies in the results as you will not copy the Trader's strategy effectively.
Other Items to Consider
Investment Strategy
Are you interested in Crypto? Forex? Stocks? Some Traders deal in one of these markets, and others in a combination. Understand the Trader's strategy and overall behaviour, and select one best aligned with your investment ideas.
Risk Score
You want to look for traders with consistent risk scores that do not change much over time. In addition to having a consistent risk score, the score should ideally be as low as possible while ensuring you get the desired results.
Take into account the maximum drawdown. The maximum drawdown is the maximum observed loss from a peak to a trough of a portfolio before it reaches a new peak. Remember, maximum drawdown indicates downside risk over a specified period. In other words, it is the maximum observed so far. A Trader with a 10% return but a maximum drawdown of 30% might mean that if you start copying at the peak, you still might get to lose 30%.
Bottomline is to protect your capital. Remember that situations change, and people also change. Don't stay put with somebody whom you don't like. It's your money, and you should care for it.