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Maximizing Darwinex - an open letter from pro users

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.

DARWIN funds
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,

@BenHardy [IDT]
@finbou [THA, FEG, STV]
@tommy9097 [LCW]
@Strivetrader [SZR]

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Thank you VERY much for this honest (and constructive) testimonial @BenHardy
as well as your kind words, and suggestions for the future!

Your post is already in transit in our various communication channels internally :slight_smile:

Thanks a LOT for being part of the Trader Movement and to have chosen us as a partner in this great adventure!

Best,
Nicolas

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This article IMHO deserves an heartfelt applause!

My thoughts:

Why we’ve chosen Darwinex

For any independent, unlicensed trader who intends to defend his/her intellectual property, work legally under safe/regulated conditions, there is no better choice in the world of social trading.

Pros & cons of the proprietary risk engine

I suspect that the process was and continues to be directed at algo trading, either intraday or very short term. It is also designed to massively accommodate thousands of traders/strategy providers, whose evaluation and management can only be done via computerized systems (unlike PAMM, MAM systems with a small number of Money Managers, easily supervised). In the world, social trading started with small investors and so it remains. This characteristic, it seems to me, is perpetuated here in Darwinex. This was the reason (I believe) why Darwinex abandoned the Var5% as per the initial project - low demand for this conservative VaR. But I continuing to think that keeping it could attract bigger investors, more traders, and make Darwinex a champion in the world.

Having said this, as for points 1 and 2, I share your observations, I feel that same problem. The current process does not accommodate traders who combine the intraday (which is not my case) with short and medium term, and to manage the risk in an adaptive way. However, given that this is a massive process (thousands of traders / strategies), I think the solution, at least, is extremely complex, IMHO. It would be good to know Darwinex’s opinion on this important matter.

Capacity and slippage

If I am not wrong, a good proposal. Additionally, if Darwinex could add liquidity providers, it could help.

DARWIN funds

Well, that sounds like an excellent idea! Of all the ideas mentioned above, perhaps it will be the easiest implementation. Everyone would have to gain from it.

Just my humble opinions :wink:

Cheers.

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Just starting with Darwinex and I was wondering how the proprietary risk engine will impact my trading system, that allocate different amount of capital to each single component of the portfolio, based on the Ralph Vince’s publications.
I think that Darwinex Proprietary risk engine should be optional. Investors should have the freedom to activate it or trade the “raw” strategy.

my 2 cents
Ciao

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Hi Epiphron,

Thanks a lot for your opinion.
I agree on your statement that designing a risk engine that is able to “normalize” all trading styles is an extremely hard challenge - no question. However since said engine is the core of every DARWIN all efforts must be first put into the optimization of it (risk engine) before making any further improvements.

Best,
Ben

1 Like

Hi MatPed,

I think making said engine optionally is no solution since Darwinex MUST use any risk engine when officially being the regulated asset manager of every DARWIN. Additionally such an engine makes performances comparable because of showing all strategies running at the same risk.
However I agree on the requirement of said engine not to “distort” an underlying strategy’s trading more than necessary.

Best,
Ben

5 Likes

Hi Ben,
can you help me understand a little better why you think that Darwinex must use any risk engine?
When you buy different ETFs, as an example, you do not have such mechanism. Is just part of the strategy (or type) of product you buy…

I am close to become an investor (small), but I am more confused than assured from such differences with other financial tools.

Ciao

1 Like

If an asset manager uses any signals of external traders that are NOT regulated and DON’T have any license to trade other people’s money, said manager at least must use any rules resp. algorithms to control the risk involved. However there’s no need to do this especially the way Darwinex handles it.

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Usually an ETF is a structured product with a high degree of internal diversification, ETFs have already a very similar risk profile.

ETFs’ behaviour doesn’t depend on the will of a single person.

Traders are much more unpredictable than ETFs , even if you have a 5 years trackrecord with a consistent and low risk profile what prevents you to risk all of your equity on 10 pips tomorrow?

Nobody can predict if tomorrow will be a winning or losing day but with the normalizer Darwinex can guarantee to investors that tomorrow your darwin will move with the same volatility than yesterday.

