How to choose the best traders/signal providers?
Before you start choosing traders (aka “signal providers”) you have to make sure you understand your own investment strategy and trading attitude:
- Are you looking for long-term growth or short-term profits?
- How much time are you able to dedicate to following your trades?
- Can you cope/deal with a negative draw down for days/weeks or do you want instant gratification?
- How much risk are you willing to take?
Understanding these things may help you to understand the type of traders you want to look for on ZuluTrade.
Types of traders on ZuluTrade:
The massive amount of traders on the ZuluTrade social trading network means every type of trading style is represented. We’ll look at the 2 main types.
Daytraders (short term):
Daytraders as the name suggest will open and close their positions during the same day. Their average open positions time will be under 12 hours (often much lower). Because they normally close any positions at the end of the day, it is inevitable that they will incur a fair amount of losses too (no-one will get it right all the time). The drawdown for this type of trader on ZuluTrade won’t be very high (because the range of movement during 1 day in any pair is range bound). E.g. the drawdown on a single open position will rarely be higher than 100 pips with a daytrader. However, you may experience a number of losing days (losing streaks) in a row because losses are booked and come off your balance. Nevertheless, when you follow this type of trader in your ZuluTrade account you will realistically know at the end of the day your “real” balance as there won’t be any open trades left. You’re also less likely to suffer massive losses due to news events because “professional” daytraders normally don’t leave positions open before important scheduled news events. Stop levels are normally carefully managed and set at less than 100 pips.
Longer term strategy traders:
Longer term traders follow a strategy or system that that takes a longer term view of the market and leaves positions open overnight. This will often mean your account will carry over unrealised losses, leading to a potential larger drawdown. These traders are looking at longer term fluctuations in the market and work of the assumption that the forex markets are volatile and won’t continue in the same direction all the time. The winning trade ratio of these traders will often be higher than daytraders because they leave losing positions open until the market eventually turns. However, the drawdown requirements will be significantly higher too. Long term strategies will also leave positions open during scheduled news releases. Stop levels are often set at 500 pips or more.
When traded professionally both types of traders (day or long term) will be able to generate consistent profits over time. It’s often more to do with an individual’s personality. Do you want to know at the end of each day the position of your account and not worry about open positions (and unrealised losses)? Or, are you ok with taking a longer term view and trust traders and systems carrying over losing positions in the hope that the market will turn? (My personal preference is short term. I don’t like positions open longer than a few days. But as I said, that’s a personal preference.)
If you really don’t want to dedicate much time on selecting the “signal providers” then the easiest approach is to look at the performance table and select those providers that have the most amount of “real money” following them (in the performance table advanced mode you can order all traders by the highest amount first by clicking in the words “AMOUNT FOLLOWING” next to the first trader on the list). This assumes you’re fully harnessing the power of the social network part of the trading platform in the sense that you trust the trading decisions by other investors and you follow the herd. Even when you use this strategy though you’ll need to review the performance table periodically as investors will drop “signal providers” when they perform badly and you’ll need to do the same.
While the “amount following” is often seen as a good start when reviewing and selecting “signal providers”, much better results will be achieved on ZuluTrade when some time and effort is put into selecting the providers and understanding their trading strategy.
When looking for the best “signal providers” and traders, here’s a list of factors and tips to consider when reviewing them:
- Look at the winning percentage. A winning percentage of 100% (or 90%+) may look great, but this only means this trader keeps on to a losing position until it eventually turns positive. This can lead to massive drawdown and in all likeliness will eventually blow your ZuluTrade account. In addition, don’t forget that at the end of the day there’s also a small broker carry fee for any open positions. I.e. even if the position will return to break-even, you’ll have lost money on the carry fee.
- Look at the past performance in pips per month. With a consistent trader this graph will show for the most part monthly gains and bars of similar length. For inconsistent (and as such more risky “signal providers”) the bars will be of different lengths, mixing high levels of profits with high losses in other months. We obviously like providers with at least 12 consecutive profitable months, though don’t mind 1 or 2 small losing months (occasional losses are inevitable, even for the best traders, and it’s better they take their losses if they feel the market has turned, instead of stubbornly hanging onto losing positions and creating a massive drawdown followed by potentially large losses).
