A Simple Strategy
Getting started is usually the hardest step on any trading journey. It’s no different for copy or social trading. You’ve selected your provider and now you find yourself looking at a page of traders that you can copy and wondering where to start.
At the Social Trading Review we do know where not to start and that is co-incidentally where most people new to copy trading choose to. What we see again and again in copy trading is new ‘followers’ being drawn to the traders who have enormous performance returns and high trade counts yet completely ignore the risks being taken to get this performance. These traders will always have what we commonly refer to as a ‘Blow-Up Event’. They are running so much risk and churning so much of their returns away in market spread and trading charges that it is an absolute given that at ‘X’ date in the future they will completely wipe out their accounts. New traders and even experienced personal traders seem drawn to these accounts when they first start copy trading and it always ends the same way. But it doesn’t have to and new copy traders don’t need to go through this process.
Boring Is Good but Bad Can Be Good!
What do we mean by ‘Boring Is Good but Bad Can Be Good’? The strategy we want to discuss today involves not just looking for the boring traders that everyone overlooks but at the other end of the scale show how you can actually aim to profit from a really bad trader.
First the boring trader. Most people new to trading come to the market with the distorted impression that lots of people are making returns and that those returns are enormous. We always hear new traders talk about their expectations of making 100s of percent returns in a very short period of time only to discover that the world doesn’t work like that. The trading industry is full of deception and down right lies about performance from trading systems that promise thousands of percent return for no work to supposed traders on Twitter publishing fake trades or leaving out their losing trades. All of this background noise makes it very difficult for an individual to see who exactly is making returns and what kind of returns they are making.
The true reality is that making 15-40% per annum while not taking on heavy risk and large trading costs is where the competent traders have always been at. It’s hard for many to believe but to achieve more than this starts meaning to take on bigger and bigger risks on an almost logarithmic scale that brings the moment of ‘Blow-Up’ closer and closer. But the market ignores these modest traders as they are boring and don’t fit the media driven and distorted expectations that everyone is day trading and doubling their money week on week. The great traders are sitting there trading infrequently, changing their frequency and sizes with the ever evolving markets and looking for very modest annual returns that they can repeat year on year. They are out there and you can find them easily on the copy trading network. They are the traders that are plodding away, booking 1-2% a month with low draw-down risk and almost no-one following them as they simply aren’t selling the dream.
Now the bad trader. There’s no shortage of this type. They are Legion! There are obviously many differing types of such traders but the one that is best to focus on for copy trading is the one who simply takes on far too much risk in search of rapid and large returns. But you can make money from these traders, which is why they are incredibly important for a copy trading network.
So how, as a follower, can you make money from an aggressive copy trader that you know is going to ‘blow-up’ down the line? To answer that as simply as possible you aim to only follow them for a short period of time and to stop following them when they are still making good returns. The aim being to pocket a return from for a few days, a week, maybe a little longer them and then jump off.
Risk management is the key here. Copying another trader is not a fire and forget situation, you do need to keep regular tabs on each trader and ensure that their trading style remains within expectations and for the higher risk traders that their performance isn’t beginning to wane or they aren’t building up a series of unrealised loss making positions.
You don’t want to follow too many traders at any one time. Keep a watch list of as many traders as you wish, broken down into low risk and high risk but you probably only want to follow around 4-5 traders maximum at any given time.
Out of that you want to aim for more low risk traders than high risk. Maybe 2-3 of the low risk types and maybe keeping an eye open that they aren’t all trading the same markets in the same way, a blend of trading styles also helps lower your risk. For the high risk traders you really only want 1 or 2 at any given time. With the high risk traders you don’t really need to concern yourself with what they are trading or how they are trading your are just looking for a high return, higher frequency trader who is currently on a roll. It doesn’t even matter if they are new to the network or show a trading history of massive draw-downs, it really is about looking at the 1 month to 3 month performance and ascertaining one simple details: Is their aggressive style of trading currently being favoured by the underlying market conditions? Is their performance chart currently heading north in a robust manner. If so then this is a trader that you can risk following with a view to jumping off after a short period of time. It’s often possible to find one of these traders each week and grab anything from 3 to 10% a week or more. But the key is to never get greedy. We know for an absolute fact that they will ‘blow-up’. We know for an absolute fact that we don’t want to be following them when they do. We know that if we get greedy then we risk getting caught up in their strategy when it goes wrong for them.
To find the lower risk traders you want to search for traders via their total performance, see how they have performed every month for as long as possible. You want them to have a low draw-down of around 15% or lower, modest and even monthly returns in the 1-2% area, to focus on a smaller number of markets and to have a sensible win rate from around 50-75%.
For the high risk traders their history isn’t so important you are focusing on what they are doing now so want to filter on the most recent performance, say 1 to 3 months maximum. It doesn’t really matter what markets they are trading or whether they are being sensible with stops. The nature of these types of traders is that they run their losses as they are obsessed with abnormally high winning trade rates so you’d expect to see win rates from 75 to almost 100%. That latter metric is a very good sign that the trader will both ‘blow-up’ when the market next evolves but that while the market conditions prevail so there performance is likely to.