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What is Social Trading?
Like so many internet buzzwords, the term “social trading” gets thrown around quite often (and rather loosely). While some out there are quick to dub “social trading” the be-all and end-all of online trading, there are still many traders who are wondering “what is social trading?”
Social Trading Basics
Let’s get down to basics: at its core, social trading is about sharing information. While every trader in a social trading network retains their private trading account, in order to participate in the social trading environment, they agree to share certain details about their trading activity.
These details might include the instruments they trade (currency, commodity, index, stock, etc.), the entry and exit rates at which they bought/sold the instrument, the percentage of gain/loss etc. Not to worry, as far as we know none of the social trading sites divulge the actual monetary amounts of investment in each trade. If you run into one that does, it’s advisable to stay away as you don’t want to run the risk of becoming a target.
What is social trading good for?
The answer is simple: by seeing what others are trading and the kind of results they are getting from their trading strategies, you are in a prime position to learn new techniques, gauge market sentiment, and be exposed to trading ideas from around the world. You are no longer confined to theoretical charts and figures, or market news; instead, you have direct access to what thousands of traders are doing in real time, and you can use that information when making trade decisions.
The downside, of course, is that no matter how many times the wisdom of the crowd wins, there will also be times when it fails. It’s always best not to follow the herd blindly, but rather take the data from your social feed into consideration along with traditional market info sources.
Most social trading platforms stream live information generated by their network through “live feeds” – much like the feeds you’re used to seeing on Facebook. However, some also borrow additional elements to bring you more concentrated information and even data analysis. For example, eToro, one of the more popular social trading platforms, collates the live trading data to create a “profile page” for each trader, that consists, among other things, of trading statistics that give a clearer picture of how successful each trader’s strategies really are.
Copy trading: taking social trading to the next level
Combining online trading with aspects of social networks is all good but when asked what social trading all about, most people will answer: copy trading. You see, while live streaming information is a nice addition to any trader’s routine, copy trading is truly a game-changing way to invest in the markets. It’s a way to take practical advantage of other traders’ know how and use it to advance your own trading game.
As you may have guessed from the name alone, copy trading is copying other traders’ trades automatically – or semi-automatically, depending on the individual social trading platform.
On the most basic level, this involves choosing traders to copy and deciding how much money you wish to invest in copying them. The trades are then copied automatically with the proportionate investment amounts, based on the percentage of funds invested in the original trade. In a sense, copy trading is much like a managed account (in fact several regulatory bodies have officially classified it as such) – even though the traders your copy don’t work directly for you, you are essentially letting someone else make the trading decisions for you.
How is social trading different from other automated trading strategies?
For starters, social trading takes the trading decisions out of your hands and places them in the hands of another person rather than an algorithm – for better or for worse. For better because the real person is staking their own money on the same investments, so they have an extra incentive to do well, and because they have the flexibility to adapt to live market situations. For worse because, well, being human, they are susceptible to human errors and emotional outbursts..
The real difference, however, and social trading’s real advantage, is the amount of control you retain over your account. With algorithm or robot trading, once you hand your funds over to the algorithm, you can no longer make any input in the development of your positions.
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The same is not true for copy trading. Many platforms will allow you to take a number of steps to control your “copy relationship”, from enabling you to place stops and take profit orders in order to manage risk, to giving the option to take over a copied trade – thereby severing the link between it and the original trade and placing it in your hands entirely.
So, what is social trading all about? It’s about connecting with people and giving you the tools to use the knowledge and know-how of others to your advantage. How much you want to rely on others to make your trading decisions is up to you. You might want to simply use the social trading network of your preference as an indicator of investor sentiment, or you might invest most of your account in copying a variety of traders, there is no right or wrong way to go about it!
The important thing is to understand the benefits of social trading as well as the risks involved so you can make the best out of your social trading experience.
What is social trading?
Social trading involves the free sharing and using of information amongst a group of traders. The information provides access to new trading ideas, risk management and client sentiment. Social trading integrates the exchange of information into an online discussion. It creates a community feeling as traders can work together to plan specific trading ideas. In addition to sharing research, traders can also pool funds to generate greater gains.
