Social trading, also known as “copy trading,” is a feature at many forex brokers these days. It allows you to follow along as other traders invest and copy their trades. As you can imagine, it can be a handy shortcut to profitability if you find someone who knows what they are doing to copy.
But how do you find that person? It is important to do your research on any trader before you start copying their trades. Anything else is just gambling. Let’s go over a checklist you can use to evaluate traders to copy.
1. Profitability
The most important thing to look for when choosing a trader to copy is profitability. If that trader does not have a profitable bottom line, copying them is going to do nothing but harm yours.
Now, we need to get a little more specific about what we mean when we say “profitability.” You should not just be looking at the trader’s results from the last week or even the last month. Ideally, you should be looking for about a year of profitable trades.
If they are a position trader who only takes a trade or two every month, you might need to look for an even longer track record than that.
Make sure that the trader is profitable over the long term and that their results are relatively consistent.
2. Longest losing streak
Speaking of consistency, every trader is going to experience periods of drawdown; losing streaks can never be 100% avoided.
For that reason, you should look for the longest losing streak that the trader you are thinking of copying has experienced. How many trades did it span?
Consider your trading account. How comfortable would you be sustaining a similar losing streak? What size will your trades need to be to ensure that your drawdown does not surpass your comfort level?
In some cases, you may feel fine copying a trader with the occasional long losing streak, but in others, you might decide to keep looking.
3. Risk score (if available)
On some forex sites, traders are assigned risk scores in the social trading area. Usually, it will be a numerical score between 0 and 10. You should be able to view the average risk score across various periods.
Ideally, the risk score should be on the low side and should be fairly consistent over time. Be sure to check on it now and again to see if it has changed for the traders you copy.
4. Skin in the game
The phrase “skin in the game” was popularized by Warren Buffet. What it means is basically just that someone is invested in something with their own money, time, energy, etc.
A person with skin in the game is motivated to do well. If they underperform, they will directly suffer the consequences.
A trader who has a live account has skin in the game. Their real money is at stake. But a trader who is using a demo account does not have skin in the game (financially, at least).
If you copy a trader who is demo trading, and they get something wrong, you lose money, but they do not. That is not a situation you want to be in, because they are not motivated by the same risk you are.
Of course, there is no way to be entirely sure that a trader with a live account has the same level of skin in the game as you. For example, they could be filthy rich, while you are not. Losing $100 on a trade for them could be the equivalent of dropping a nickel under a vending machine.
Still, at least they are risking something. Avoid copying traders who are on demo accounts. Instead, copy traders who are risking real money on live accounts, just as you are.
5. Social proof
When you are thinking about trying a new restaurant, you probably go online to look at reviews, right? Well, you can do the equivalent of that with copy trading too.
Check to see how many followers a given trader has. Then, see if you can find information about whether those traders have been profitable copying the trades. Once again, ideally, these people should be using live accounts, not demo accounts. They, too, should have skin in the game.
You might also find some people talking about a trader they are copying on social media. If you can find good (but believable) testimonials, that is another positive sign.
6. A fit for your risk management needs
Think about the steps you plan to take to minimize your risk when trading forex:
- Will you be comfortable trailing your stops, or do you want to set fixed stop losses?
- How much do you plan to risk on each trade?
- How many trades are you comfortable having open at a time?
- How do you feel about trading on super short timeframes?
- What are your feelings about trading currency pairs that are prone to whipsaws?
- What is your philosophy around placing trades during news releases?
Make sure that the trader you want to copy is trading in a way that is compatible with your risk management requirements.
For example, if you would not feel comfortable entering more than two trades at a time, copying a trader who routinely has three or more open is not going to be a fit for you.
If a trader is using a method that relies on trailing stops, and you do not want to trail your stops, then another trader might be more suitable for you to copy.
7. A fit for your schedule
Consider your trading schedule, especially if you want to manually execute all your trades, rather than setting up auto-trading.
For example, you would not want to have to wake up in the middle of the night to copy the trades.
Think about your long-term schedule for meeting your goals as well. If you want to place a lot of profitable trades to grow your account quickly, then it may make more sense to copy someone who is taking several trades a week, rather than several trades a month.
Choose Traders to Copy Wisely
Now you have some tips for how you can separate the wheat from the chaff when you are deciding which traders to copy. Social trading can be a powerful tool, but only if you are copying traders who are executing consistent profitable trades.
