Dear Traders, Investors and Darwinex Staff,
My fellow DARWIN owners and I want to share our thoughts regarding Darwinex in context of social trading. We are experienced (strategy) developers and asset managers who strive for getting the maximum out of this platform. Hopefully this letter can initiate a fruitful discussion among all users to bring the best ideas together.
Why we’ve chosen Darwinex
When it comes to sharing “signals” of a system that is profitable in the long run the respective trader has to ensure that they can’t be copied and redistributed illegally. Otherwise his strategy would soon lose its edge because of uncontrollable slippage (everybody makes the same trades at the same time “for free”). But in times of Copy EAs and decompilers etc. it’s very hard to prevent scammers from hacking you. Therefore conventional social trading platforms don’t work anymore. Actually most professional traders have stopped offering their strategies through such sites and currently Darwinex is the only social trading platform in the sector of FX / CFDs that really protects intellectual property. This is the main reason why said broker is a must for social traders.
Apart from that you don’t have to be regulated or own any license to get AuM since Darwinex acts as a fully (FCA) licensed / regulated asset manager. This along with the unique platform features as well as the fully automated accounting and the fast-growing community convinced us to create our DARWINs.
Pros & cons of the proprietary risk engine
Darwinex doesn’t copy your trades directly respectively 1:1 for investors. Instead a proprietary risk engine is used to “normalize” the risk for every DARWIN according to VaR95(monthly) = 10 % (by default). In other words: There’s a probability of only 5 % that an investor will lose more than 10 % of his capital in any given month (by default).
Basically this is a fantastic concept because no matter what the trader behind the underlying strategy does, an investor is always protected at the same risk level which he has chosen priorly. But said risk engine also has some limitations. Let’s demonstrate this on two examples:
1.) Assuming that the trader respectively DARWIN owner suddenly decides to halve the risk of every new position the engine will calculate the lot sizes for investors based on the statistics of the preceding 3 months (as always). So if said trader is generally using variable position sizes (e.g. based on volatility) the risk engine can’t “know” if a new small position within the underlying strategy is due to an overall decreased risk setting or if it’s simply about a “normal small position” according to the risk setup of the previous 3 months. So in this case the engine will not - as theoretically necessary - double the “halved” lot size for investors but copy the position the same way as it was done within the last 3 months. Thus investors will finally get halved returns. It will take 3 months until the engine will copy the new 50 % risk reduced trades properly so that investors will get full returns again.
2.) In a second example let’s consider a trader who adapts the risk for every position based on the probability of a specific trade to become a winner. For example he risks 4 % of his equity when seeing a “once in a quarter” trading opportunity, otherwise he only risks 0.25 % on average. Thus if such a big opportunity occurs and the trader uses a relatively big position the engine will consider this as “excessive risk” because from its point of few the respective lot size looks like an aberration (“haven’t ever seen this within my lookback period of 3 months”). So investors will only get a fraction of the respective return although the risk to reward of said trade might have been extraordinary good.
Capacity and slippage
Liquidity is a rival good and hard-fought. Every strategy has a fundamental limitation of how much profits can be made per year in total. Generally scalability is the better the more delay can be used for a position’s entry and exit without losing too much profitability. This is due to the fact that the respective delay’s time interval can be used to sequentially and fractionally absorb liquidity without exhausting too much DoM (Depth of Market) which would result in excessive slippage.
Darwinex currently has a quite thin ToB (Top of the Book) which is ok when talking about one of the very few true ECN retail brokers that allow small accounts. However when considering that more and more DRAWINs are reaching AuM levels that cause big divergences it would make sense to think about an increased environment of liquidity providers. But a feature which allows DARWIN owners to define a time interval, within that positions are allowed to be opened and closed after the underlying strategy’s original entries and exits, would immediately help to increase the capacity of many DARWINs by a multiple.
Choosing the “right” DARWIN is almost as difficult as becoming a (really) profitable trader. Therefore most investors can be happy when not losing their money. However on the other side there are some traders and asset managers out there that know how to invest safely and sustainably. So it would be great if said pros would be allowed to create actively managed “DARWIN funds” that can be copied by investors. Such managers could earn e.g. 10 % of the investors’ gross commissions and/or an additional performance fee in the amount of e.g. 5 % on top. Darwinex wants the best trading systems to make investors happy and a “fund manager” enables this by creating the best of the best investment products - a win-win business for all. Here’s the performance of a model DARWIN fund created on 31st of January 2018:
Future of Darwinex
Darwinex has a great potential of becoming the world’s number one social trading platform. In times of low interest and (retail) investment funds that in more than 90 % of all cases can’t even beat their reference indices there’s a very big demand for alternative investment solutions. If Darwinex will manage it to become “adult” we all can profit from it more than from everything else…
What are your thoughts on this?
Best of luck to all,