Before you copy a trader: a practical checklist

Copy trading platforms let a client link their account to another trader, often called the strategy provider or master, so that trades are replicated automatically in proportion to the copier’s capital. The appeal is obvious. The risk is that the copier inherits every decision, good or bad, along with costs the leaderboard may not show.

This checklist sets out what to examine before you copy anyone.

1. How long is the track record?

A few weeks of strong results say very little. Look for a record long enough to include different market conditions: trending and ranging markets, high and low volatility, and at least one difficult period.

European regulators have set a useful benchmark for how firms should present performance. In its March 2023 supervisory briefing on copy trading, the European Securities and Markets Authority said past performance should not be the most prominent element of marketing, and that it should cover the preceding five years, or the full period if shorter, provided it is based on complete 12-month periods. It also expects firms to avoid basing forecasts on simulated past performance and to disclose the effect of fees where figures are shown gross.

A strategy with a short, spectacular history is exactly what those rules are designed to put in context.

2. What was the worst drawdown?

Return figures hide the path taken. The maximum drawdown, meaning the largest fall from a peak to a subsequent low, shows what you would have had to sit through.

Ask how it is measured. Drawdown based on closed trades only can look far smaller than drawdown based on equity, which includes open losses. A strategy that holds losing positions for weeks while closing winners quickly can show a smooth closed-trade record while its equity swings violently.

Also look at:

• Leverage and position size relative to the account.
• Use of stop losses. Strategies without them can run for months and then fail in a single move.
• Averaging down or grid and martingale techniques, which add to losing positions and can produce long runs of small gains followed by a large loss.

A smooth equity curve can be a sign of skill, or of risk that has simply not arrived yet.

3. Are the statistics verified?

Some platforms calculate performance from the actual trades on a live account they hold. Others display figures supplied by the trader, or from a demo account. Check where the numbers come from and whether the account is real money.

Be cautious with screenshots, performance claims made on social media and results from accounts you cannot inspect. The US Commodity Futures Trading Commission warns that people promoting trading on social media may lack expertise and may be paid for referrals without saying so.

4. What does it cost?

Copying usually carries layers of cost:

• Performance fees paid to the strategy provider, often as a percentage of profits above a high-water mark.
• Subscription or management fees.
• Spreads, commissions and swaps on every replicated trade, which may be higher on a copy account than on a standard one.
• Markups built into the copy product.

Ask how the provider is paid. ESMA’s briefing points out that payments to copied traders can create conflicts, for instance if their pay depends on the number of followers or the volume of trades copied rather than on client outcomes, and that some copied traders are themselves clients of the firm.

5. How much slippage is there between master and copier?

Your fills will not match the master’s. Orders are replicated with a delay, at your account’s prices and sizes, and sometimes into a thinner market. For slow, longer-term strategies, the difference is usually small. For scalping and short-term strategies that aim to capture a few pips at a time, slippage and spreads can consume much of the edge.

Where the platform shows it, compare the master’s results with the average copier’s results over the same period. A persistent gap tells you what copying actually delivers.

Check the mechanics too: minimum capital, how positions are scaled for small accounts, and what happens if the master closes a trade while your copy fails to execute.

6. How is the service regulated?

Regulators increasingly treat copy trading as more than a technology feature. ESMA’s view is that copy trading services offered by investment firms are likely to amount to portfolio management, where trades are copied automatically without the client’s intervention, or investment advice, depending on how the service works.

That classification matters. It brings suitability assessments, cost disclosures and expectations about the knowledge and experience of the traders being copied. ESMA says firms should make sure copied traders meet minimum requirements on skill, trading experience or knowledge.

Before signing up, confirm which legal entity provides the service, which regulator supervises it and how that regulator treats copy trading. An unregulated signal service offers none of those protections.

The short version

• Prefer long, verified, real-money records to short, spectacular ones.
• Judge risk by equity drawdown, not only by returns.
• Add up every fee, and compare copier results with the master’s.
• Check the regulatory status of the platform, not only the strategy.
• Remember that copying someone else does not make leveraged products any less risky.