Social trading is generally performed on social trading platforms. Investors can trade within a community and replicate the style of expert traders. Moderators, who are usually experts, drive these discussions. Social trading can also involve aspects of copy trading and mirror trading.
An offshoot of social networking, social trading has created a different way to test financial information. In the past, investors would focus on fundamental or technical analysis. With social trading, however, traders can share information about the current market environment and offer insight into future market movements, thus driving trading decisions. For some traders, it has changed the rules of analysis.
Most social trading takes place online. It provides traders with psychological support and can offer different points of view. By emulating some of the techniques learnt in a social trading environment, traders can often improve their strategies, risk management techniques and trading psychology. Social trading focuses on short-term trading. This can in turn provide additional liquidity to the markets.
Using social trading, one can also access the historical performance of members and can see the returns produced by specific strategies. There are strong benefits to the transparency associated with it.
What are the benefits of social trading?
There are several benefits associated with social trading. Even if one is not open to online social interactions with other traders, there are specific aspects of social trading that can be beneficial. Social trading chatrooms with a moderator allow traders to follow trades and ask questions. This can be a good way for novice traders to learn more about trading.
Social trading is a broad category of trading and can include elements of copy trading and mirror trading. Traders can share information about individual trades that can be copied by other traders, or specific trading strategies that can be mirrored by other investors. Social trading can span the foreign exchange markets, as well as stock and commodity markets.
Social trading platforms
Social trading platforms are usually provided by retail brokers. Anyone can become a leader or follower. Leaders recommend trades – they must show a track record and describe their trading techniques. This helps followers to find them. Some social trading networks have millions of followers and provide many social trading tools. Some social trading platforms provide a risk score, like a Sharpe ratio, along with leader track records. These offer higher levels of transparency.
A risk score like the Sharpe ratio shows the average return, divided by the standard deviation of the returns. The larger the number, the more efficient the returns.
Social trading platforms also often provide a social newsfeed. Members are constantly providing information about a specific subject. Traders can post their trading ideas as well as information to back up their thesis.
How to find a trader
Some social trading platforms provide a search criteria so traders can customise their social trading experience. Traders should test drive their trading for a while first before they start copying other investors. This can be done with the use of a demo trading account. Traders should also ensure that the risk score is in line with their expectations and the maximum drawdown is not outside their tolerance level.
When a trader’s Sharpe ratio is low, it means that they are used to making money from volatile changes to their positions. This can mean that they have an average return of 20% annualised but will regularly make and lose more than 50% on their trades. If the average return is 20% and the standard deviation of the returns is 50%, the Sharpe ratio is 0.4.
If, on the other hand, the average return is 20% and the standard deviation of the returns is 10%, then one will have a Sharpe ratio of 2. This is very good. The maximum drawdown offers information about the peak-to-trough drop. One should understand that if a leader has a maximum drawdown of 30%, a trader copying this person’s trades could lose 30% from peak-to-trough.
It is usually a good idea for traders to consider risk and diversify their capital across many leaders and to pick a strategy that meets their time horizon. For instance, traders who want to place lots of short-term trades should find a trader that has this type of historical track record. If they are interested in trades that are held for multiple days, weeks or months, they should focus on traders who have transacted trades in this fashion.
While one can set up an automatic trading mechanism, it is considered unwise to leave money unattended. As a very minimum, it is recommended that traders check their trades at least once every day. The best due diligence is to understand the logic behind the trading decisions made by a leader, and to be interactive in asking questions about the strategy one is using.
What is the difference between social trading and copy trading?
With social trading, one can garner ideas from many social trading networks. Copy trading, on the other hand, involves solely copying the trades of another investor. The goal of copy trading is for the trader to have the same positions as the investor they are copying. When copying another trader, one doesn’t receive the layout of the trader’s strategy and follows their trades blindly.
