Accurately selecting a signal provider needs a universally accepted opinion or algorithm. Many individuals adhere to the practice of subscribing to traders based on a fundamental principle: “The greater the magnitude of profit generated, the more favorable the outcome.”
However, it is imperative to rectify this situation, as the parameters mentioned above, namely maximum drawdown, profit factor, risks, and other vital elements, have yet to be noticed. In this analysis, we shall deliberate upon the paramount factors that warrant careful consideration when electing a trader within the context of a copy trading service.
Trader’s Profitability as the Main Parameter of Choice
The initial parameter pertains to the trader’s profitability over a given period. It is commonly held that a lengthier account duration indicates superior performance. From a particular perspective, this statement has validity.
What is the minimum duration required for the evaluation of a trader? In general practice, it is advisable to prioritize the analysis of trading activity based on the number of transactions rather than time intervals, as the frequency of trades may vary among traders. The average quantity of work required for a reasonably accurate strategy evaluation is approximately 100 trades.
High Rate of Return
The second parameter of significance pertains to the profit factor. To identify a viable long-term investment strategy, the investor should seek out systems that exhibit a profit factor exceeding 1.8. From a mathematical perspective, in cases where the approach demonstrates profitability but lacks stability, the profit factor typically ranges between 1.01 and 1.6. Naturally, strategies demonstrating stability and profitability tend to exhibit values of 1.6-1.8 or higher.
The subsequent parameter to consider is the WinRate associated with the strategy. The analysis of this figure should be conducted in conjunction with the assessment of the average profit and loss. In the given scenario, it is observed that the trader’s rate of successful trades amounts to a mere 30%, while the magnitude of their average profit surpasses that of their average loss by a factor of five. The profitability of the trader’s strategy extends over a significant range.
Drawdown and the Maximum Deposit Load
One of the subsequent significant variables to consider is the drawdown and the maximum deposit load. Not all copy trading services display this particular parameter. The recommended practice is ensuring the full deposit load is at most 15%.
In the event of an elevated value, the trader assumes a level of risk that surpasses the optimal threshold. The matter concerning the drawdown is rather intricate. The maximum drawdown on the deposit must remain below the threshold of 30%. The provided value is representative of the mean.
Certain risk managers enforce a maximum drawdown threshold of 40% on either the account or a specific strategy, while others impose a more conservative limit of 20%. Based on the analysis conducted, it can be concluded that the optimal variant is 30%.
When analyzing drawdown and deposit load, it is imperative to carefully observe the notable spikes that exhibit a significant deviation from the remaining indicators. In the trades above or on the specified day, the trader assumed a higher degree of risk compared to their customary approach. A lower drawdown on the account is considered more favorable for the investor.
Furthermore, investors can acquaint themselves with the trader’s strategy and discern its classification, including scalping, intraday, mid-term, or algorithmic (EA) approaches. Frequently, traders articulate the process within the description, typically concisely.
However, it should be noted that if investors are presented with a martingale strategy, engaging in activities involving such processes may entail a significant level of risk. When making decisions, it is imperative to carefully evaluate and select the optimal course of action by considering the trade-off between risk and profitability.
Within finance, the evaluation of a strategy’s merit is contingent upon its potential to generate a monthly return of 5% while maintaining a moderate level of drawdown. Such a strategy is deemed highly commendable.