There are three core components to becoming a profitable forex trader: your trading method, your risk management strategy, and trader psychology.
A lot of traders gravitate toward copy trading because it allows you to rely on another trader’s trading method. You do not even have to learn their method; you just replicate it in your own account.
Copy trading forex also helps traders to avoid pitfalls with their psychology. Those who have a hard time not exiting orders in a panic, chasing losses, etc., can benefit from automation.
But one thing you still have to manage on your own is your risk. There are a few different aspects to risk management with copy trading. These include position sizing as well as your overall approach in choosing traders to copy.
Without good risk management, even the most reliable trading methods can fail to make you profitable. So, it is critical to get it right. Here are some tips to help you out.
1. Research carefully
Effective risk management when copy trading starts with researching the traders you are thinking about copying in-depth.
You can start by checking their ratings, if your broker provides them. Once you find some traders with solid ratings, take a look at their trade histories.
Be sure to note not just how they have been doing recently, but also how they performed further back in the past, if the data is available to you.
Here are some questions to ask yourself:
- What is their win/loss ratio?
- What is the size of their average win? What is the size of their average loss?
- Are they setting fixed stops and targets, or trailing their stops? How is that impacting their results?
- How long is their longest losing streak?
- Is there enough data for you to comfortably say that they aretruly profitable, and have the potential to stay that way for the long term?
If, based on your analysis, you feel pretty confident that they are likely to stay profitable, then you can consider copying their trades.
2. Diversify
A lot of people start out by just copying one forex trader. It is easy to begin that way. Given how effortless it is to then watch the profits stream in, you might get lazy and not bother looking for more.
But it is important to diversify. If something goes wrong with that one trader, you will not be able to profit again until either they get their act together or you find someone else to copy.
So, don’t put all your eggs in one basket. Copy at least several traders. If one of them starts to fail, at least you have the others to fall back on.
You also might want to consider diversifying by following traders who are using very different strategies, or who are trading different assets.
3. Choose your position sizes wisely
Position sizing is one of the most important components of risk management. That is true no matter how you trade, and copy trading is no exception.
You should stick with the basic rule that we always recommend: risk no more than 2% of your account on any given trade.
Higher amounts of risk per trade can result in your losses adding up much more rapidly than you might expect. 2% should keep you in the game for a long time even if you hit a vicious losing streak.
Whatever you do, avoid progressive risk management “systems” like Martingale. These are not actually strategic at all. They just cause you to lose all your money incredibly quickly.
4. Make sure you are using stop losses
A stop loss is an order you can place at the same time you enter a trade. If price reaches your stop loss level, you will automatically exit the trade, ensuring that you suffer no further losses.
Stop losses are important safety nets. They prevent you from blowing through tons of money if a trade goes against you. They are especially essential if you are not there to actively monitor all of your open positions.
You should always have a stop loss. It is fine to trail your stop loss if that is what you want to do. But you should never be without one.
Setting a stop loss is our strong recommendation for any type of forex trading you do, be it copy trading or otherwise.
5. Track and analyze your performance
One more thing you can do to manage your risk when you are copy trading is to make sure you are checking in on your trading regularly. Do not just “set and forget,” however tempting that might be.
Keep a spreadsheet where you log the result of every trade, along with any additional information that might be useful. You should put in how much you won or lost on each as well.
Calculate running totals so you have stats like win/loss ratio, largest win, largest loss, longest losing streak, etc. That way, you will always be able to gauge whether you are still profitable or not. If you start experiencing a decline, you’ll be able to pause copying the trader that is causing the issues until they have sorted out whatever is going wrong on their end.
Managing Your Risk Will Help You Get the Most Out of Copy Trading
There is a lot about trading that involves luck, but there are some things that are well within your ability to control.
You can never guarantee you will win a trade, no matter how good the trader you are copying is.
But you can control how you mitigate the risks of losing. By following our suggestions above, you can manage your position sizing and overall approach to copy trading in a way that will help you to prevent or slow drawdown in your account.
