Social trading is a new way to invest. It is the simple concept of basing trading decisions on the wisdom of the crowd. Investors share details of trades – then others can use this user generated financial analysis. The growth of social media has led to an explosion in publicly shared trading information.
Since the advent of online trading, the social aspect of the activity has represented a natural and powerful draw for the masses looking for shortcuts to easy profits. Social trading has gone through a number of incarnations over the years and at this point, it is safe to say that it is here to stay.
For many beginners, it presents a clear path towards some degree of success, as well as towards an actual understanding of how profitable trading should work.
It is defined as a process, during which online traders make their own trades based on data generated by other users from various trading platforms.
There are several online operations built exclusively on such user-generated financial data. They cover a wide range of business models. According to a study, around 80% of online brokers offer some form of social trading. Indeed, social trading has permeated the entire industry from the bottom up.
The most basic social trading channels come in the form of social media-based signal groups. There are operators like eToro, who have built up entire businesses based on social interaction among traders, on their own, proprietary platforms.
Lately, chat-based work groups focused on trading have emerged too, with specially developed and designed platforms, allowing members of such groups to cooperate on a never-before-seen level.
The appeal and top selling point of social trading is that it creates a sort of symbiotic relationship between those who provide useful data and those who consume it.
With the right sort of copy trading strategy, those who have mastered their trading, can make rather good money. Traders can profit not only from their trades, but from being followed too. The broker will reward popular traders financially. Either via improved trading terms, or direct commissions.
Followers will find that the benefits could be two-fold. Firstly, this easy way to invest can produce good returns. Secondly however, followers can learn from the profitable traders they follow. Following other can provide a great learning opportunity. Success will however, depend on choosing the correct social traders to follow.
The most popular form of social trading is copy trading. Copy trading is all about using massive social networks of traders. These allow followers to have their accounts linked directly to the accounts of expert traders. The trades of the “expert” are then automatically copied and replicated by the software.
This sort of social trading requires no input on the part of the follower, which explains its popularity. The size of investment is tailored to the follower. So a professional forex trader placing trades of over £10k, can still be followed by a novice risking just a few pounds.
eToro is arguably the biggest and most advanced copy-trading network. It provides scores of trading features, expert profile analysis tools and monetization options implemented. It is the total package of copy trading. As such, eToro is the preferred destination of millions of traders in 150 countries worldwide.
The tool below allows you to search for winning traders and find the best traders to copy, learn from or trade with:
When social trading was first introduced it was designed to make trading available to anyone with a web browser. The aim was to make trading and investing simple, enjoyable – and profitable. The early pioneers of social trades ensured their platforms where intuitive and user friendly. The platforms are constantly improved though, offering new tools and improvements. Concepts such as “one-click trades” for example (an eToro feature). Brokers also put an emphasis on giving clients free educational tools, and explaining the concept of social trading. Demo account are a popular way for traders to get used to the ideas.
On most advanced platforms, traders can open a “buy” or “sell” position. They can also set “stop loss” and “take profit” orders. These are powerful risk management features. They automatically stop a transaction when a certain target is reached. Similarly, the “trailing stop-loss” will keep a trade open, but adjust the stop loss upwards if a trade makes gains. Very helpful where traders are not monitoring their positions all the time.
Offering cutting edge, yet simple, trading platforms since 2007 – and serving over 5 million users in 140 countries – the world’s leading social trading platform is currently eToro. The platform has more than 1,000 assets to trade. They offer clients powerful charting and analysis tools for managing their online accounts, and a range of social features.
In 2010, eToro released their first-ever social trading platform. It has since evolved to become an integral part of the platform. The firm enabled traders from around the world to interact, learn from each other, copy each other, and see each other’s portfolios. The Roubini Thought Lab has predicted that by 2021, one in four traders will use social trading and investment services.
Copy trading has grown rapidly since the idea first surfaced. Mirroring the growth of social media and the ability for information to be shared instantly, copy trading (or ‘social’ trading as described above) allows traders to quickly share their trade ideas and strategies with whoever is interested. Those following these traders can duplicate their trades and profit from them automatically.
Sometimes referred to as both copy trading or social trading, the idea gained traction quickly as novice investors could watch, learn from – and copy – experienced traders. They could piggy-back on their success and place exactly the same trades, at exactly the same prices. The instant nature of these trades meant followers were not missing out on price movements – they are able to configure their account to place exactly the same trades – at exactly the same time – as the traders they follow.
Social trading is hugely attractive for those traders making their first steps in the investing world. It is often sold as a method for those new to investing to get involved without a huge amount of research or prior trading experience. But is there more to copy trading than that? Read on to find out….
Once a trader has decided they wish to use a copy trading platform to follow others, they need to search for the right traders to follow. This can be done using a variety of methods. Traders can be filtered by performance, trade frequency, the assets they trade – any element of their trading style. Some might look for those with long term results – others might prefer the people making big profits in the last few days.
The window above gives you a chance to run through this search process
Once a user has found someone to follow, in one-click, they can ensure they open each and every trade made by that individual. The actual sums involved can be tailored to suit – so a person can follow a millionaire forex trader, making huge trades – for maybe just £1 per position. Once configured, each time a new trade is opened (or closed), the follower will also have their trade opened or closed at the same price. Apart from the size of the investment, everything else is identical.
Traders can copy (or follow) as many different people as they like, and mirror all of their trades. Of course, they still have the flexibility to stay out of particular trades, or end the copying altogether. There is no commitment and the follower is in complete control.
Of course, the description given so far is very one-sided. Following other traders is what has attracted the vast majority of people to social trading. There is however, another side to the coin – those traders who are followed themselves. Without those talented, profitable traders, there would be no-one to follow, and the model would break down very quickly. So what is the motivation for traders to try and attract followers?
Firstly, traders are initially just looking to be profitable for their own benefit – obviously. They are opening and closing positions with a view to getting a good return on their investments for themselves. Assuming they are successful however, why trade with a social trading platform? Well, the broker will generally reward traders who are followed in significant numbers, with a share of their trade volume generated.
If a trader places a single trade, which makes the broker £1 in commission or via the spread, that is all well and good. What if the same trader makes the same trade, but is then followed by 1,000 users, who all place exactly the same trade, generating the broker £1000? The broker can then reward the trader with a cut of that commission. The brokerages know they need to attract good traders to ensure there is actually people to follow – so a good trader can quickly ramp up their own profits by trading well, attracting users and generating greater trade volume.
In truth, social trading should appeal to a broad range of investors. Below are three different descriptions of ‘traders’ and how they might make best use of a social trading platform. Most people will fall into one of these categories;
So it is clear that most people will fall into one of these groups – and social trading suits all of them. It is perhaps the middle group – aspiring traders – who might be reticent about social trading. They do not particularly want to follow, they want to make their own choices – but why not get the best of both worlds? There is no reason why a trader could not be both copied – and still copy others.
Forex social trading is the sharing of trading information – whether tips, signals or opinion – but specific to the Forex markets. Social trading will generally include foreign exchange assets anyway, but is occasionally referred to separately.
eToro lead the way when it comes to social trading. Their trading platform makes finding other profitable traders easy and the trading platform is very slick. They offer a demo account, where those new to social trading can learn all about it – including copying traders with demo funds. A demo account offers the best starting point, enabling traders to try the platform risk free.
Copy trading software providers are not currently integrating Metatrader 4 widely.