Traders can also invest their capital in a thematic investment. These are funds that turn capital over to specific traders who then act as portfolio managers. In essence, one is participating in copying funds. This is a bit like a funds investment, but instead of investing in hedge funds, one is investing a pool of capital into a fund that copies multiple traders. This provides diversity in copy trading and allows returns to be uncorrelated. Traders can perform this on their own, but it’s imperative for traders to ensure that they are not putting all their eggs in the same strategy basket.
What are the risks of social trading?
Like any trading activity, there are risks involved in social trading a market. Whether when copying another investor’s strategy or using the information to create their own trading decisions, traders should understand that there are risks involved. All trading leaders will, at some point, lose money. Individuals should feel comfortable that the risks are in line with their individual tolerance levels.
Traders should also outline their own parameters. It is useful to find a social trading environment that fits their individual profile. For example, if they are socialising with home run hitters, they should be aware that these traders are willing to risk large sums to generate large gains. The more capital risked, the greater the reward. They should also be aware that some social trading platforms charge a fee.
When allocating capital to social trading, traders should start with determining the amount of capital they are willing to lose to generate the gains they are looking to achieve. This step is critical and should not be overlooked. They must also be realistic. For instance, a trader cannot expect to risk $50 to make $5,000. Traders should carefully look through the risk profiles associated with different social trading leaders and see if they are in line with expectations.
Social trading involves the sharing and using of information amongst a group of traders. There are several types of social trading, including strategy mirroring and copy trading. The information provided in social trading allows access to new ideas, risk management, and sentiment.
Social trading can drive a community feeling as investors work together to formulate specific trading ideas. News feeds in social trading platforms offer access to real-time ideas that describe a strategy in detail. In addition to sharing research, social trading can also involve pooling funds to generate greater gains.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
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In this supplement, David Stevens, explores the growing world of social trading and what it means for the financial services industry.
What is social trading?
Social trading is a new online trend quickly picking up traction across financial markets. While there are just a few operators offering the service, there’s a strong likelihood that this movement could very well be the ‘next big thing’ in investment markets.
For those unfamiliar, social trading is essentially the people’s stock market, where users can follow and even copy the trades of the world’s best players. But is this the easy way to play the market, or does the over-democratisation and gamification of the world’s financial markets place us at risk of making risky investment decisions?
Until a few years ago, trading on the stock and currency exchanges happened behind closed doors with guru traders, hedge fund managers and brokers demanding huge sums from clients wanting to take advantage of their expertise. This when the majority of so called professionals underperform their benchmark. When you consider that the benchmark itself may be below inflation then this is a sobering thought. There seems to be a belief by some people that investing is very complicated and should be left to professionals – we know this is not the case.
The idea of social trading is built on a few simple principles:
- Everyone deserves the opportunity to invest in markets without the need for expensive brokerages.
- Not everyone has the time to monitor real-time market fluctuations.
- People should have control over what they invest in.
- Advanced social technology means trading can be democratised and insights easily shared globally
Based on these principles, a few online services are providing the means to allow Joe Public to bypass the world of secretive stock tips and essentially piggy-back on the success of some of the world’s most successful traders.
How does it work?
According to WorldFinance.com, social trading works by giving ‘…those with limited financial knowledge an insight into the stock exchange by allowing a real time analysis of individual trader performance. Seen as one of the most significant shifts in trading, social trading has the potential to open up opportunities for those interested in stock markets.’ To paraphrase (although hopefully without oversimplifying the concept), imagine Twitter for investors; users create a social trading profile and as they trade, their interactions are broadcast in real-time to their followers. If followers of a particular investor like what they’re doing, they can even choose to ‘copy’ their trades (like a retweet) with a click of a button, removing what many would see as the painful process of identifying the best performing currencies and commodities and then deciding whether to buy or sell them.
I have a stockbroker, why should I pay attention to social trading?
With as much as $59 Trillion being traded across the top exchanges in 2020, and $4 Trillion worth of trades happening daily on the Foreign Exchange, it’s not surprising more and more people want a slice of the pie – and at first glance, social trading provides the means to get stuck in quickly.
