Every signal provider statistic for a trader on ZuluTrade is there for a reason, and ‘Drawdown’ is no exception. Maybe it’s not the most important, but, if you are choosing traders to copy, it is one that definitely should not be ignored.
When I first started CopyTrading, I thought that I’d do what I thought would be the smart conservative thing, and follow traders with 100% win ratios. However, although when you look at 3 month stats you may find 100% win ration traders (signal providers), but none of them have 100% over all time. Not a problem. No-one is perfect. But, even if you do find traders with near perfect ‘win ratios’, should you copy them in search of often lower, but safer profits?
Probably the answer is yes, but, before you select a signal provider on Zulutrade with a high win ratio you should check out their Drawdown stats on a ‘tab’ on the right of their performance page (see image below). (There is also a column for Drawdown percentage on the Performance main page (Max D/D %), however as this figure may be aggregated, it’s probably safer to look at the actual ‘over time’ graphs). The stats show you in graphic form how far ‘south’ or in the red their trades have gone. So what does this tell us? It may tell us a bit about their trading strategy.
Before we answer this, we should look at exactly what ‘Drawdown’ means. When you are on a signal provider’s drawdown graph, you can mouseover points on the graph and you will be given a figure of how many pips in the wrong direction their trade went. This doesn’t mean that they lost the trade, it simply means that before the trade was closed, they were ‘x’ amount of pips potentially in the ‘red’.
The closer the red line is to the green line the better. This shows that the trader was probably following the ‘trend’, and that they got in, opened a trade and either closed manually or via ‘Limit’ at the right point. This does not mean that a trader with highly divergent red and green lines is a bad trader, but, nevertheless, they are risk takers.
If you look at the drawdown graph above, you will see that a lot of his/her trades go seriously into the red before they go green. He wins the majority of his trades, however his worst trade is a loss of over 1,000 pips, which could wipe out a lot of smaller trade copiers’ account out (depending on the lot sizes they were using). However if you want to learn and start off with a demo account, you can test this out without potentially losing any cash. And even with the demo, you could use very small lot sizes (0.01 on a mini account), and see if your demo strategy is one that could be feasible with a live account.
The potential problem for copiers, is that even though the signal provider usually wins, it may be because they have a large account, and this means their margin is less likely to be called. A copier with a smaller account may find their margin called sooner, and may suffer a severe pip loss, while the original signal provider can ride out the wrong direction that their trade has taken until it breaks out.
Even if you do find a trader with high overall pip gain, and protect yourself with ‘sensible stop losses’, that may not work. It may even backfire on you and make you lose more trades, because your stop losses may be too conservative for the trader’s strategy. Your trades are closed due to stop loss, but he wins, because he knows that the currency will eventually break out, and his margin is large enough to play the ‘long game’.
If you have a large account that can absorb big losses against overall long term gain, then this may not be the most important factor for you when choosing a trader. But for copiers with smaller accounts that cannot happily take the big hits this is very important.
What a high drawdown rate may tell us about a signal provider’s strategy is that they are the opposite of scalpers. The winning ones are ones that look at the ‘bigger picture’, and not short term indicators like the US non farm payroll. They may actually be some of the best traders, although, again they are taking highly calculated risks. And, let us not forget those traders traders with high drawdown who simply lose anyway.
Drawdown is only one of many factors that you should consider when choosing traders to copy on ZuluTrade. But, it is one that is apparently overlooked by some traders, to their regret. However, at least the facility is there to use of which gives it an advantage over other copy-trading platforms. The best way to test it out, is to try out a demo account.