Social trading opens up trading and investment for everyone. Social platforms (and brokers) allow traders to copy more seasoned investors who share their information about trades. Retail traders will see what skilled fx traders do around the network, and from their broker site or device make exactly the same trades. Experienced traders will also enjoy hosting competitive traders with social trading sites like eToro, Zulutrade and Ayondo. Read on to see if social trading suits you.
What is Social Trading?
Social trading is a trade field that, according to its advocates, democratizes trade by making knowledge more available to less experienced traders and investors.
Social trading operates on the same basic concept as social media: social trading service or platform subscribers may follow other traders and see their trading behavior and info. Then they can use this knowledge to direct their own business.
Some forms of social trading, such as copy and mirror trading, allow users to copy other’s trades automatically.
This is regulated as closely as the rest of the finance and investment sector.
Let’s discuss the social trading history, its various forms and its underlying pros and cons.
Comparing Social Trading Brokers
For traders, all social trading brokers have their specific selling points and their positive and negative points, so it can be difficult to really figure out which one is right for you. Here’s a short guide on the key items you can look for.
The overall trade costs you may face between one company and another are a crucial factor for comparison. These may not be as clear as you would hope:
Spreads And Fees
Fees are one of the most significant considerations for most traders when choosing a broker. If you’re trading fx or ETFs, time costs are mounting over time.
This is more complex than a quick look at what fees are the highest, because you’re going to have to think about how you’re trying to exchange and then what features you’re going to use and if a fee is attached.
Opening an account and trading is always free, but brokers will charge fees for everything from the amount of withdrawals you make to the dealing spread, so make sure their pricing scheme doesn’t end up eating up an unfair chunk of your earnings.
Another difference point between brokers is the minimum size of the trade, or the minimum deposit when you start.
Some brokers are built for absolute beginners, and when it comes to their minimums, they don’t make major demands, whereas others are built for higher rollers, but as a result they might be cheaper and offer more leverage.
As with anything, the correct answer depends on your type of trading.
Deposit And Withdrawal
Third, it’s crucial how you add and remove money from your accounts. Some brokers use a good old fashioned bank wire, which has the advantage of being safe and sponsored by your bank, but can be a little inflexible compared to more modern methods. Most will also let you use other services such as Paypal, Skrill and Neteller that are more mobile-friendly and faster than using a bank, although less stable.
How you plan to use your account will have an effect on what kind of platform suits you best, and contrast is another important factor. Need charting features? Would you like to trade automatically? You need a platform that fits your needs.
Ease Of Use
Brokers will either use their own trading platform or use under their brand a standardized trading system that you can then utilize every day.
This is another important consideration, as it is the interface on which you are going to rely to make your trades, and it needs to be the right one for you. When you just start out, the usability is the most desirable function.
Trading is complicated enough without the platform making it harder for you, so both a clutter-free interface and a simple, logical layout are crucial to help you get the most out of your broker.
It’s imperative and necessary to have the buttons in a sensible position, useful shortcuts and easy read displays.
As an alternative, a highly configurable interface with several trading windows is the next best choice, so you can make it suit your needs even if it isn’t straight out of the box.
Having found a front end you’re pleased with, it’s time to dig under. The first task is to see whether the platform works the way you need it to do?
How quick are your trades relative to other marketing platforms? Does that make the trades exactly what you intended? All of these are important because even if the product is not good enough, even the best-looking interface is useless.
The second part of that is security. You can’t be certain you won’t be a victim of fraud, but the best thing you can do is do your homework on your broker.
Make sure they have some kind of security strategy and that they will tell you how to protect the data and what steps they will take to mitigate the risk.
Platforms with two factor authentication or protection assurances for deposits are a smart idea, as are those with more strict financial controls.
Another way to protect yourself is to make sure that the broker in your area is registered as a trader and that they are allowed to sell their services on the market, which means that someone periodically checks their behaviour.
There are plenty of brokers out there who use proven trading platforms and have a high degree of reliability in terms of their reputation and health, so how do you choose between them?
The next move is to look at the functionality of its application. When it comes to features, there are a wide variety of options, so it’s a buyer’s market and it’s up to you to determine how you want to trade.
Is trading available while markets are open or are there downtimes when trading is impossible?
Some brokers don’t work when the hours aren’t sociable where they are based, which may prohibit you from trading in a target market, or worse, your home market.
The first move is to look at their list of assets, which will tell you how many markets you can trade in.
Some brokers may be specialized in a few primary markets such as fx, CFD or Crypto Currencies, while others may have a wider yet shallower range, so you can select the former if you have a specialty or the latter if you want to open up your choices.
A fx trader that specializes in certain currency pairs is likely to be happy with any broker, but other trading strategies will maybe depend on a variety of less correlated markets. Thus consumer choice is criteria that will be different for each person.
What kinds of tools and widgets are on the platform next, and do you need them? Brokers offer everything from news updates to advanced analytics and you can think about what is included in the price and what you need.