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I think I got your point. It’s just my impression - possibly a less complex solution to accommodate more conservative trading styles without distorting them too much, could be re-introducing VaR 5% as an option for investors. This is not a free lunch, I suspect. This would probably increase the data storage capacity, thus increasing fixed costs. But I am not within Darwinex’s cost structure, so I do not dare to add anything more to a terrain I do not know.

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Hi BenHardy. If I understand correctly if a Trading System is not camouflaged in some way, can not be offered as an investing tool. If that is the case what you say, makes o lot of sense.

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I loved the idea of DARWIN funds.

I don’t know much about technical analysis. Usually I just buy DARWINs with good Darwinex Score or good profitability.

I’ve been using Darwinex for a year and managed to be profitable, but I surely made some mistakes. Currently my portfolio yields a +4% profit. However, my expectations were much higher.

I’m sure that there are other people that can do a better job at selecting DARWINs than me. And also, that more actively do so (I usually only reevaluate my DARWINs once a month/once every 2 months). So the idea of DARWIN funds sounds great to me!

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Dear @BenHardy, @finbou, @tommy9097 & @Strivetrader

First of all, many thanks to you all for taking the time to write such thoughtful & constructive feedback on making the most from Darwinex. It’s hugely appreciated.

We did mention & shared some verbal comments during the “Ask me Anything” session last week - but given you took the time to start the debate, I’ll do my very best to give our view from the inside.

I look forward to your thoughts & challenge!

The Darwinex USP
It means the world to us every time a qualified trader appreciates the thinking that went into creating it all. We’ll keep at it!

Proprietary Risk Engine
Thank you for explaining the need for an independent risk management service. This is the first line of defence to preserve not only Darwinex, but also spillover effects from trader to trader. E.g. if trader A blew investor 1’s money, the next thing investor 1 would do would be to withdraw funds from trader B - who behaved responsibly. This is an unacceptable risk.

  1. Changes to risk: This is true - regardless of how one parameterises the engine, there will be a transition period until the independent engine “learns” about the new leverage levels. But isn’t this part of the price to be paid for independence? Think of it another way: if you worked at a hedge fund, surely you’d have to inform & seek approval from middle office before implementing a significant change?
    Our team often provides specific advice on how to incorporate similar changes & minimise investor friction. Rather than provide a 1 size fits all answer, we’d be delighted to look at the individual DARWIN & change at hand in order to find the best solution
  2. Once in a quarter opportunities: The first question for the trader is - what’s wrong with trading once a quarter if that’s the real opportunity? This would make the “risk management problem” go away… More to the specific point, traders are optimistic souls - that’s why we love them :slight_smile: Investors are risk averse, and a risk engine MUST look at the worst case. In the case you mention, a position 16 x more levered than usual will have an outsize impact on investor performance (positive or negative). What do you call something that lets a trader deviate 16 times from its typical leverage? A risk manager? Or a groupie cheering on from the sidelines?

Improving the Risk Engine
We could argue forever about where to draw the line, but it’s great to agree that someone HAS to be draw a line in the sand, and he/she must be INDEPENDENT from the trader, in alignment with the investor.

The risk engine isn’t perfect. But possibly it’s biggest gap at the moment is that it is too much of a “black box” to traders. We’re working on functionality to provide instant feedback on if / why the risk engine intervened. This will develop their “intuition” into “how it ticks”… and we’re confident this will improve everyone’s contribution on how best to continue improving the engine. Crucially: we all know it’s not perfect & it never will be.

Hopefully increasing transparency we’ll take all of us to a point where market & trader lessons inform it faster than they currently do.

Capacity and slippage
Several well thought points for an area (capacity management) that requires development. Conceptually one could break it down into 2 concepts:

  1. Capacity maximisation: empower DARWIN providers with tools & information to control investor trade fractioning & sequencing to make the most of the Depth of Market. We are working on this, and expect significant improvements to slippage / divergence for most strategy types once this goes live,
  2. Capacity rationing: because capacity is a rival good, ideally it should be used by investors who extract the most profits. In a hypothetical future, this might even involve traders filtering which investors are allowed to back them (this is a long term idea, we’re just including to show you “how the vision ticks”)

When it comes to liquidity providers: Darwinex have access to the liquidity providers, and to alternative feeds with better Market Depth (but also wider spreads!) than ToB. Part of capacity maximisation will be to give traders transparency & advice on which of the available feeds to trade. It will also involve barring some “toxic” traders from free-riding off a feed designed for benign retail flow in the broker. E.g. it’s not a question of having more providers, but of how we make them available to customers.