- Looking at the past performance in pips per month, also include the unrealised PnL (Profit and Loss). If this shows unrealised losses at the end of some profitable months it may be an indicator that the trader is protecting their monthly commissions by deferring losses to another month (as long as the losses were less than their booked profits, otherwise they would not get their ZuluTrade commissions anyway). Hence they’re not really trading a proven strategy at those times.
- Look at the historical drawdown of the trader/”signal provider”. This is the maximum number of pips the trader has been negative on ZuluTrade at any time in the past. Not only can this happen again (unless they have changed their strategy), but there’s also a good chance the next time the markets go against this trader, the drawdown will even be significantly higher (our Forex Cruise Control case study is still relevant to look at). Some trading strategies and traders will require a higher drawdown than others. A professional signal provider will normally explain in their profile description or in their comments field the maximum drawdown to be expected. While this is more a factor that impacts your money allocation, it’s important to check that the expected drawdown matches the historical drawdown. Please also note that there’s no guarantee that the drawdown “suggested” by the Signal Provider in the ZuluTrade interface will never be breached (there are enough of examples of this happening before).
- With regards to drawdown you also need to consider the account level drawdown. For day and short term traders this will normally be higher than the one reported by ZuluTrade in the Signal Provider statistics. This is because the reported figure is for open positions, though as day traders may post a number of losing trades in a row you need to have a look at the difference between the peak and valley level on their historical profit diagram (example here).
- Look at the other accounts the trader is “also known as” on their profile screen (left hand side). If there are many other accounts of this trader with a “bomb” icon next to it, it may indicate that this trader has tried (and blown) many different systems and strategies in the past. They eventually got lucky with one, but it’s highly unlikely that luck will continue. E.g. look at f8, one of ZuluTrade’s most popular traders for quite a while in 2013/14, they had/have 96 (!!!) other accounts, most of which have failed (now still about 10 are shown). Was not really a surprise they eventually crashed as well.
- Try to understand whether the trader is trading manually or whether they’re using an automated system. If they’re using an automated system, look in their profile whether they’re manually intercepting the system if necessary. It’s fairly risky to just blindly follow an automated system as these systems are only based on previous markets conditions and hence cannot always predict how they deal with new unknown conditions. If the “signal provider” doesn’t manually intercept, please note that you may have to monitor the position of this trader more closely yourself. News events (scheduled or unscheduled) may significantly impact the performance of a system and lead to massive losses when not monitored.
(Please note though that the EA icon next to the trader’s name in the ZuluRanking is slightly confusing. While it stands for Expert Advisor, the name of an automated system on the MetaTrader trading platform, it doesn’t actually mean the trader is using an EA. It just means they’re using MetaTrader to send their signals, but some traders use this platform to send manual trades to ZuluTrade as well.)
- Professional traders will normally set their stop levels at meaningful price levels such as previous support or resistance levels (or just past those levels to account for spread and slippage). They’ll also adjust stop levels if needed while they ‘watch the market’ and close trades manually if needed. Hence have a look through the signal provider’s trade history to see the levels the losing trades were closed at. If they were all closed at the same level, e.g. -50, -100 or -500, than this is a sign of (blind) system or robot trading. No long term successful trader uses arbitrary stops!
- Avoid “signal providers” who use a strategy on ZuluTrade of adding new positions to losing positions (Martingale type trading strategies). This strategy is similar to going to a casino and doubling up on ‘black’ on the roulette table until ‘black’ eventually comes up. As we all know, there’s a fair chance that your money may run out before ‘black’ eventually comes up. This is the same issue with these strategies. They all work fine in volatile markets when the currency pair moves up and down within some fixed ranges, but often go horribly wrong (i.e. lead to massive drawdown and/or losses) when the currency pair goes 500 pips or more in one direction without retracing. You can try and spot this behaviour by looking at the maximum number of open trades in the past (as this will be high in bursts) and looking in the trades history. They normally start with 1 trade and gradually add more trades at specific intervals when the trade starts moving against them.