Risk management is one specific feature which is useful. Many brokers provide tools for risk management providing risk advice and ways to avoid building up losses, which can be helpful info when you start.
Mobile App And Research Tools
You can be happy with a bare-bones kit and the upgrade option, but if the price is right it never hurts having tools up your sleeve. A Metatrader platform may be overcomplex, a binary one may be too inflexible. That’s a major factor.
The app and the analytics features are two of the most crucial resources that most brokers will be providing, so you should pay particular attention to these while doing your research.
You need to figure out whether the framework is as usable as the software, or whether it is more of an extension of it, and how many models the features of the study provide.
The type of online trading account you open will influence anything from the size of your first deposit to the cost of trading you might be paying. Ask yourself what account you need before you make a choice.
Margin And Leverage
It might even be more important to compare a trading account than to compare brokers, since different accounts can dramatically alter your platform experience, and with the right platform it can unlock your full potential.
Many brokers go beyond basic accounts and offer more expensive versions of Professional and VIP accounts which may include elements that are missing from the basic accounts you need.
Paid accounts may have a higher leverage, allowing you to exchange more assets than you have, which is a virtual requirement if you want to be serious about trading.
Often you’ll also be able to trade in more exotic currencies apart from the Pound, Dollar, Yen, and Euro – such as the Real, Dinar, Zloty, and Canadian Dollar – or cryptos like Bitcoin, Dash, Litecoin, or Ethereum – those can greatly expand your business choices.
These offerings can vary. Before signing up to a specific brand, find out the different things you may want to research.
Follow & Lead
The ability to be cpied and copy trades is what separates social trading from other styles, so the standard of copy trading on your platform is paramount.
The beauty of social trading is the opportunity to follow others in one direction and then make your own way once you know where you want to go and successful platforms will boost that skill.
The size of the pool of fellow traders to copy is important because you’ll find like-minded traders in a larger pool more likely, and this is important for comparisons.
Amount Of Data
It is also important to be able to see a specific trader’s past, how good they are and what their tactics are, so that when you want to follow someone, you don’t go in blind.
Variety is also crucial and you don’t want to be kept back so try to avoid platforms that arbitrarily restrict how many traders you can follow or limit the types or sizes of trade you can track.
Some of the easiest ways to determine a broker’s efficiency is the input other traders like you gave them but you can do your own detective work as well.
Just by using comparison sites can be one way to do so, because the ranking of a legitimate broker would match well with others on an equally respectable comparison platform, but you can also test their credibility on social networking platforms and find out what others think about them.
Security Of Broker
Beware of brokers without a presence on social media and with a small number of ratings, because they may not be trustworthy.
Another choice is to get their official credentials checked. It’s always best to go with a properly licensed and supervised broker who adheres to local trading policies, but you can also see what voluntary steps the broker takes on data and financial protection – such as membership in regulatory bodies or codes in practice – that should be listed on their websites.
The financial stability is worth double checking if possible.
Brokers in the EU are expected to list the percentage of their traders who lose money so a low-percentage broker is a good starting point.
A significant number of traders is going to lose, this is market nature. But a higher percentage loss at a certain broker may mean that there are trading costs and spreads which make profitability harder for traders.
Lastly, part of the fun of trading is learning to become stronger and more effective as a trader, and a broker that helps you do that is a true asset.
Many brokers will be providing online tips, courses or video guides on everything from risk management to diversification, so consider taking advantage of their advice and knowledge whenever possible.
The History of Social Trading
Social trading is a logical development from traders talking to each other about their jobs.
Picture a scene in the late 1980s, where a pair of traders are in a wine bar after the markets have closed for the day: one tells the other about a position they have opened that looks likely to make a profit. The other trader likes this investment’s sound and the next day, he/she copies it for himself/herself.
When you follow this scenario through the technological advancements of the past three decades, you can easily imagine this conversation being repeated through emails, and through chat rooms and other internet forums; with more and more people being able to hear the conversation each time.
The idea of paying people for access to the discussion was developed very quickly.
With the rapid growth in the 2000s of social networking platforms like Facebook, it was only a matter of time before trading formed on its own type of social networking.
eToro was one of the first companies to capitalize on this and its OpenBook platform debuted in 2010. In addition to encouraging traders to share their trading activity with OpenBook and other websites, they allow us to see what the experts are doing in real time and learn from them (and copy trades in real time).
Trading floor secrets are common knowledge and everyone can benefit from it.
Forms of Social Trading
Various networks allow for various types of social trading. The most prominent ones are:
Occasionally, the term copy trading is used interchangeably with social trading. It can be misleading because while copy trading is a form of social trading, social trading isn’t inherently copy trading.
Copy trading platforms such as eToro, ZuluTrade and Ayondo not only allow investors to follow traders but also to copy their trades automatically.
