🧭Fundamentals
❗️ I recommend keeping the traders you copy confidential to enhance your performance. If too many people copy same wallet, it can lead to less favorable entry prices due to slippage. Similarly, when it comes to selling, you might find yourself selling a lower price. This issue becomes even more pronounced if other copiers are using more efficient bots, have larger positions, or if the targeted wallet trades in smaller market cap coins. Don't assume that copying wallets of influencers or publicly known figures from the internet will necessarily be profitable, unless you are using performant infrastructure and you are able to frontrun your competitors and use TP settings so you can sell before the target wallet dumps the price.
❗️ Don't feel regret if the trader you copied exited with a small profit just before the token's value soared. Remember, hindsight can be deceiving. In trading, what truly counts is how much you risk per trade and the overall change in your portfolio's value over time—whether daily, weekly, or monthly. Consistency is the most important factor in successful trading.
As in regular trading, we need to pay attention to statistics and basic metrics. Moreover, in copytrading, there are another metrics that need our attention:
Winrate and RR
Win rate and risk-to-reward (RR) ratio are two critical metrics in trading that need to be considered together to determine profitability. For example:
RR of 1.5 with a win rate of 45% can be profitable. This means wins are higher and the system is profitable even if more than half trades are losses
Similarly, a RR of 1.03 with a win rate of 70% can also be profitable. Here, gains are smaller but also losses don’t encounter that often
Balancing these numbers is key. A higher RR can afford a lower win rate because the higher profit on winning trades compensates for losses. Conversely, a lower RR requires a higher win rate to remain profitable since the gains per trade are smaller.
To better understand how these dynamics play out in practice, it's beneficial to experiment with an equity curve simulator. These tools allow you to input different RR and win rate scenarios to visually assess potential profitability outcomes and how they can fluctuate over time. This can help you find the right balance between risk and reward that suits your trading strategy.
Average buy amount
Understanding the typical buy amount per trade and correlating it with marketcaps/liquidity of tokens traded helps in assessing the trader's potential impact on market prices. If you still dont understand the correlation between buy amounts, marketcaps and price impact, please watch this simple video:
Trade frequency
Analyzing how often a wallet engages in trades provides insights into the trader's activity level and consistency and the potential of gains you can make in a certain timespan. The more trades the better, if all the other parameters are good.
Hold time
Evaluating the hold time of positions and the number of fast orders a wallet have is important, try to be careful with wallets holding between 5-10 seconds, unless they are good scalpers and its an usual behaviour for them. Avoid wallets that hold for less than 5 seconds because you may end up holding the tokens because the copytrading bots may miss the sell.
Net profit and max profit
To avoid copytrading wallets that been lucky at some point and just had a big win, compare the max profit to net profit. If this is too much, it means you wallet just hit big once and maybe in the future this may not happen, so you wont have same potential returns
Risk related parameters
The longest losing streak is also a valuable metric as it provides insight into what to expect when copying a particular wallet. It's important not to panic if the trader enters a losing streak, as their strategy may have a smaller win rate but a higher risk-reward ratio, making such occurrences normal. Always bear in mind the losing streak value of the trader you're copying and contemplate ceasing the replication if an unusual losing streak occurs.
Also, consider examining the number of consecutive purchases a wallet makes in a single token. Optimal trading patterns often include sequences like one buy followed by one sell, or two buys followed by one sell. It's advisable to avoid more than four consecutive buys on the same token. This strategy helps prevent excessive dollar-cost averaging (DCA) and sidesteps the pitfalls of following traders who may make decisions based on emotion, potentially leading to significant losses in your account.
Drawdown will tell you the teoretical max loss you can expect from your wallet (assuming your trader keeeps same style and have constant performance), pair it with the avergae buy amount. The ratio between this parameters will also help you decide how much SOL you need to keep in wallet when copying that trader. For example, if drawdown/buy amount ratio is 2, and your buy amount is 1 SOL, you should keep around 3+ SOL in your wallet, so even if your wallet hits the absolute drawdown, you will still have enough balance to take the next trades.
Marketcaps and liquidity distribution
This parameter is very important. Correlating it with the buy amount will help you understand the price impact of the wallet. Additionally, this should be paired with the RR of the wallet, because, as you know, copy trading is all about the room we have to make money. The main goal is to target wallets with a smaller price impact compared to the RR.
💡 We know that the number of parameters you need to consider is extensive. To summarize, I would like to mention the following things and how I see everything:
Win rate and Risk-Reward (RR) are critical components in trading, serving as primary indicators of potential success. A high win rate suggests consistent performance and confidence in strategies, while a favorable RR ratio, indicates that the potential reward outweighs the risk taken on each trade. Balancing these two metrics is essential for long-term profitability, as they help traders make informed decisions about each trade's viability and overall trading strategy effectiveness.
Fixed ROI is the best metric I could suggest because it indicates what to expect from every trade in terms of potential returns. Pair it with win rate, as that's a basic trading principle.Then, you need to see the other factors specific to copy trading because of the price impact occurring here. Start making connections between buy amount and liquidity/market caps. If the price impact is higher than the fixed ROI, you theoretically have no real chance to make money while copytrading that wallet.
Proceed to the next step: risk management parameters. This will help you understand potential risks when copying that wallet. Check if the buy amount-to-drawdown ratio is reasonable. More importantly, this will help you determine the potential dollar loss you may encounter. Additionally, the losing streak helps you understand how many consecutive losses you might face. Average and max purchases before sell parameters will help you understand the DCA behaviour of the wallet, and according to your risk tolerance, you can decide if you limit your number of buys or not.
To proceed, we need to focus on the parameters associated with the timespan, which are crucial for understanding the velocity at which capital can be rotated when mirroring the wallet. This involves analyzing metrics such as net profit and the number of trading days. By doing so, you can gain insights into the efficiency and daily performance. This assessment will provide you with a clearer perspective on the trader's strategy and effectiveness, helping you determine the potential speed of capital turnover and the consistency of profits.
In the end, I think we should look at all metrics as part of the big picture, so I don't recommend considering only fixed values for every parameter. For example, an RR of 1.06 can be great on some wallets (low buys, decent market caps), and an RR of 1.25 can be bad on others (low market caps, competition, huge buy amounts). Of course, you can create ideal intervals, but keep in mind you need to correlate all metrics before deciding to copy a certain wallet.
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