Brokers typically charge for their expertise, often as much as $10 per trade. In real-time markets where prices fluctuate in a matter of seconds, this adds up. In social trading, the process of socialising investments essentially democratises the investment process, removing the middle man in the form of a hedge fund manager or broker meaning your pie slice is a little bigger.
Features such as leader boards allow you to see the most successful traders in terms of profit by week, month and year. Making this data public should, in theory, provide insight into the best traders to follow, thereby increasing your earning potential. This gamified approach also instills a sense of aspiration into the service, although, as we’ll explore later, this also has the potential to give misleading impressions about sensible trading practice.
Over the next few weeks we’ll be looking in more depth about social trading, particularly around the existing pitfalls, the potential opportunities to improve the customer experience and what social trading could learn from online gaming. There’ll also be some juicy insights from investment experts about whether these kinds of tools could be the key to market stability, or whether they will inflate the risk of another global recession.
Why would a successful trader share his trades with strangers?
In finance, as in life, imitation is often the sincerest form of flattery. New technology combined with advancements of social trading platforms and online networks today make it even easier than ever for investors to share – and copy – trading ideas. But that is not all. Traders who allow others to copy their trades typically earn a tiny little extra each time someone copies their trades (this is usually built into the technology of the social trading platform). In itself this remuneration isn’t much but when a top trader (i.e. signal provider) has hundreds if not thousands of followers this can add up to a healthy extra income each month.
Anyone can become a ‘popular investor’ on eToro or a ‘signal provider’ on ZuluTrade if they can convince enough people to copy their trades. Signal providers receive a commission for each trade executed by a live follower account while eToro rewards ‘popular investors’ based on the number of copiers they rack up.
Social trading: Just another ‘get-rich-quick-scheme’?
In the feature above, we explored what social trading is and how the act of ‘following’ and ‘copying’ the trades differentiates it from other investment options. This next post explores some of the mechanics and potential pitfalls of the system, especially for novice investors, or those expecting a quick return on their investment.
First things first; social trading is not a get-rich-quick scheme. Don’t get me wrong; there’s nothing stopping you from making some serious money, if you do it right. But investing in stocks and shares is like gambling. Just like when the odds go against the favourite in sports events, the same can happen in investments. Values can fall as well as rise, and the historical performance of stocks, currencies and commodities does not provide a clear indicator of future performance.
Trading can be hard so this is another alternative for people who don’t know how to trade – they can simply copy the more experienced traders. It may seem easy to make money copy trading but this is a misconception; you still have to put the time and do your homework including careful risk assessment. Finding traders who know what they are doing isn’t easy and you have to keep watch; unfortunately many of the traders on these trading platforms are out to make a quick buck. Some social trading sites provide incomplete stats so although a trader may look at first instance that’s he’s successful and making good gains, the underlying data may reveal that he’s actually sitting on a number of losing trades that they haven’t closed yet in the hope the trades will reverse.
As a new member of a social trading platform, these realisations raised a few concerns for me:
Am I following bad investors?
In theory, while ‘following’ and ‘copying’ other traders should take the pain away from investing, I could end up copying a series of poor investments based on chains of lucky novices.
For example, imagine I am following and copying the trades of Trader Z, who is copying Trader Y, who is copying Trader X. This would be fine if they all knew what they were doing. But what if they’re all like me and are just amateurs following other high performers? What if it’s a really long chain of people with no trading experience copying each other and getting lucky based on the decisions of, for example, Trader A at the beginning of the chain. Despite the fact she may be an expert, there’s a risk that the ‘Chinese whisper’ effect could get out of control and people are no longer making informed decisions.
Secondly, there is a risk you could simply be following the random dumb luck of a trader who is doing no more than taking a long or short punt, the 50/50 taking a shot. Start off with a large enough group of traders, the larger the better, and some are bound to make a success of it due to nothing more than probability and the way numbers play out. Indeed you only need one who has a particularly good run to attract people.
