Unlocking crypto copy trading: Top metrics for choosing a lead trader

Copy trading is a method that allows less experienced traders to copy the positions of their more experienced peers. The tactic is considered by many to be a relatively simple way for growing traders to gain exposure to sophisticated crypto trading strategies.

However, it’s important to remember that crypto trading always carries some element of risk, and copy trading is no different. Doing your own research before jumping into copy trading is essential. It takes time to understand how copy trading works, the fees involved, and the potential gains to be made. But most important of all, you’ll need to decide who is the right trader — known as the lead trader — to copy, based on your personal strategy and risk appetite.

Here, we’ll walk through the fundamental metrics and considerations you should know when choosing a lead trader for copy trading.

What is crypto copy trading?

Put simply, copy trading is just as its name suggests: a tactic for traders to copy the positions of others. Here, the copying trader has no control over what positions are opened, but can control actions such as closing a position, setting the take profit or stop-loss limit, and defining leverage — all based on their risk management preferences. This approach involves the copier linking their funds to those of the chosen lead trader. That’s why choosing the right lead trader is imperative.

Copy trading is like mirror trading and social trading — two other tactics involving the influence of other traders, but there are key differences to understand.

Here’s a quick breakdown of mirror and social trading.

Mirror trading: In mirror trading, you’ll typically follow the signals of other traders — imitating the strategies of others. However, you’ll remain in control of deciding the position size and certain risk management rules.

Social trading: Social trading encompasses both copy trading and mirror trading and applies some principles of social networking to the world of crypto trading. With social trading, you can interact, swap knowledge, and discuss potential strategies with others. It’s more about collaborating to learn and grow as a trader rather than quietly replicating the actions of the lead trader.

How do copy, mirror, and social trading differ?

Where copy trading would see your account automatically follow every action of a lead trader, mirror trading involves following a chosen strategy and related signals, but you’re the one opening positions. Both approaches can be automated to simplify the process.

Social trading incorporates both copy and mirror trading and refers to the broader collaborative community lead traders and copiers join as they swap knowledge and share insight.

The role of lead traders

The lead trader is the anchor for copy trading. Without them, there is no copy trading. Specifically, the lead trader is responsible for:

• Defining the strategy: Copiers stake their success on the strategic decisions of the lead trader. The lead trader is the one to define the assets chosen, the trading vehicle, and the entry and exit points.

• Risk management: Closely linked to strategic decisions, the lead trader is also in charge of defining the risk management approach to minimize losses and protect any realized gains.

• Measurement: Many agree that being a lead trader brings an obligation to measure performance and make refinements to the strategic approach. After all, other traders are copying them with the expectation of growth.

• Communication: Just as some might expect lead traders to measure and refine the strategy, communicating these changes is also considered important. Frequent and transparent communication is fundamental to social trading, and it's also an opportunity for lead traders to grow their networks and influence.

Why metrics matter in copy trading

Metrics play an essential role in achieving success in all forms of trading — even in copy trading where the strategic decision making isn’t entirely in your hands. Many consider data and advanced analytical tools to be a powerful complement to their own knowledge and experience, guiding them towards smarter decisions.

Although copy trading requires giving up some degree of control to a third party, metrics are still crucial to helping you navigate the tactic in a responsible and intelligent way. Studying the massive amounts of data available to traders can help you answer some fundamental questions before and during your journey in copy trading.

Is this method right for me?

A key question metrics can help you to answer is whether copy trading is the right instrument for you. Analyzing the risk-reward payoff from copy trading could lead you to decide whether the tactic is a good fit for your personal trading goals. Many would argue that performing this due diligence before you commit funds, rather than testing the waters with a live account, is the wisest move.

Is this leader trader right for me?

The many analytical tools available today allow you to study the performance and strategy of prospective traders before you decide which is right for you (there’s more on this below). The task is about much more than deciding which lead trader presents the best opportunity, but the one that’s best placed to help you realize your specific goals.

What’s my exit strategy?

Every strategy needs a goal, and for trading, that’s often a quantifiable growth target. Metrics and data can help you define an end goal to work backwards from, using technical analysis to study indicators that show a suitable entry and exit point. Beyond entry and exit, data on past performance can help you decide which instruments and traders are best placed to help meet your goals.

The top metrics to consider when choosing a lead trader

Now that we understand why metrics matter in copy trading, what metrics can help you choose a lead trader?

Win-loss ratio and win rate

Many would argue the win-loss ratio and win rate percentage is the most important metric when looking for a lead trader. It gives insight into the trader’s overall effectiveness by measuring the ratio of their average gains to their average losses. Here's how to calculate the ratio:

Number of days with profit / Number of days leading trades × 100

Complementing this is the win rate, which is typically a percentage of the total successful trades compared to the total trades. A positive win-loss ratio and win rate points to a solid trading strategy, making it a fundamental metric to apply.

