There is no single opinion or algorithm for correctly selecting a signal provider. Many people subscribe to traders based on a straightforward rule: “The more profit generated, the better.” But this needs to be corrected, as they miss such essential parameters as maximum drawdown, profit factor, risks, etc. Let’s consider the most important parameters for selecting a trader in a copy trading service.
The first parameter to be considered is the trader’s profitability for a period. Everyone is accustomed to thinking that the longer the period of the account, the better. On the one hand, this is true. But what is the minimum period to evaluate a trader? As a rule, it is better to analyze by the number of deals rather than by time because there are traders who often trade and vice versa. The average number of trades for a more or less correct strategy evaluation is 100 trades.
The second important parameter is the profit factor. If the investor wants to find a good strategy that has worked for a long time, he should look for strategies with a profit factor higher than 1.8. From a mathematical point of view, if the strategy is profitable but there is no stability, then the profit factor will be around 1.01-1.6. Stable and profitable strategies are usually 1.6-1.8 and above.
The next parameter is the WinRate of the strategy. This figure should be analyzed together with the average profit and loss. For example, if the number of a trader’s profitable trades is only 30%, but his average profit is five times more than his average loss. The trader’s strategy is profitable over a distance.
The next most important parameter is the drawdown and the maximum deposit load. Not all copy trading services show this parameter. Maximum deposit load should not exceed 15%. If it is higher, the trader risks more than necessary. It is a bit more complicated with the drawdown. The maximum drawdown on the deposit should not exceed 30%. This is an average value. Some risk managers allow the maximum drawdown of no more than 40% on the account or on one strategy, and some allow no more than 20%. Therefore, 30% is the optimal variant. When analyzing the drawdown and deposit load, pay attention to the sharp spikes that stand out strongly from the rest of the indicators. In these trades or on this day, the trader risked more than usual. The lower the drawdown on the account, the better for the investor.
Additionally, investors can read about the trader’s strategy itself and identify the type of strategy: scalping, intraday, mid-term, or algorithm (EA). Often traders themselves write about the strategy in the description, as a rule, very briefly. But if the investors see a martingale strategy, working with such strategies will be extremely risky. It is always necessary to choose the best option between risk and profitability.
In the financial world, it is considered if a strategy can yield 5% a month at a moderate drawdown – it is a great strategy.
Have a good trade.