Could the scale of trading result in manipulated markets?
Another concern was that placing complex market trading in the hands of many novices would exaggerate the effect of global trading behaviour to such an extent it could create a snowball affect across markets, potentially contributing to world economic events on an unprecedented scale. Furthermore, could this be used by rogue traders to alter the effects of market conditions?
Is it focusing too much on short-term success?
Tools like the leader board at first glance are extremely useful in identifying the most successful traders, therefore providing a good indication of people to follow.
As a result, I ended up following people with the highest percentage gains (more than 300% over their initial investment), as indicated by the leader board, thinking I could make good money quickly. Low and behold by Friday last week I had made $150, so carried on in the same vein. But come Monday morning I was $15 down on my initial investment!
My concern is that while the leader board tools highlight the best performers to follow, it makes a game out investing and focuses people on short term gains, rather than promoting good trading practice and helping them see the bigger picture. In fact most people have a tendency to follow the traders with the best short-term performance but this is a mistake – those traders are likely to be using very risky strategies with a high probability that they will eventually blow up their accounts – the ones you should follow are the ones who have the longest track record and who don’t trade that often.
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Best Social Trading Platforms And Brokers 2020
Social trading opens trading and investing up to everyone. Social platforms (and brokers) allow traders to copy more experienced investors who share their trading information. Retail traders can see what professional forex traders do across the network and make exactly the same trades from their broker platform or app. Experienced traders can also benefit with social trading platforms like eToro, Zulutrade and Ayondo all keen to host profitable traders. Read on to see if social trading might suit you;
Top 3 Brokers For Social Trading or Copy Trading
What Is Social Trading?
Social trading is an area of trading which, its proponents say, democratises trading by making information more accessible to less-experienced traders and investors.
Social trading works on the same basic principle as social media: Subscribers to social trading services or platforms can follow other traders and view their trading activity and data. They can then use this information to guide their own trading.
Some forms of social trading, such as copy and mirror trading, allow users to automatically copy the trades of others.
Regulation is as tightly controlled as the rest of the finance and investing industry.
Let’s explore the history of social trading, its different forms, and its inherent pros and cons.
Comparing Social Trading Brokers
All social trading brokers have their unique selling points and their positives and negatives for any trader, but to actually work out which one is best for you can be tricky. Here’s a quick guide to the main things to look out for.
A key comparison factor is the total trading costs you might encounter between one firm and another. These may not be as clear as you would hope:
Spreads And Fees
One of the most important factors for most traders when choosing a broker is their fees. Whether you trade forex or ETFs, costs mount up over time.
This is more complicated than a simple look at whose fees are highest, because you’ll need to think about how you plan to trade and so which features you’re going to use and whether there’s a fee attached.
It’s often free to open an account and trade, but brokers may charge fees for anything from the number of withdrawals you make to the dealing spread, so check that their pricing plan won’t end up taking an unreasonable chunk of your earnings.
Another point of difference between brokers is the minimum trade size or the minimum deposit when you’re starting out.
Some brokers are designed for complete beginners, and so don’t make large demands when it comes to their minimums, while others are designed for higher rollers but may be cheaper as a result and offer better leverage.
As with everything, the right answer depends on your trading style.
Deposit And Withdrawal
Finally, the way you actually add and subtract money from your accounts is important. Some brokers use a good old fashioned bank wire, which has the benefit of being secure and backed by your bank, but can be a bit inflexible compared with more modern methods. Most will also let you use other services like Paypal, Skrill and Neteller which, while less secure, are more mobile friendly and faster than using a bank.
eToro – Copy Trading – Lower Risk Examples
How you intend to use you account will impact what sort of platform suits you best, and it is another important factor to compare. Do you need charting functions? Would you prefer automated trading? You need the right platform for your needs.
Ease Of Use
Brokers will either use a trading platform of their own design or a generic trading programme under their brand which you’ll use day to day.