Track record

If you want to succeed as a copier, you’ll want to first find potential lead traders who have a track record of success. Here, it’s wise to zoom out and take a long-term view of a prospective lead trader’s performance. Recent short-term success could disguise undesirable performance over a longer time frame.

It may be helpful to understand the consistency of the trader’s returns over an extended period, as consistency potentially points to a strategy that’s well thought out and has been adjusted in response to fluctuating market conditions.

Risk management

A variety of metrics can be used to understand a potential lead trader’s approach to risk management. Some of the most insightful include:

• Position size: Analyzing a trader’s position size relative to their total capital can be a signal of how much risk they’re willing to take. Generally, a low position size compared to overall capital is a sign of a more risk-averse trader.

• Diversification: Trading 101 suggests a diversified portfolio is more resilient to market turbulence. Among a lead trader’s own portfolio, is there a mix of stablecoins and alt coins? How successful has this diversification been?

• Stop-loss usage: Is the lead trader using a stop-loss to manage uncertainty and prevent a bad day from becoming a catastrophic one?

• Drawdowns: Looking at the maximum drawdown size can show how risk-averse a trader is. A relatively small drawdown size could suggest the trader takes a more conservative approach.

Time horizon

Many copy traders prefer to choose a lead trader whose time horizons — the period they generally hold positions open for — align to their own. If your personal trading goals are short-term, conventional wisdom suggests you find a lead trader who also has a shorter holding period. Doing so can help you avoid compromising on your time horizon.

It’s also important here to reflect on your personal risk tolerance and how a potential lead trader’s time horizon impacts risk. For example, a trader with a long-term view and low risk aversion might not be right if you’re looking for quick rewards and are comfortable with a little volatility.

What’s the role of trading bots in copy trading?

Today’s copy trading can be heavily automated, saving you time, reducing emotional responses, and minimizing the opportunity for human error. These are all reasons why many lead traders prefer to employ bots. The stakes, after all, are higher when other traders are counting on your success.

Trading bots can be used to underpin copy trading in various ways, including:

• Automating trade execution: Trading bots can execute trades for the lead trader as per the strategy they program into the bots. This makes sure of prompt and accurate execution to avoid missed opportunities. This approach is particularly beneficial in fast-moving and volatile markets such as crypto.

• Backtesting the strategy: Traders can benefit from backtesting a chosen strategy, which means testing its effectiveness based on historical market data. Of course, the outcome can't be totally accurate and past events are never an indicator of future performance. However, backtesting can reveal insights to help a lead trader optimize their strategy.

• Risk management: The autonomy provided by bots allows lead traders to program in risk management parameters to be applied without hesitation. These parameters could include stop-loss, hedging, and take-profit, minimizing risk by managing potential losses.

Understanding whether your chosen lead trader uses trading bots, and precisely how, is a vital part of your due diligence. Seeking answers to the questions below is a good place to start.

• How dependent are they on trading bots?

• Do they create their own bots, or rely on others’?

• What role does automation play in the overall strategy?

• What experience level does the trader have with trading bots?

• What data-driven evidence is there showing the bot’s performance?

What are the risks of copy trading?

Like all forms of trading, copy trading carries a specific set of risks and challenges you’ll need to keep in mind before you commit funds.

• Lack of strategic input: The lack of strategic control experienced when copy trading is as much a psychological challenge as it is a practical one. If you’re an experienced trader choosing copy trading because of its relative simplicity and efficiency, the inability to make your own strategic decisions can be stressful. This is only compounded when losses are seen, which are out of your control. And, if you’re less experienced in trading, you may experience a loss of capital with little understanding of why.

• Stunted development: Should you become too reliant on copy trading, you run the risk of slowing your own development as you miss opportunities to analyze, test, reflect on, and refine different strategies.

• Overconfidence bias: Another risk is the overconfidence bias, where you become overconfident in the lead trader’s abilities. This could lead you to be less inclined to complete the necessary due diligence.

The risks outlined above underline the importance of always doing your own research — no matter how much of a hot streak your lead trader is on. This means critically assessing the strategy being applied, the market conditions, and progress towards your goals.

Don’t be hesitant to look at the success of other lead traders relative to the current market conditions to see how your chosen trader compares.

Making the final decision

Copy trading has the potential to be a successful tactic for crypto traders of all experience levels if they choose the right lead trader at the right time. Doing so is easier said than done. Data can be your friend, guiding you towards informed decisions based on the trader’s track record, win rate, risk management approach, and time horizon.

It’s wise to keep in mind that choosing a lead trader requires more than just data. Many successful copy traders also factor in their own personal circumstances, reflecting on their risk tolerance, trading time horizons, and objectives before jumping in.

Taking the time to apply metrics as part of a wider due diligence approach can help set you up for success with copy trading. OKX provides a sophisticated platform to get you started with copy trading, combining a detailed market board and leaderboard to help you find the right lead trader for you.