5 Dirty Tricks Used to Boost Copy Trading System Performance

At some point on your trading journey, you have most likely browsed through the various copy trading websites out there. Like many people, you were probably left wondering:

What is real and what is a scam?

Some of the results seem way too good to be true.

In reality, here are legitimate copy trading signal providers out there.

But they are not always easy to find.

This is because there are a lot of signal providers that are gaming the system. So let's take a look at the tricks that you have to be aware of and how you can separate legitimate copy trading signal providers from the rest.

Keep in mind that the ability to execute these tricks is directly related to how a copy trading platform works. So certainly do your due diligence on the signal providers, but also do a lot of research on the platform itself.

Think of different ways to potentially trick the reporting system and see if that is something that can actually be done. Contact the support team of the website and discuss these concerns with them.

Any legitimate site should be willing to openly discuss the strengths and weaknesses of their platform.

Alright, now on to the list…

1. Publishing Backtesting Results

This is becoming less of an issue, but it might still be possible on some sites. On some platforms, you could do a backtest, export the results, then pass them off as live trading results.

It used to be possible to do this on MyFxBook, but they have since changed things so you can only copy verified accounts.

In order to figure out if this is possible, try to sign up as a signal provider and see what the verification process is. Are there loopholes that would allow someone to cheat the system?

2. Withdrawing Money to Inflate Wins

Another way to increase percentage return on winning trades is to take money out of the account before a big win. So let's say that a signal provider risks 1% per trade and targets an 8% return.

If they lost ten trades in a row, they would lose about 10%. Then they could have one winner, but withdraw half of the account balance just before the target was hit.

This would give the account a 16% gain on the trade and a net 6% gain overall. However, when you take the beginning balance into account, the net is actually a 2% loss.

These numbers are simplified, but you get the point. Look out for suspicious spikes in performance and see if they can be tied to a withdrawal.

3. Curve Fitting

You see this a lot.

A signal provider will publish an aggressive system that is doing really well. Like several thousand percent in a few months.

Then guess what? In 12 months, the gain on the account goes back to zero.

Why?

Because they have designed the system to perform well over the past few months, but it is not robust enough to work over a longer period of time.

The system might be taking advantage of a current trend or some other market condition that will change in the near future. In order to prevent this, look for a track record that is at least three years long.

Longer is better. 

A related variation of this is “account fitting.” This is when a shady signal provider will open several different accounts at the same time. These accounts trade different strategies.

Then if one account does really well, they will make the other accounts private and just keep the best performing account public.  Since the account has been around for awhile, it looks like a reputable system.

But in reality, this is a variation of curve fitting. Here's what a curve fitted account might look like.

4. Trading in Demo Accounts

Another thing that you have to be aware of is if the published results are in a demo or real account. It is obviously much harder to establish a track record with real money. Especially a substantial amount of money.

Many platforms don't allow you to copy demo accounts, but there still might be some out there that do. So be sure to check this off your list before you subscribe to the signal.

5. Copy of a Copy

There's one more strategy that you should be aware of. This is when a person subscribes to a signal from a copy trading service, then republishes those trades in another account, as a separate signal.

In my conversation with Juan Colón at Darwinex, he mentions this as a major problem on many copy trading sites. Since Darwinex is a broker and controls everything from the trading accounts to the reporting, they say that they have eliminated the possibility that someone can republish a copied signal on their platform.

But that is not the case on other platforms. 

So how do you know if the signal you want to follow is a copy? One way to figure this out is to look at all of the signals available on the platform and filter the signals by performance. 

Look for signals that have very similar performance records.

It may be harder if a signal provider is blending signals from multiple sources. But if there are other systems with almost identical track records, it is usually pretty obvious that one of them is a copy.

Then you have to figure out which is the source.

Conclusion

Copy trading can work, but you have to be aware of the tricks that some unscrupulous providers use to boost their published performance. I personally believe that learning to trade for yourself is the best way to make money in trading.

However, finding a solid signal provider can be a good way to diversify your income streams.

Before I end this post, there is one more thing worth noting about copy trading. From what I've seen, the biggest risk outside of finding the right signal provider is making sure that trades get copied to your account properly. 

Therefore, you should start out with a demo account or a small real account to see how well the copy platform works. The signal provider could be the best in the world, but if the platform doesn't execute trades properly, then the signals are worthless.

Good luck and be safe!