This is another of the most important factors, because it’s the interface you’ll rely on to make your trades, and it needs to be right for you. When you’re just starting out the most desirable feature is usability.
Trading is complicated enough without your platform making life harder, so a clutter-free display and a clear and logical layout are both important to help you get the most out of your broker.
Having the buttons in a sensible place, having useful shortcuts and quick read displays are obvious, but important when you’re starting out.
As an alternative, the next best option is a highly configurable interface with multiple trading windows, so that you can make it fit your needs even if it’s not perfect straight out of the box.
Once you’ve found a front end that you’re happy with, it’s time to look under the bonnet. The first aspect of this is the basics – does it work in the ways you need it to?
How fast are your trades compared to other platforms on the market? Does it make the trades you intended accurately? All of these are important because even the best looking interface is useless if the product isn’t good enough.
The second aspect is security. It’s impossible to guarantee you won’t be a victim of fraud, but the best you can do is to do your homework on your broker.
Make sure they have some kind of security policy, and that they can tell you how they secure your data and what steps they take to minimise risk.
Platforms with two factor authentication or deposit protection guarantees are a good idea, as are ones with more stringent financial checks.
Another way to protect yourself is to make sure that the broker is registered as a trader in your region, and that they are licenced to offer their services in the market, which ensures somebody makes regular checks on their conduct.
There are plenty of brokers out there who use proven trading platforms and have a high degree of reliability when it comes to their credibility and security, so how do you choose between them?
The next step is to look at their platform’s features. There is a huge range of options when it comes to features, so it really is a buyer’s market, and it’s up to you to decide how you want to trade.
A simple one, but still important. Is trading available whenever markets are open or is there downtime when you can’t trade?
Some brokers don’t operate at unsociable hours where they’re based, which could prevent you from trading in a target market, or worse, your home one.
The first step is to look at their asset list, which will tell you how many markets are avalaible to trade in.
Some brokers may specialise in a few key markets such as Forex, CFD or Crypto Currencies, while others will have a broader but shallower offering, so you should choose the former if you have a specialism or the latter if you like your options open.
A forex trader specialising in specific currency pairs will likely be happy at any broker, but other trading strategies might rely on a diverse set of markets with less correlation. So choice of markets is criteria that will be different for each person.
Next up, what kinds of tools and widgets are there on the platform and do you need them? Brokers offer everything from news feeds to advanced analytics, so you should think about what you need and what’s included in the price.
One particular function that’s handy is risk management. Some brokers offer risk management tools that offer risk guidance and ways to stop losses from building, which can be handy when you’re starting out.
Mobile App And Research Tools
You might be content with a bare-bones package and the option to upgrade, but it never hurts to have tools up your sleeve if the price is right. A metatrader platform might be over complex, a binary platform too inflexible. It is an important consideration.
Two of the most important tools that most brokers will offer are the app and the analysis features, so you should pay particular attention to these when you’re doing your research.
You need to find out if the app is just as functional as the programme or if it’s more of an accessory to it, and how many models the analysis features offer.
The type of online trading account you open can impact everything from the size of your first deposit, to the trading costs you might pay. Ask yourself what kind of account you need before making a comparison.
Margin And Leverage
Comparing a trading account can be more important even than comparing brokers because different accounts can radically change your experience of a platform, and with the right platform, it can unlock your full potential.
Many brokers go beyond basic accounts and offer more expensive Professional and VIP versions, which may contain elements missing from basic accounts that you need.
Paid accounts may have higher leverage, which will allow you to trade more assets than you have, a virtual necessity if you plan to be serious about trading.
Some often also allow you to trade in more exotic currencies beyond the Pound, Dollar, Yen and Euro – such as the Real, Dinar, Zloty and Canadian Dollar – or cryptos like Bitcoin, Dash, Litecoin or Ethereum – which can greatly enhance your trading options.
Leading Traders At Zulutrade
Copy trading offerings can vary. Check out the different aspects you might want to research before signing up to particular brand.
Follow & Lead
The ability to copy trades and be copied is what distinguishes social trading from other kinds, so the quality of the copy trading on your platform is of paramount importance.
