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How to create a balanced investment portfolio in copy trading

July 16, 2020

July 16, 2020

Create best investment portfolio in Forex copy tradingOleg Tkachenko

How to balance investment portfolio copy trading in Forex

What is an effective strategy for an investor in the Forex copy trade system? What trader is better for copy trading? The one who features high profitability two months a year but has a positive balance at the end of the year? Or the trader who has a small but stable income during the entire year?

Balancing an investment portfolio according to the investor’s goals and the type of investment allows reducing potential risks and increasing potential profit. Read on and you will know the ways of balancing your investment portfolio and what you should note when choosing a trader to copy forex trades.

How to create a balanced investment portfolio in copy trading Forex

Copy trading or social trading in the forex exchange market has been covered many times in the previous educational articles. If you a beginner trader or a beginner investor, you can enable the option of automatically copy trading. In your LiteForex client profile, you can select any number of traders, copy their trades, and earn money in automatic mode.

This is an opportunity to join successful traders and copy their trading behavior. From this review, you will learn how to select the traders, how to sort traders by specific parameters. You will make your investment portfolio is as balanced and optimized as possible in terms of risk and profitability.

Optimization of risk and profitability when balancing the investment

portfolio

The more is the potential profit, the higher is the risk of loss. A strategy that suggests entering two trades a week (conventionally) is more risky, than the strategy with 10 trades a week with the same weekly profit. Although the first strategy is less time-consuming.

Before start creating your balanced investment portfolio, answer the following questions which will determine your investment management:

  • What is more important for you, low risk, or the maximum profit?
  • Do you prefer strategy with a quick one-time profit but with a high risk, or a steady income but slower and more time-consuming? What is more important for you, save time but risk more to spend more time, but have a lower risk of loss.

There are two investing strategies of optimizing the investment portfolio:

  • “Do not put all your eggs in one basket”. This concerns asset allocation among different asset classes. Creating a balanced investment portfolio. The major share of assets here are financial assets with a middle yield level and moderate volatility, the proportion of such assets is about 60%-80%.

The majority of assets are those whose price less depends on the fluctuations of the Forex market and the fundamental factors. The rest of assets are high-risk/high-yield assets and conservative trading instruments. For example, cryptocurrencies and [safe-haven assets]1.

  • “Put all eggs in one basket but take care of the basket itself”. You create several portfolios with different asset classes, venture, high-risk ones, for those who are prepared to risk their money and wants quick big profits. Or several conservative portfolios, for investors who are interested in the minimum risk and a long-term steady income.

You can apply similar portfolio investment  principles when creating an investment portfolio in copy trading.

Criteria for balancing an investment portfolio in copy trading

The basic criteria of balancing and optimization of the best investment portfolio include the following parameters:

  • Trader profitability. The traders, who perform very high profitability in financial markets, usually trade the Martingale way and other high-risk trading strategies. The below screen presents the radical difference in the profitability levels over the past 4 months.

![LiteForex: How to create a balanced investment portfolio in copy trading][2]

  • The type of strategy employed. Traders are not willing to reveal the trading system they applied, but it could be partially deciphered from the equity changes. You can learn more about the principles for evaluating trading strategies [here][3].
  • The volume of trader’s own assets. The more money is held on the account of the trader the more likely he/she is to be trading in a safe way.
  • The frequency of making transactions.

How to optimize the risks for an investment portfolio:

1. Compare the requirements for the trading strategy of the trader you are going to copy with your capabilities. I mean the deposit amount, financial leverage/ position volume and so on. For example, your deposit is 100 USD, the deposit of the trader you copy is 1000 USD. So, the trader can stand with a deep drawdown, while your trades in mirror trading will be stopped out.

The same is with the position volume. If you, employing financial leverage, set a big trade volume, you positions could be closed earlier with a stop-out.

A tip. If your deposit differs much from the deposit of your managing trader, change the copy trade type. Set a different copy type parameter “In proportion to my funds” or “% of each trade volume”.

The second option will suit you more if you are copying the trades of several traders simultaneously. Note the minimum investment amount specified by the trader.

![LiteForex: How to create a balanced investment portfolio in copy trading][4]

2. Diversify the trading strategies of the traders based on the following parameters:

  • Profitability and risk. These parameters are most commonly, but not always, negatively correlated. If you witness the profitability of 100%-200%-500% per month, take into account that it may be just one-time. It could be just “good luck”, otherwise everyone was a millionaire already.
  • But if the trader still performs such a level of profitability, you are lucky to find such trader to copy the trades!