- Try to understand how the ZuluTrade trader deals with scheduled news events. These events, such as the US non-farm payroll data, central bank interest rate decisions or GDP/FOMC statements can cause the main USD currency pairs to spike 50 to 100 pips within seconds of the release (exotic pairs even more) and cause swings of 200 points in the aftermath. Not so much an issue for long term traders (stops >500 pips) who tend to ignore these movements. But for day or medium term traders it’s important to understand how they trade scheduled news events. For example, assume a trader has a trade on which is 30 pips in profit before a major news release, and this trade had a profit target of +50 pips and stop loss of -50 pips. If a 100 pip spike up occurs, at that point they’ll gain an extra 20 pips, but if a 100 pip spike down occurs, they lose 80 pips from that point (30+50). So with the news outcome being a 50/50 chance (since markets will have priced in any bias before the release), this trader took a 50% gamble to either make 20 pips or lose 80 pips. Professional traders would work this out and know their probabilities and in this case would close the trade in 30 pips profit before the news release. This is obviously easier to spot when you follow a trader live mode, since you can quickly see real-time if they have trades open before big news releases. However from the signal provider’s historical trade data in ZuluTrade you can look for the trade activity around the first Friday of each month (non-farm payroll) or other key events. We’re not saying in these tips here that signal providers should always close all trades before all news releases, though professional day traders understand their odds and the importance of the release at that time (and to be honest most will close their trades if they feel a massive swing is possible since they don’t tend to gamble on 50/50 bets).
- Consider the type of Forex pairs the trader trades. With most major pairs the broker spreads will be similar between different brokers. However with some exotic pairs (e.g. GBP/NZD or EUR/AUD) the spreads may be significantly different between your broker and their broker, and hence significant slippage can occur (i.e. your results may worse than theirs if the slippage is against you).
- Look at the comments the “signal provider” leaves. The more often they comment and communicate their strategy and market views, the higher the chance that they’re following the markets closely and will be able to react to sudden news events which impact their system.
- Look at the “signal provider” rating and comments. The ZuluTrade social trading community is very vocal and will punish a trader when they change their strategy. However, do try and put the comments into context. If a trader advices followers that they’re running a system that may lead to a drawdown of 1000 pips, ignore comments which start complaining when a drawdown of 500 is reached, as this is clearly to be expected by the system.
- Take a look at the “Profit made from following this trader” table on the left hand side under the statistics. This shows the amount of “real” money other followers have made with this “signal provider” so far. Amounts over $5,000 mean people have put a fair amount of trust in this trader and backed them with significant amounts of their money. Any amounts lower than $500 mean that this trader is still working their way up in gaining the trust and capital investments from their followers. You can also order the traders by this metric in the ZuluTrade performance table. Just make sure you select “advanced view” in the top right corner and then click on the words “LIVE FOLLOWERS PROFIT” next to any trader.
- In addition, instead of listing the Traders by ZuluRank or amount following (the two most popular searches) you can also list them by rating. To do this you have to select the ‘simple mode’ and click on the word “RATING” next to one of the Traders. This is useful since consistent traders will get good ratings over time. You will need to ignore those with limited amount of followers and limited history on ZuluTrade since they won’t have any meaningful ratings yet.
- Avoid traders who have been hedging in their accounts before on the same currency symbol. E.g. covering a losing 300 pip Buy position with a new Sell position, will in net result be the same as closing the Buy position in loss. The only reason a “signal provider” will do this is to make more commission from you by doing an additional trade. (Luckily we hardly ever noticed this practice though.)
- Don’t be attracted by the lure of “new signal provider additions” in the ZuluTrade e-mails. Most often these traders have less than 4 months experience on the ZuluTrade social trading platform and have made less than 50 trades. It may be better to try them in your test account first and evaluate over time how they perform once they start getting “real money” followers.
- Understanding the “signal provider” payment structure has become important as well. They’re paid only when they end the month in profit (this was introduced by ZuluTrade from November 2011). This has led to some abuse and manipulations from providers who try to safeguard their commissions and change their usual trading strategy. For example they may stop trading near the end of the month when they’re only just positive to ensure they stay in the green. Others may close losing positions at the end of the month to ensure a fresh start the next month (either when it means they’re still in profit or when they’ve lost for the month anyway). Worst ones are those who execute a few extra very short term trades (with a few pips gains or losses) near the end of the month to make more commissions when they’re already comfortable in the green (and hence a few pip losses at the end will hardly harm their overall return). It’s therefore useful to look through the “signal provider’s” closed trades at the end or start of each month to see if you notice any larger than usual losses being taken.