The beauty of social trading is the ability to follow others in one direction, then make your own path once you’ve got where you wanted to go, and good platforms will enhance that ability.
The size of the pool of fellow traders to copy is important because it is more likely you’ll find like-minded traders in a bigger pool, so this is important for comparisons.
Amount Of Data
It’s also important to be able to see the history of a particular trader, how successful they are and what their strategies are, so that you’re not going in blind when you choose to follow someone.
Variety is also important, and you don’t want to be held back, so try and avoid platforms that artificially restrict how many traders you can follow, or limit the types or scales of trade you can track.
One of the best ways of assessing the quality of a broker is the feedback that other traders like you have given them, but you can also do your own detective work.
Simply using comparison sites can be one way to do this, and a legitimate broker’s rating will compare well to others on an equally reputable comparison website, but you can also check out their reputation on social media websites too to find out what others are saying about them.
Security Of Broker
Beware of brokers without a social media presence and a limited number of reviews, as they may not be trustworthy.
Another option is to check out their official credentials. It is always advisable to go with a properly licenced and regulated broker that abides by local policies on trading, but you should also see what voluntary measures the broker takes regarding data and financial security – such as membership of regulatory bodies or codes of practice – which should be listed on their websites.
It is also worth double checking the financial stability if possible.
Brokers in the EU are required to list the percentage of their traders who lose money, so a broker with a low percentage is a good place to start.
A large percentage of traders will lose, that is the nature of markets. But a higher losing percentage at a certain broker may mean trading costs and spreads are making profitability harder for traders there.
Finally, part of the joy of trading is growing and learning as a trader to become better and more successful, and a broker who helps you do that is a real asset.
Some brokers will offer online tips, classes or video tutorials on everything from risk management to diversification, so try to take advantage of their advice and education where you can.
The History of Social Trading
Social trading is a logical progression from traders talking to each other about their day’s work.
Imagine a scene in the late 1980s where a group of traders are in a wine bar after markets have closed for the day: one tells the others about a position they’ve opened that looks sure to make a profit. The other traders like the sound of this investment and copy it for themselves the next day.
If you follow that scenario through the technological advances of the past three decades, you can easily picture this conversation being repeated through emails, then through chat rooms and other internet forums; each time with more and more people able to hear the conversation.
Quite quickly, the idea to charge people for access to the conversation was developed.
With the rapid rise of social media sites such as Facebook in the 2000s, it was only a matter of time before trading gained its own form of social media.
eToro was one of the first companies to capitalise, launching their OpenBook platform in 2020. Not only do OpenBook and other platforms allow traders to share their trading activity, they theoretically allow anyone to see what the experts are doing in real-time and learn from them (and copy trades in real time).
The secrets of the trading floor become common knowledge and everyone can profit.
Forms of Social Trading
Different platforms allow for different forms of social trading. Here are the most prevalent:
The term copy trading is sometimes used interchangeably with social trading. This can be misleading as although copy trading is a form of social trading, social trading is not necessarily copy trading.
Copy trading platforms, such as eToro , ZuluTrade and Ayondo, allow investors to not only follow traders, but also to automatically copy their trades.
Traders are ranked according various criteria including profitability, career level, maximum drawdown (the largest amount of money they’ve lost after a bad run of trades), number of followers, risk etc.
Using this information, less experienced traders can decide who they trust and assign a percentage of capital to be invested in opening the same positions. For instance, for every £100 that Trader A invests in Stock X, you might set the platform to invest £10 of your money.
Your position closes when the trader’s does and you make the same relative profit or loss as Trader A.
Mirror trading is used in forex trading. Although it sounds identical to copy trading it has crucial differences, the main one being that the it is a strategy that is copied, rather than a trader.
An investor (or ‘mirror trader’) selects a trading strategy based on what currencies they wish to trade, how much money they want to make and how much they can afford to lose.
When a position is opened by the chosen strategy’s developer, the same position is automatically opened (or mirrored) in the investor’s account.