The stability of making profits is important. Low profitability of a trader doesn’t mean low risks, it may signal the lack of professional skills. And vice versa, a stable high income doesn’t always mean high risk, it proves the trader to be a professional.

  • Important! To make it more convenient for potential investors, LiteForex risk managers have already calculated the maximum risk level for each trader in the copy trading service.

![LiteForex: How to create a balanced investment portfolio in copy trading][5]

The risk scale has values from 1 to 10, where 10 is the maximum risk level (assigned to new accounts). When calculating the risk level, the Forex brokers  consider several parameters in real time. They are the deposit load of the trader, the drawdown level, the account lifespan, and so on. You can learn more about the way the risk level is calculated [here (paragraph 4)][6].

  • The number and the time of trades entered. Select the traders and the strategies so that you won’t create a simultaneous deposit load. Differently put, trades according to different strategies should be opened at different times (for example, during different trade sessions), not simultaneously.
  • Type of the trading strategy. Add both long-term and short-term strategies to your portfolio.
  • Trading instruments. Add to your investment portfolio the traders who trade not only currency pairs but also other types of trading assets, like stocks or commodities. So, that you can make profits in the stock market, forex, commodity or bond market.

3. Pay attention to the following parameters:

  • Trader’s commission. This is a management fee. The first trader with an average profitability of 100% per month charges a 50% commission.

The second one performs a 70% profitability, but the commission is 20%. With equal risk, the second option is more profitable.

  • The trader’s account lifespan. In a perfect situation, the account of the trader you want to copy should have existed at least for year. There should not be any breaks in trading on this account.
  • The maximum drawdown during the entire account lifespan and the drawdowns over particular periods. An enduring drawdown means that the trading system doesn’t perform consistently.
  • Performance consistency in each month. The greater is the difference between monthly performance, the less consistent is the trading strategy and the higher is the risk.
  • The number of people (investors) who copy the trading behavior of a trader. The more investors, the better. The total amount of money held in the accounts of the attached copy traders is also important.

But take into account that not all investors have a sensible approach to selecting a trader. There are can be a great number of copying traders because the trader’s commission is low and the profitability is high (which can mean high risks).

  • How often a trader tops up his deposit. If the trader constantly increases the trade volumes, it means that he/she is confident and has a serious spirit of success.

And finally, I want to give one more tip on managing your own investment portfolio. No trading strategy can be winning forever. If a trader changes a strategy, a trading approach or even takes a break, this will have a direct impact on the structure of the investment portfolio. If you notice a greater deposit drawdown, a sharp drop in the profitability, or other since that the stability was broken, re-balance your portfolio.

Conclusion. There is no perfect investing strategy of how to create an optimally balanced investment portfolio. But there are ways to optimize your investment portfolio according to your personality, goals, and risk appetite.

Everything depends on you! If you have any questions or need consulting, LiteForex analysts will help you at any time. Write your questions and ideas in the comments!

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” :)

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

Useful links:

  • I recommend trying to trade with a reliable broker [here][7]. The system allows you to trade by yourself or copy successful traders from all across the globe.
  • Use my promo-code BLOG for getting deposit bonus 50% on LiteForex platform. Just enter this code in the appropriate field while [depositing][8] your trading account.
  • Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders

![Create best investment portfolio in Forex copy trading][9]

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. www.liteforex.com/blog/for-professionals/safe-havens-and-a-balanced-portfolio/
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  3. www.liteforex.com/blog/for-professionals/rules-for-evaluating-the-trading-system-and-its-equity/
  4. cdn.liteforex.com/cache/uploads/blog_post/blog_posts/Portfolio–balancing/Balance-2-en.jpg?w=30&s=821a7365045a73c7b43ca57ce558597d
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  6. www.liteforex.com/social-trading/faq/
  7. my.liteforex.com/?category=for-investors&slug=create-best-investment-portfolio-in-forex-copy-trading&openPopup=%2Fregistration%2Fpopup&utm_source=blog&utm_medium=article&utm_campaign=bonus
  8. my.liteforex.com/deposit/?category=for-investors&slug=create-best-investment-portfolio-in-forex-copy-trading&promo_code=BLOG&utm_source=blog&utm_medium=article&utm_campaign=bonus
  9. cdn.liteforex.com/cache/uploads/blog_post/blog_posts/Portfolio–balancing/Portfolio-balancing-prewiu.jpg?q=75&w=1000&s=abba869222621924242295e3db5b151e