Hi everyone,
I have just started doing copy trading of MetaQuotes signals on MetaTrader 4. So far I'm having good results, but I'm concerned about the different risks of copy trading. For this reason, I have compiled a list of all the risks of copy trading that I could think of. Maybe I have overlooked some risks, and, if so, what are they?
I know most of you are going to say why don’t I trade on my own instead of copying others. The reason is that the return to risk ratio of the best signals can be achieved by almost no one. I have searched through more than 36,000 signals, and I have ruled all of them out except 3. If you think you are a better trader than the best signals, then prove it. Send me a link to your trading history and I can compare you side-by-side to the best signals in terms of Sharpe ratios, win rates, wining weeks, max drawdowns, monthly growth, and length of trading history.
If you don’t think copy trading is a good idea, I would love to be proven wrong so I can come up with ways to mitigate every possible risk you can think of. Below is my list of risks of copy trading. I also have a second list on how to mitigate every single risk on this list.
The Risks of Copy Trading:
Improper settings
I have just started doing copy trading of MetaQuotes signals on MetaTrader 4. So far I'm having good results, but I'm concerned about the different risks of copy trading. For this reason, I have compiled a list of all the risks of copy trading that I could think of. Maybe I have overlooked some risks, and, if so, what are they?
I know most of you are going to say why don’t I trade on my own instead of copying others. The reason is that the return to risk ratio of the best signals can be achieved by almost no one. I have searched through more than 36,000 signals, and I have ruled all of them out except 3. If you think you are a better trader than the best signals, then prove it. Send me a link to your trading history and I can compare you side-by-side to the best signals in terms of Sharpe ratios, win rates, wining weeks, max drawdowns, monthly growth, and length of trading history.
If you don’t think copy trading is a good idea, I would love to be proven wrong so I can come up with ways to mitigate every possible risk you can think of. Below is my list of risks of copy trading. I also have a second list on how to mitigate every single risk on this list.
The Risks of Copy Trading:
Improper settings
- Follower’s account allocation to the signal is too high per the follower’s allowed leverage, which could cause a premature stop out.
Lack of Diversification
- Insufficient diversification among signals.
- Returns of different signals are too correlated in the same direction.
- Insufficient diversification across different asset classes.
Lack of Due Diligence
- Inaccurate or manipulated statistics on the copy trading network could make risky signals look better than they really are.
- Following a signal purporting to be manually traded that is really a bot, which runs without human supervision. Big news events or programming bugs could lead to substantial losses.
- Survivorship bias could lead to inaccurate analysis of signals, which erroneously makes the surviving signals look better.
- Following a real account that is really a demo account (or too small to matter to the trader) overexposes the follower to risk.
Market Risk
- A big news event, such as central banking intervention, could cause sudden, rapid, and massive change in the currency markets, which could cause a stop out or a negative account balance (e.g. The Swiss National Bank intervention in 2011 triggered by the Greek sovereign-debt crisis.)
Offshore Risks
- War or political instability in the home countries of the trading signals.
- Lawsuits from the CFTC against the foreign broker who accepts U.S. residents.
- Insufficient diversification across offshore brokers to mitigate the effects of offshore broker failure.
Selection of broker
- The follower’s broker minimum lot size is too high, which could cause malfunction on some platforms.
- The follower’s broker maximum open trades limit is reached, which could cause malfunction on some platforms.
- Subscribing to signal that trades instruments you can’t trade, which could cause malfunction or result in insufficient hedging of your portfolio.
- The follower’s broker margin call and stop out percentages are too conservative, which could cause a premature stop out.
- FIFO/hedging restrictions of the follower’s broker could cause malfunction or insufficient hedging.
Signal Trader Risks
- The signal trader discontinues his signal without notice and you don’t have a backup plan.
- The signal trader later changes his trading strategy or becomes too aggressive, which could mean riskier trades.
- The signal trader could get stopped out by his broker because of a large drawdown.
Technical Risks
- The signal disconnects because of forgetting to renew the signal subscription or paying the monthly VPS fees.
- The VPS goes down or MetaTrader closes without restarting.
- Follower’s account gets out of sync with the signal without knowing it.
- The copy trading network servers (MQL5, ZuluTrade, etc.) go down during trading hours.
- Your VPS or trading account gets hacked.