You're looking at two traders on a copy trading platform. Both show 50% annual returns. They look identical. But one will sleep peacefully while the other loses everything in the next market downturn.
The difference? A systematic evaluation checklist.
This checklist is your protection. Seven red flags that institutional traders use to eliminate 90% of traders immediately. If any flag is raised, skip them.
The 7 Red Flags Checklist
Red Flag #1: Sharpe Ratio Below 1.0
The check: Is Sharpe Ratio displayed? If no, skip immediately. Is Sharpe above 1.0? If no, red flag.
Why it matters: Sharpe below 1.0 means excessive risk for returns earned. Probably luck-based or leveraged.
Action: Pass on this traderRed Flag #2: Maximum Drawdown Worse Than -30%
The check: What's the Maximum Drawdown? Is it better than -30% (like -25%)? OK. Is it worse than -30% (like -45%)? Red flag.
Why it matters: -30% means at some point you'll watch your account drop 30%. Most people panic and sell.
Action: Pass unless you've personally experienced 30%+ drawdowns beforeRed Flag #3: Track Record Shorter Than 12 Months
The check: How long has the trader been trading? Under 12 months = red flag. Under 6 months = immediate skip.
Why it matters: Short-term returns are mostly luck. 12 months minimum shows across market conditions.
Action: Pass on anyone with less than 12 monthsRed Flag #4: Current Risk Score Above 6
The check: Is Risk Score displayed? Is it 6 or below? Safe. Is it 7-8? Investigate. Is it 9-10? Skip immediately.
Why it matters: Risk Score 8-10 means potential collapse is imminent.
Action: Pass on Risk Score 7+Red Flag #5: Inconsistent Monthly Returns (High Volatility)
The check: Look at last 12 months of monthly returns. Pattern A: +3%, +4%, +3.2%, +3.5% = consistent (skill). Pattern B: +20%, -5%, +30%, -2% = chaotic (luck/leverage).
Why it matters: Chaotic returns indicate leverage or unsustainable strategy.
Action: Pass if pattern is chaoticRed Flag #6: Win Rate Without Context (Especially >80%)
The check: Win rate alone is worthless. Always ask: "At what position size?" 75% win rate but 1:3 risk-reward (loses big when wrong) = worse than 45% win rate at 3:1 risk-reward.
Why it matters: Win rate is gamed. Sharpe Ratio can't be gamed.
Action: Ignore win rate alone. Check Sharpe Ratio insteadRed Flag #7: Massive Follower Count (>50,000 Copiers)
The check: Does trader have 50,000+ copiers? Yes = red flag (investigate).
Why it matters: Extreme popularity causes execution slippage (your trades get filled slower), popular traders attract emotional followers (who panic-sell during drawdowns), and more copiers = worse conditions for you.
Action: Slight preference for traders with 1,000-20,000 copiers insteadThe Evaluation Checklist (Complete)
TIER 1: Absolute Requirements (All Must Pass)
- Sharpe Ratio above 1.0
- Maximum Drawdown better than -30%
- Track record at least 12 months
If any fail: SKIP THIS TRADER
TIER 2: Strong Indicators (Most Should Pass)
- Current Risk Score 3-6 (not overleveraged)
- Positive returns 70%+ of months (consistency)
- Win rate 40-60% range (realistic)
- Monthly returns pattern is consistent (not chaotic)
If 2+ fail: Investigate before copying
TIER 3: Nice-to-Haves (Good to Have)
- Track record 24+ months (proves long-term skill)
- Sharpe above 1.5 (exceptional skill)
- Maximum Drawdown better than -20% (very comfortable)
- Follower count 1,000-20,000 (not too popular)
- Clear trading strategy description (transparency)
Real-World Analysis: Using the Checklist
Trader A: The Attractive Mirage
Verdict: SKIP IMMEDIATELY
Fails 4 of 7 red flags. Blowup is imminent.
Trader B: The Boring Winner
Verdict: COPY THIS TRADER
Passes all red flag checks. Genuine skill and sustainability.
Key Takeaways
- Use Tier 1 as hard filter: Sharpe >1.0, MDD <-30%, 12+ month track record
- Check all 7 red flags before committing capital
- Pass on traders with 2+ Tier 2 failures
- Boring, consistent traders beat exciting, volatile traders
- Re-evaluate traders quarterly; risk scores change
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