Traders are ranked according to various factors including profitability, career level, maximum drawdown (the highest amount of money they have lost after bad trading), number of followers, risk etc. Using this knowledge, less experienced traders may determine who they trust and allocate a percentage of capital to be invested in opening the same positions. For instance, you could be setting the platform to invest £10 of your money for every £100 that Trader A invests in Stock X.
When the trader closes their position, your position also closes and you make the same relative profit or loss as Trader A.
In fx trading Mirror trading is used. While sounding similar to copy trading, it has important differences, the main one being that the copied strategy is in focus, rather than the trader.
An investor (or ‘mirror trader’) chooses a trading strategy based on what currencies they want to sell, how much money they want to make and how much they can afford to lose.
When the creator of the chosen strategy opens a position, the same position in the investor’s account is automatically opened (or mirrored).
Mirror trading is typically used by more experienced fx traders because its fully automated nature can result in a high volume of operation, and thus involves a greater amount of capital than copy trade.
Signals and Tips
The use of signals and tips requires less controlled forms of social trading. These are usually given free of charge by experienced traders (either on websites or via YouTube videos, etc.) or by subscription services such as internet trading rooms.
FX signals are also available on subscription services. Signals are created either through human interpretation or by algorithm, and can provide a text or email warning to investors when a fx signal is created that fits a selected investment profile.
While signals and tips services usually cost subscription money, traders still have a choice as to how to act on each. Communication technology that is being used is important when using signals – speed is necessary.
The Pros and Cons of Social Trading
Of course there are advantages and dangers associated with social trading. Here are some of the most important ones:
One of the key benefits of social commerce is that it cultivates mutual awareness. The views or strategies of one more experienced trader are not offered to less experienced traders subscribing to social trading platforms; they are provided with a much wider range of knowledge from multiple sources.
As already stated, traders on social trading platforms are rated according to different criteria. These provide other users with some degree of protection because they can determine the credentials of a trader before they start copying their trades.
Watch and Learn
The opportunity to see what other traders do in real time is a great advantage of social trading. The skill of new traders is to see what other traders are doing and not only learn from them, but also make those trades themselves. Social trading will provide an interesting way to learn ‘on-the-job’ in this regard.
Trading can be a intimidating, or even a lonely activity when you’re new to it and sit in front of your computer at home. Again, there is an benefit here regarding the mutual existence of social exchange. Since traders share their expertise and learn together, this can help create trust among new traders in their own growing skill.
One of the reasons for the use of copy and mirro trading is that they take the emotion out of the exchange. Investment decisions are better made with the head rather than the heart, and trading’s often pressurized nature can also lead to misguided decisions.
By automating the process according to their requirements, a trader will allow the algorithms to make trade decisions based on logic rather than emotion.
Although social trading has benefits, there are risks and disadvantages, too:
Even though traders on social trading platforms are ranked on that platform according to their operation, they still retain secret elements in their sector. For instance, the top-ranking traders whose operation you plan to imitate will have a high rate of success but do not disclose the following:
How much capital they have. They may be big enough to feel confident opening high-risk positions.
If their portfolio is highly diversified, helping to offset any losses they make on this platform.
Unless you’re really doing your homework, it’s doubtful you’ll be able to find out about the extent and effectiveness of their off-site trading operations.
How successful are they going to continue to be.
False Sense of Security
Although social trading gives a genuine sense of security, it has the ability to trick less experienced traders into a false sense of security as well.
It should always be acknowledged that it is never easy to trade. There is always some hazard, and any scheme that promises to make you vast and quick profits should be approached with caution. There is no exception to social trade when it comes to this.
While the process is more straightforward and allows you to join several different relatively effective traders, if you have no idea what you’re doing, you can still make big losses very quickly.
The last argument follows on from that. Imagine you’re just following the platform’s most highly rated traders and the first few trades you’ve copied have made a profit without you having to do anything.
It is very simple to become overconfident in these circumstances, and to abandon the platform and leave it to its own devices. Traders may encounter major drawdowns, and if you haven’t kept a close eye on how the traders you subscribe to are handling the trade – so will you.
As noted above, they can have investment capital that you do not.
The only ways to offset possible losses when using social trading are the same as with any other type of trading:
- Using a sound risk-management plan
- Keep a close eye on your trading platform, particularly when you engage in social trade
- Conduct your own on-going study on business trends and viewpoints
- Do not lose money you do not have or cannot risk to lose.
eToro is a multi-asset platform offering both stock and crypto-asset portfolios, as well as CFD trading.
Please notice that CFDs are dynamic instruments and run a high risk of rapid loss of capital due to leverage. By trading CFDs with this company, 62 percent of retail investor accounts lose money. You should consider if you understand how CFDs operate, and if you can afford to take the risk of losing your income.
Past success is not a surefire way to profits.
Cryptoassets are unpredictable resources that can fluctuate widely within a very short timeframe, and are thus not ideal for all investors. Other than through CFDs, the trading of cryptoassets is unregulated and hence no European Union regulatory structure regulates them.