DARWIN Funds
One of the functionalities we’re working on is disclosing the “DARWIN trading API” DarwinexLabs use internally for everyone’s benefit. This will open a wealth of options to the more sophisticated traders and investors already on the platform… including the option of a DARWIN EA marketplace, etc. Nothing would please us more than building an eco-system around the DARWIN asset, and we’ll do everything in our hand to support it.

Having said that, current priorities are as per the order of your contributions. 1) Increase transparency around the risk engine, 2) Improve the risk & capacity management toolkit and 3) gradually expand the asset class.

Future of Darwinex
There’s a large team doing their very best to create a true asset class, and make it available to both managers and investors. As you’ll hopefully gather from the above, we know where we want to take Dawrinex - it’s all a question of making the best use of the means available to us… and we’ll get there with your continued support.

Very happy to hear your thoughts and challenges!

15 Likes

Quote: “We did mention & shared some verbal comments during the “Ask me Anything” session last week - but given you took the time to start the debate, I’ll do my very best to give our view from the inside.

Question: Are you going to upload this and upcoming sessions to youtube?

Thanks :slight_smile:

Hi Juan,

Thanks a lot for your detailed feedback.
I really appreciate your (and your colleagues’) effort for steady improvements and ultimately we’re all in the same boat.

Let me tell you my thoughts regarding the points you mentioned:

1.) Changes to risk
Maybe the risk engine could be modified in such a way that it is able to “learn” if there’s a strong correlation between the initial stop loss of a trader’s positions and his maximum risk of equity per position. Because if said “max risk” is identical in most cases, the engine could easily recognize when the trader e.g. suddenly halves the risk (because e.g. his personal trading account became much bigger).
Moreover you’re right when saying that in most cases a trader who “suddenly” uses a multiple of his typically utilized leverage tries to gamble. But this is not a universal rule. For example when trading news strategies there may be very seldom situations in which a DARWIN owner wants to set a very small stop loss but still risk a normal or even increased % of equity for the respective position. In this case the used leverage will be much bigger than usually but the respective trade must not necessarily be much more risky. Of course higher leverage is ALWAYS riskier but in our specific case it may be exaggerated to let the risk engine decimate the position size. I know it is difficult for an algorithm to determine if a “suddenly” higher leverage is due to gambling or based on a robust strategy. However maybe a solution could be to let the engine first consider more than only 3 months for making the assessment and if – only if – a systematic usage of higher leverage is detected such trades’ position sizes still will be reduced but not to a fraction anymore.
In any case said “instant feedback” you mentioned would be a nice new feature to increase transparency regarding the risk engine’s functionality.

2.) Capacity & Slippage
For me it’s a fact that Darwinex needs to improve liquidity as well as capacity in terms of fractioning position sizes within multiple entries according to a DARWIN owner’s demand resp. specification. So I’m looking forward to the new features you’re working on!

3.) New asset classes
Disclosing the “DARWIN trading API” is a very good idea however I still think that additionally “DARWIN funds” created via the regular Darwinex platform would be more important since not many traders and asset managers can deal with API. Actually I think “DARWIN funds” would be the biggest revolution for enabling investors to earn money in the long run and that’s what all is aimed for…

Best,
Ben

3 Likes

Risk engine is indeed crucial but also very hard to implement, It’s impossible to cater everyones needs.

[quote=“BenHardy, post:15, topic:4273”]
… the engine could easily recognize when the trader e.g. suddenly halves the risk (because e.g. his personal trading account became much bigger).
[/quote]I would be shocked if this wasn’t already the case.

I would argue that this is indeed a lot riskier than a lower leveraged trade in a less volatile environment. During a high impact news event, the price won’t care much for your stop-loss but slide right through it. If you are highly leveraged with a small stop loss this can result in much bigger losses than anticipated. Personally, I approve that the risk manager reduces leverage in those situations.

