The foreign exchange market provides opportunities to make money on a daily basis, but not everyone has the skills to capitalize on those opportunities or the necessary time to do so.
The fact of the matter is that Forex trading is not something that’s easy to do, and like most demanding professions, it requires a fair amount of knowledge and experience in order to be able to do it right.
Consequently, it makes sense to leave trading to those that are really good at it if you are someone who doesn’t have the time to analyze the Forex charts on a daily basis. One of the simplest ways to do that is to start copying trading signals from Forex traders who are already profitable. However, profits are not guaranteed and there are certainly some dirty practices in this sphere of Forex trading as well.
Namely, signal providers don’t always fulfill their promises and some even downright scam their clients. Copying Forex trading signals is not a sure or risk-free way to profits, but it’s definitely an excellent option for a lot of people.
So, let’s get into the most important aspects that you need to examine before entering into an investment.
What is copy trading?
A copy trading platform allows an investor’s account to be connected to and replicate the trades from a manager’s account. Investors can connect their account to multiple managers and can choose how much capital they want to allocate to each manager, therefore, diversifying their portfolio and risk.
Keep in mind, copy trading is different from mirror trading (mirroring automated strategies) and from PAMM and MAM accounts (putting your funds in the hands of a money manager).
Although all trades from the signal provider’s account will be copied to the investor’s account, the investor still has the option to close any positions that were automatically opened. And this is an advantage of copy trading because the investor can choose to stay out of trades that he/she thinks are risky or otherwise doesn’t like.
What are your goals and what is possible?
Before you start copying trading signals it’s crucial to know what you want to achieve and what is realistically possible. A profit of 2% - 5% per month on average is something that is realistically possible with a relatively low level of risk. But, anything higher than 10% per month would start crossing some lines of reasonable risk levels.
In this sense, look for managers that are profitable but also pay attention to risk. So many of these signal providers are only promising profits of 1000s of percent but in the end, blow up their accounts and everyone else’s account who copied them. Don't be fooled by big returns and instead try to verify that the managers or signal providers really know what they are doing.
Again, as we said thousands of times here, don’t expect to become a millionaire overnight (that is unless you are ready to deposit a large sum of money).
Selecting a manager and a strategy
Selecting a manager isn’t necessarily simple as there are a lot of aspects that you need to consider for finding a good one, like for example their strategies and performance. Evaluating the performance of other traders is similar to evaluating our own performance and strategies. To learn more about how you can do that take a look at the article we published last week titled “How profitable is your strategy? – Average winner to average loser ratio and the winning percentage”.
The most important thing to look for is consistency and enough trading history. Six to twelve months of trading history may be enough for a day trader or a scalper, but for a swing or position trader more than this is preferable Something like 1 – 2 years of consistent result would be solid evidence that this trader and his strategy have good chances to remain profitable in the future.
Another very important thing to look for is their drawdowns and any unusual large losses. Generally, you want their drawdowns to be contained with no gigantic losses that erase months of gains in one trade for example. The steadier that their equity and balance curves are the better.
Make sure there is reliable execution
Finally, make sure there is reliable execution on the copy trading platform. When you’ve decided to invest your money through copy trading you need to make sure that trades from the managers you chose will be indeed copied without errors.
You can use different copy trading platforms or even the popular Metatrader platform to connect your account to a signal provider (For Metatrader you will need to use an expert advisor). Nonetheless, no matter which service you choose it’s important to test their execution.
Popular social trading platforms like Zulutrade or eToro can be used successfully but also execution is not the best.
For example, a lot of those platforms experience large delays between the executed time on the mangers account and on the trader’s account. Accounts can also randomly get disconnected and you may be missing out on trades without knowing.
For these reasons, PAMM accounts have an advantage since the manager controls the pool of funds and delay cannot exist as a result. As an example, you can take a look at Purple Trading’s PAMM solution here:
Using a different broker to that of the manager to copy trades can also lead to large delays between the two accounts as execution speeds of the two brokers will be different. Spreads also vary among different brokers, so in case of short-term traders, this can result in drastically different results to those of the signal provider.
So, as with anything in Forex trading, make sure you test how stable and efficient is the copy trading platform before proceeding with a full investment.