- “Signal providers” are also paid per trade. It is therefore in their benefit to make many small gains instead one massive one. I.e. provider A making 100 pips through 10 trades of 10 profit each will get 10 times more commission than provider B who makes 100 pips in just 1 trade (assuming the follower invest the same amount with both). Some traders may be tempted to make some quick extra commissions near the end of the month by performing some quick low risk trades (certainly if they’re already in profit for the month). Be on the look-out for “signal providers” who change their strategy and increase the number of trades near the end of the month. Again this is a practise we saw more quite a few years ago and not so much these days. Followers have grown smarter as well and will normally invest larger amounts with traders opening a small number of trades than those who open many (because the anticipated risk is less).
- Nothing will be more tempting for a ZuluTrade trader to change their strategy than the lure of more money (commissions). We’ve seen some providers come in with a robust system and solid strategy which they’ve been running for months with excellent results, only for them to change this once the number of live followers (and hence commissions) increases dramatically. Often this happens when they make an entry in the top of the performance table. Where their normal trading system may dictate taking 10 trades for the month, the attraction of those extra commissions may mean they just try and take a few more (because they’re paid per trade), against the principles of their tried and tested approach and often with very negative results. Be on the lookout for this by looking at the number of trades per month and ranking graph. Do the trades per month increase when the ranking went up? Also, do they maintain their top ranking once they get into the ZuluTrade Top 10?
- Probably the best way to evaluate the quality of a trader is to see how they behave during and after a poor run of trades on ZuluTrade (this is the same for professional traders when they get evaluated by the top investment banks). Having a bad run at some stage is inevitable since absolutely no-one will guess the market correct every time. Trading during a winning streak is always easy since the profits justify the belief the trader has in their skills and system. However, it’s when a trader has a losing streak that their “real” quality as a trader shows up. E.g. Do they stick to their principles and system or panic and make wholesale changes? Do they increase their trading activity to try and recover as quick as possible or do they take a break? To identify this on ZuluTrade, look for the period on the performance graph when equity went down significantly. Then have a look at whether the trader started increasing the number of open positions during this period (normally very bad sign as it means they tried to chase their losses). If the trader communicates often, also try and see what they wrote during that period. Did they panic and talked about changing their system (e.g. changing stop levels or maximum open positions) or did they stay calm, explaining some occasional losing trades are to be expected. For this reason some caution also always has to be given to new ZuluTrade traders who have an excellent first few months, since no data is available to see how they’ll react when they have a poor run.
- Avoid copying traders who’ve changed their strategies in the past without any prior notice (comments are a good way to spot them as well as sharp increases in maximum number of open trades). For example, if their ZuluTrade strategy mentioned 2 open positions (and this is what they traded) and they started opening 4 or more. This normally happens when they’re in a drawdown position and they open more positions to try and and get out of it quicker. First of all, this can end very badly (see above in the tips in the casino/Martingale strategy bullet point), but even more so, if they’re successful it’s unlikely all followers would have the same results, because most would have restricted the maximum number of open trades to what was suggested in the strategy (the normal sound money management practise). That’s why it’s important to monitor traders as well and if you see someone changing their strategy without notice (and especially for this reason) it’s probably best to stop following them, even if their gamble worked out this time round.
- When you’re evaluating which traders to copy, add them to your UserLists. You can create as many lists as you want. So for example you can create a list with short terms daytraders and one with longer term traders. Or create one with “established propects” (e.g. interesting traders with > 1 year history) and one with “new prospects” with recently added traders you want to evaluate over the next few weeks or months.
- To get some more ideas and tips on which traders to follow it’s also useful to look at the ZuluTrade Followers table. We normally start by ordering this table by number of pips gained. Then we look for followers with more than 52 weeks history, more than 1,000 trades and average pips of 9 or more. These investors would be well experienced and if their profit graph is fairly gradual, it’s really worthwhile to check out who they’re currently following (and even who they used to follow but now discarded).
Last updated: April 25, 2016