This is an exclusive article for Forex Illustrated by Elite Popular Investor Kenneth Mowat, a.k.a. Simple-Stock-Mkt. As his title suggests, Kenneth is one of the Elite Investors with more than 7,000* followers and 2,000* copiers. He has more than $300,000* of copy assets under his management and finished 2015 with +33% on his trades.
In this article, he shares his insider wisdom and tips on how to find the best traders to copy on the eToro platform. You will not find these tips anywhere else, so enjoy and share with your friends and colleagues so we know if we should create more articles like this or not.
Hello traders! Deciding which popular investors to copy sounds easy, but with so many different traders and trading styles to choose from, it is a tricky process. It can be quite daunting to someone who is unsure about what they are doing. I thought I would put a few tips together as a recommendation of what I personally might look for in a search of the best traders to copy.
Let’s start in the trader’s Stats page.
1. Look for consistent profits over 1 year or more.
The first thing to look for is what we are all interested in: profits! Has the trader been consistently profitable over a reasonable period of time?
Of course, it is perfectly possible that someone could have seen huge profits over a short period of time but unfortunately, this does not necessarily mean that they will be able to continue to be profitable in the medium to long term.
Although a trader may be fully convinced that they have a great system, it could just be that they have been quite lucky and caught a nice trend in a particular market. So a few good months does not necessarily mean that a trader has a good system. Will their system still be able make money once the current trend has stalled or reversed and higher volatility has come back in to the market?
I have seen many people diving in to copy traders with some big short-term gains only to find they have copied at exactly the wrong time. It is advisable to only consider those traders with enough history to demonstrate consistent profitability over a reasonable period of time, and preferably in a range of markets.
2. Look for traders with low historical drawdowns.
Controlling loses, or drawdowns, is one of the most important factors in becoming successful in the long term. It may be possible to make 20% or more in a month through high-risk trading but when those risks do not pay off, you may well find yourself with a 50% loss or more the following month. In the medium to long term, you will usually find that high-risk traders have gone backwards. So maintaining low drawdowns through a sensible money management strategy is perhaps one of the most important criteria to long-term success in trading, and by default, copying.
What many people don’t consider is that say you incur a 5% drawdown, you then need to gain 5.26% to get back to break-even. However, lose 50% and you now need a whopping 100% gain just to get back to break-even, and with higher drawdowns, the gains needed start to grow exponentially.
I see some traders ask copiers to set the copy stop-loss (CSL) at the maximum level of 95%. Of course, nobody ever expects that they will ever lose that much but it does happen. By incurring a 95% drawdown, you will need an unlikely 1900% gain just to get back to break-even before you can even start making any money.
Here is the cheat-sheet for knowing how much gain you need for specific drawdown amounts:
3. Avoid traders with huge percentage gains.
High percentage gains can be a useful indication of high-risk trading since the only way to make excessively large gains is to trade with higher leverage and/or big stakes. This is fine when it goes the right way, but nobody can ever win 100% and just one bad trade can easily bust a high-risk strategy.
4. Look for a low Risk Score.
The eToro risk score is not perfect but it is a useful metric as part of your research into gauging how risky copying a particular trader might be. Large swings in equity, trading with high leverage and large stakes are all important factors which are taken into consideration within the Risk Score calculation.
eToro trader risk levels are the following:
- 0-2 – Low risk
- 3-6 – Medium risk
- Over 6 – High risk
It is also important to consider that higher risk does not necessarily mean higher gains over the long term. High risk trading usually ends in failure.
5. Avoid Martingale traders.
Martingale is a process of doubling your bet each time you lose. It is used by gamblers around the world, usually in 50/50 scenarious such as roulette.
Variations of the fundamentally flawed Martingale betting system have become very popular among inexperienced traders. This is where traders simply keep averaging down as the market goes against them. Perhaps, only entering trades with as little as 1-2% of equity per trade, but it is not uncommon to see 20-30 losing trades or more running at any one time. This type of high-stakes trading can, of course, can lead to huge swings in equity.
It has become so popular amongst beginners because at first, the system can often appear to have an amazing success rate with historical stats showing 100% winning banked trades. However, take a look at the portfolio of open trades and you may find many losing open trades.
Martingale traders will run these trades for many months or even years, continuously extending stop-losses in the hope that the trades may eventually be closed even a few pips in profit. The 100% success rate only comes to an end when the trader runs out of funds available to extend stop-losses and loses 100% of equity.
6. Copy in demo mode before committing real cash.
Just as traders must test a trading system to see if it works or not and to fine-tune any flaws, it is highly advisable for copiers to test their copy selections in demo mode before risking any real money.
7. Think about long-term growth and be patient.
We all want to see big profits as soon as we enter a trade, or in this case, a copy. Nobody wants to have to wait. This same issue applies double to copiers who may be new to the whole thing and are excited about the opportunity to make money.
However, constant screen watching should be avoided. It will drive you crazy as short-term market valuations fluctuate. Sometimes, markets are extremely volatile and sometimes, they can be flat for weeks, perhaps stuck in a range where it is very difficult to find a decent trade. So if you are constantly watching your screens to see how much profits are rolling in from your copy, it can be extremely frustrating when you do not to see much movement, or worse, prices may be going against you, causing a bit of drawdown.
After spending a lot of time searching, studying stats, and perhaps copying traders in demo for a period of time, your portfolio should be monitored, but there is no need to obsess over every short-term move and get spooked into jumping from copying one trader to another and then another just because someone recently had a big win. The big win may never be repeated and it could be that you stopped copying the other traders just as the market takes off in their predicted direction. Worst case scenario is that you can jump from loss to loss and more losses.
When a trader takes a trade, it is far more advisable to decide in advance how much you are willing to invest, place your copy stop-loss and then be patient as you monitor the situation. Whatever happens with any individual trade, if you have done your research and chosen your trader wisely, you should see what we all want to see: solid consistent gains giving long-term success.
Thank you for reading. You can follow my trades and get in touch with me on the CopyTrade platform.
eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFD assets.
Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 66% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
Cryptoassets are volatile instruments which can fluctuate widely in a very short timeframe and therefore are not appropriate for all investors. Other than via CFDs, trading cryptoassets is unregulated and therefore is not supervised by any EU regulatory framework.
Past performance is not an indication of future results.