Because the traders you can copy and follow on each of the social trading networks are ranked and rewarded in a different way, their trading behaviors differs. We’ve therefore created some separate tips for selecting the “Signal Providers” on Zulu Trade and Experts on eToro.
Here are some general tips which apply to the networks and platforms that we reviewed, though will also apply to any new social trading networks:
- Look for traders with a proven track record of at least 12 months on the social trading network. The longer the better, as this allows you to evaluate the performance of the trader during different market condition (bull and bear markets)
- Look for traders who deliver consistent results over time. I.e. a trader delivering 3% (or 200 pips) each month over 12 months is much more consistent than a trader returning 6 winning months of 10% (or 600 pips) and 6 losing months of 7% (or 200 pips). When you look at the historical performance graphs, consistency is demonstrated by a gradual increasing graph. Graphs with irregular spikes are signs of less consistent traders.
- Look at the number of other people following the trader with “real money”. The more, the better. This is a key advantage from a social trading network as it allows you to benefit from what other investors are thinking and doing. However bear in mind that you shouldn’t just use this as your only factor.
- Does the trader risk their own money or not? If if so, how much? Most social trading networks don’t share the amount but some do. Obviously it’s easier to trust a trader who risks their own money than one which doesn’t. However if a trader has a long history sending signals from a demo account and plenty of live followers, don’t discard them. They’ll risk future revenues in terms of commissions, which for some of them is their main source of income.
- Look at the trader’s trading strategy and profile description. Is there a clear strategy? Is this an individual trader or trading firm? Is it clarified whether the trader is using automated trade signals or whether they are trading manually?
- If a trader is using an automated system and strategy, try to identify whether they are monitoring the system and will make manual interventions if certain extreme market conditions occur (e.g. Greece default). No automated system is perfect and they’re only based on historical events. Hence no-one can predict how a system can behave under future market conditions, but professional traders will know when to make manual adjustments.
- Does the trader set stop levels on each open trade and at which level? Setting stop levels is used to manage the risk of a trade (i.e. maximum loss). The distance of the stop levels determines the level of risk. No stop levels means potentially unlimited risk.
- Review the closed trades of the trader and look for the average pip size of the gains and losses. If these are fairly small you need to consider that due to the slippage your actual result will be significantly different from the result of the trader. I.e. if your slippage is 1 pip, and a trader makes 2 pip profit per trade, your returns will be 50% less than theirs. However if they make 10 pips per trade, your result will be 90% of theirs.
- Look at the historical drawdown of the trader. I.e. by how much has their account been in negative. Assume that in the future this trader will experience at least the same amount drawdown and probably even more if they use the same strategy.
- Look at the winning percentage. Anything above 85% means the trader will probably carry a high drawdown risk because they hold on to losing positions until they eventually turn positive again.
- Look at how frequent the trader communicates with their followers and what they say. A trader who frequently keeps you up-to-date with their strategy and market views is more likely to be following the markets closely and will be able to react and adjust their strategy when new market conditions occur.
- When you’re looking at spreading your risk by following different traders, make sure you compare their strategy and historical trades. If 2 traders follow a very similar strategy (e.g. Forex Cruise Control and High Profit Factor on ZuluTrade) then this wouldn’t really spread your risk.
- If you don’t like to have “open” positions in your portfolio for days or weeks, look for day-traders. I.e. traders who close their positions at the end of the day and who normally don’t leave positions open for more than 12 hours.
- Look at how the trader behaved or behaves during and after they had a bad run. Trading when on a winning streak is easy, since the profitable trades justify the trader’s system and skills. However, no-one is able to always predict the market correctly, so a losing streak will always happen at some stage. This is when the best traders show probably their most important qualities. Do they panic and start changing their system, or do the stay calm? Do they start chasing their losses (e.g. by adding more to their losing positions or trading more often to try to quickly win the losses back), or do they stick with their tried & tested system and principles? Very important factor this!
- Know when to cut your losses. If a trader is underperforming, or even worse, has clearly changed their trading behaviour, drop them. Dropping your unsuccessful traders will also free up equity to invest in potentially more successful traders. Don’t be afraid to owe up to a mistake of following someone, you’re never going to be 100% correct when picking traders to follow.
- If you’re looking at spreading risk, considering evaluating and copying traders on different networks. Each network has slightly different characteristics and hence often attracts different types of traders.