Martingales also have a systematic usage of higher leverage :wink:
It’s very hard to do a proper risk assessment when there is an unpredictable change in the trading behaviour. So if you are doing breakout, scalping and swing trading on the same darwin it gets very tough. Maybe an idea would be to assign specific magic numbers to single strategies so the risk manager can handle each strategy according only to its specific trading history?

Your posts contain great ideas. I just picked the few points where I don’t necessarily agree. Sorry :wink:

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Hi KlondikeFX,

Thanks a lot for your contribution.

Your idea with the different magic numbers for different strategies to enable the risk engine to distinguish between them and treat each of them differently is great! Especially for manual traders also the MT4’s “Comments” could be used for this.

Unfortunately the engine currently actually can’t recognize immediately when the respective trader suddenly halves the risk. It will take 3 months until all positions are copied with the proper new risk level.

I don’t think that a small stop loss within news trading in any case is very risky. Many news traders don’t trade the very first seconds after a major news release (which also doesn’t make much sense when using MT4) but what happens a few minutes later. When using a tight sl then it is of course riskier but not necessarily 10 times more so the risk engine must not generally “kill” such trades. However there must of course be an assessment of the respective trader’s behavior in the past (as I’ve described above).
Martingale, grid or averaging techniques could easily be detected with an updated algorithm. Currently the risk engine doesn’t significantly intervene regarding such systems as you can see here for example:
https://www.darwinex.com/darwin/AUA.4.24/
So for me it seems a little bit strange that said news trading technique is “punished” so hard compared to really high risk trading like AUA.

Best,
Bernhard

1 Like

It seems to be a feasible solution. I do not do scalping, not even daytrading, but my swing / short term trading can vary in time and range of motion, according to the conditions of the market. My experience is that the Darwin engine does not recognize this and scores evaluation criteria such as Os, Cs, R +, R-, Dc as mediocre.

This is not to mention the sacalling in and sacalling out strategies (with zero risk already in place or even positive risk), which seem to me that the Darwinian mercanism returns a negative assessment of the risk criterias. I know solutions could be complex.

I’m still studying better all the above aspects. Anyway, I’m not going to change my strategy and risk rules (which are conservative) in order to accomodate all the possible shortcomings. I’ll assume all possible risks associated in not geting good Darwinian scores.

Just my thoughts.

Honestly, I haven’t deeply looked into this. To make sure we are talking about the same thing. For example, a trader deposits additional money. Internally he keeps trading with 1% risk per trade so his lot size will increase whereas the actual risk stays the same. Are you saying the risk manager does not recognize this? :astonished:

We probably just disagree there. Which is fine :slight_smile:
In my opinion, highly leveraged tight stop losses are in any case riskier than a “normally” leveraged wider stop loss.
Just an example: If you do receive negative slippage of 1 pip on your exit this will make a big difference with a 2 pip stop loss whereas it’s not as bad on a 20 pip stop loss with 1/10 of the leverage. And slippage is just one example. There have been cases where the order wasn’t correctly closed on the investor accounts etc.
In my view high leverage is always riskier. How is the risk manager supposed to handle this if even the two of us can’t agree :wink:

3 Likes

I also said that higher leverage is always riskier, no matter if used after a high impact news is released or not - that’s not the point. I tried to explain that there are some strategies that in specific situations use tight stop loss levels but still risk the usual % of equity (or even more) so that bigger leverage must be used (e.g. 8:1 instead of 1:1 etc. which is still safe enough). I also said that the risk engine should reduce the risk in such cases but not by almost “killing” such positions. Let’s assume that said bigger positions would be used a few times per month. In this case the engine wouldn’t punish them so hard since it considers them as “not excessive” then. However if said riskier trades are only conducted once per quarter etc. the engine currently would “think” WTF. So a longer look back period that analyses the trader’s behavior in the long term would help to let the engine better learn his strategy. Of course this only works if the trader shows consistent behavior, otherwise he MUST be punished in said case.

Regarding your example with the “suddenly bigger account” trading natively at the “old” risk level in % of equity: No, that is not the issue I was talking about. I meant e.g. a trader who makes a lot of money and deposits more and more on his live trading account. Then he “suddenly” decides to halve the risk on every trade since he wants to trade safer now with all the money. In this specific case the respective DARWIN investors would be “punished” by also getting halved returns. This would gradually change then but take up to 3 months (according to the engine’s current algorithm).

1 Like