In this guide we explain some of the key concepts of both Social Trading and Copy Trading and take a look at the top Social Trading Platforms.
Until recently getting involved in any kind of trading from the stock market to trading currencies, or dealing in commodities, was a fairly daunting prospect, with many barriers to entry for the beginner. However, in the past 5 years a number of Social Trading platforms have sprung up, which have made it considerably easier for the newbie to get involved in this kind of investment.
What is Social Trading?
Social trading is based on one major concept, which is transparency. Previously investors could only get tips from close knit communities and access to trading history of individual traders was extremely difficult to get hold of. Now, that world has gone forever and the new approach is of ‘sharing’ is ‘caring’.
Wikipedia describes social trading as “the process through which online financial investors rely on user generated financial content gathered from various Web 2.0 applications as the major information source for making financial trading decisions.” –
Basically, the spread of financial information through the social trading platforms allows investors to gain quick access to information that they would previously have found difficult to reach. They then base their investment decisions on this knowledge shared by other investors. They key to success with this is finding the right people who you will trust and user their information for your investments.
The good news is that finding the Top Traders or ‘Gurus’ is made a lot easier by the various Social Trading platforms, who give anyone with an account full access to all of the trades that individual traders are making within that platform.
Each trader has a full profile which shows things such as how profitable their trades are, their risk level, what type of trades they are making (Forex, stocks, indices, commodities), how long they have been trading, and a whole bunch of criteria that can help you to select the traders that you are interested in.
This means that if you like the trading strategy that someone is applying then you can start to follow them, which will give you the ability to interact with them either via instant messages or their Facebookesque wall.
The basic rules are finding someone in the community who is responsive, has a good track record and matches your type of investment strategy that you are looking for.
Social trading is all about the free flowing of information and the ability to learn from other traders knowledgebase
What is Copy Trading?
The power of modern technology has given us one more gem to help with our investments…. copy trading.
Most of the social trading platforms now offer this feature, which allows you to copy all of the same trades that another trader is carrying out on the platform, and takes away a lot of the pain and effort of choosing the right trades to make.
If you have done your research and have found a particularly exciting trader that you like the look of, you can simply click a ‘Copy Trader’ button and allocate an amount that you would like to copy them with, and then every trade that they make will be copied proportionally out of your account.
For example, you decide to invest £100 in ‘Social Trader X’, who’s portfolio has a value of £100,000 then your investment is 1% of his portfolio size.
If ‘Social Trader X’ makes a trade worth £1000, then you will automatically make a trade of £10 as well in your account.
Everything is calculated automatically for you and you can choose to stop copying the trader at any point. Some platforms allow you to choose which of their trades you copy as well and you can usually decide at which point (Stop Loss) you stop copying them if they are losing or at which point you stop copying them if they are making big profits (Take Profit).
This means that the process of selecting a trader becomes even more important as you are not analysing the information that they are giving as much as you are analysing their performance. It’s a bit like selecting a fantasy football team, which are then going to manage your money for you. Actually, the thought of Wayne Rooney managing my money scares me quite significantly!!!
How Does Social Trading Work?
WHAT’S IN IT FOR THE SOCIAL TRADING PLATFORMS?
The platforms take a small commission on every trade that is made on the platform, so whether a trader is successful or not is not important to them. All they care about is getting as many users onto the platform, who are trading as much as possible, which is why you’ll see a vast number of introductory offers seducing you to join their platform.
WHAT’S IN IT FOR THE PROFESSIONAL TRADERS?
As with any social network, everyone wants their voice to be heard and their opinion to be valued, so I’m sure a lot of traders will use these platforms as a form of social approval.
However, traders like one thing more than social approval…. money!!! Most of the platforms offer some kind of monetary incentive, which get paid to them after they have a certain number of copiers or followers and can add up to a nice supplementary income.
WHAT’S IN IT FOR THE AMATEUR TRADERS?
Entering into the trading arena is fraught with risk and pitfalls, however, if you go about it the right way then social trading can be a way not only to make good returns on investment, but also to receive free training from seasoned professionals in a potentially lucrative market.
Using a social trading platform can potentially save you on hours of research, by tapping into the wisdom of the community. You’ll also find that trading fees tend to be a lot cheaper compared with traditional brokers and a lot of the most recent interfaces have been designed with the amateur trader in mind.
What Are the Risks of Social Trading?
Whilst on paper, this looks like a failsafe way to make money online, I can’t emphasise how much you really need to do your research before you make any investment. The old adage of ‘Don’t put all of your eggs in one basket’ is more relevant with social trading than anywhere. Since I’ve been looking into this over the past months, I’ve seen a number of Top Traders, who were making phenomenal returns completely wipe out all of their profits in a couple of days.
Yes, you really, really, really need to be careful. Remember, traders are human beings, sometimes they get up in the morning, like you and I, and are going to have a bad day. They might be sick, hungover, be suffering personal issues, who knows. The bottom line is that all of this can have an impact on your treasured savings, so you need to make sure that you balance your account across a good number of traders (I would suggest a minimum of 5 to spread your risk)
TOP TIP : Remember, if an investor is making incredible profits, then they are also likely to have a great number of people copying them. However, don’t always be fooled by this. This could just mean that the trader got particularly lucky on a couple of trades, which made them the big profit. This usually means that they are a very high risk trader and at some point will blow their account up and lose all of your hard earned profit. If it looks too good to be true, then it usually is, so I’d advise looking for traders with lower profits and steady growth over a sustained period of time.
Social Trading Platforms?
OK, so I’m guessing you’ve had enough of me bleating on about this Social Trading malarkey again, and you want to have a look at what it’s all about.
Well, there are tons of social trading platforms out there at the moment and the number is growing bigger every day, but here are 5 that you can start off with. I’ve chosen these 5 platforms specifically because you can start off with a demo account, before you take the plunge and risk your own money:
- eToro – https://www.etoro.com
- ZuluTrade – http://www.zulutrade.com/
- Tradeo – https://tradeo.com
- Avatrade – http://www.avatrade.com/
- Ayondo – http://www.ayondo.com/
Ok, to sum up we’ve learned that social trading is all about the free flow of information to help people make informed decisions about their investments through the power of the community.
It seems like a great way to expand your knowledge of the financial markets, get used to some of the terminology used and is potentially a good way to make some money online without investing too much time. The idea of copy trading seems quite appealing as well, especially for newbies, as you let the trader do most of the work, and focus your efforts on finding the right trader to copy.
My time so far looking into this has been both fun and educational. The next step for me is to start investing in this, which I intend to do in the next month.