Mirror trading is generally used by more experienced forex traders as its fully automated nature can lead to a high volume of activity and so requires a larger amount of capital than copy trading.
Signals and Tips
Less automated ways of social trading include the use of signals and tips. These are generally provided by experienced traders for free (either on websites or through YouTube videos etc.) or through subscription services such as internet trading rooms.
There are also forex signal subscription services available. Signals are generated either by human analysis or by algorithm and can provide investors with a text or email alert when a forex signal matching a selected investment profile is generated.
Although signals and tips services generally cost money to subscribe to, traders still have a choice whether to act on each one. Choice of communication technology is key when using signals – speed is of the essence.
The Pros and Cons of Social Trading
There are of course benefits and risks of using social trading. Here are some of the major ones:
One of the main advantages of social trading is that it cultivates collective knowledge. Less-experienced traders subscribing to social trading platforms aren’t being given the opinions or strategy of one more experienced trader; they’re presented with a much wider range of information from multiple sources.
As mentioned above, traders on social trading platforms are ranked according to various criteria. These give other users a degree of security as they can assess a trader’s credentials before they begin copying their trades.
Watch and Learn
The ability to see what other traders are doing in real time is real advantage of social trading. New traders have the ability to watch what other traders are doing and not only learn from it, but also make those trades themselves. In this respect, social trading can offer an exciting way to learn ‘on-the-job’.
Trading can be a daunting, perhaps even lonely venture when you’re new to it and sat at home in front of your computer. Again, the collective nature of social trading is an advantage here. Because traders are sharing their knowledge and learning together, it can help build new traders’ confidence in their own growing abilities.
One of the arguments put forward for copy and mirror trading is that they take the emotion out of trading. Investment decisions are best made with the head and not the heart, and the sometimes pressured nature of trading can sometimes lead to misplaced decisions.
By automating the process to their specifications, a trader can theoretically let the algorithms make trading decisions based on logic rather than emotion.
Whilst there are advantages to social trading, there are also risks and drawbacks:
Although traders on social trading platforms are ranked according to their activity on that platform, their trading still retains hidden elements. For example, the top-ranked traders whose activity you decide to copy may have a large success rate but won’t reveal any of the following:
How much capital they have. They may have a large enough amount to feel comfortable opening high-risk positions
Whether their portfolio is heavily diversified, helping to hedge any losses they make on this platform
Unless you really do your research, it’s unlikely that you will be able to find out about the nature and success of their off-platform trading activity
How successful they’re going to be in the future
False Sense of Security
Although social trading does give a genuine sense of security, it also has the potential to lull less-experienced traders into a false sense of security.
It should always be remembered that trading is never easy. There is always risk and any system that claims to make you vast profits with little or no effort should be approached with caution. Social trading is no exception.
Although the process becomes more transparent and allows you to follow many different seemingly successful traders, it is still possible to make big losses very quickly if you have no idea what you’re doing.
This follows on from the last point. Imagine that you’re following only the most highly ranked traders on the platform and the first few trades you’ve copied have made a profit without you having to do much.
In such situations it’s very easy to become overconfident and leave the platform to its own devices. However, all traders can experience large drawdowns and, if you’ve not been keeping a close look at how the traders you subscribe to are doing, so can you.
As pointed out above, they may have capital available to risk which you don’t.
The only ways to hedge against potential losses when using social trading are the same that apply to any other form of trading:
- Employ a proper risk management strategy
- Keep a close eye on your trading platform, especially when copy or mirror trading
- Do your own continual research on market conditions and outlook
- Only put up capital you can afford to lose
eToro is a multi-asset platform which offers both investing in stocks and crypto assets, as well as trading CFDs.
Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 62% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
Past performance is not an indication of future results.
Cryptoassets are volatile instruments which can fluctuate widely in a very short timeframe and therefore are not appropriate for all investors. Other than via CFDs, trading cryptoassets is unregulated and therefore is not supervised by any EU regulatory framework.
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