Social trading is a more-profitable and less-risky type of Forex trading platform in the market. On these platforms, newbie traders can follow professional traders while observing and analyzing their trading methods to learn from them.
By getting direct insights into experienced forex trading, retail traders can copy and do the same on their selective platforms. Famous eToro, Zulutrade, and Ayondo social trading platforms are not only beneficial for FX traders, but they also help out experienced traders. If you continue to read this article, you will have adequate knowledge of social trading.
What is Social Trading?
Social trading is quite similar to the concept of social media. It allows less-experienced investors and traders to be able to accumulate more excellent information from experts in the industry. All those people who subscribe to social trading platforms are given access to follow other investors and observe their trading activities. The collected-data will improve their trading.
You can also automatically copy other investors’ trades by using social trading forms like copy and mirror trading. There is robust regulatory control over social trading, just like on the rest of the components of the trading industry. Below are more details on how social trading works.
Comparing Social Trading Brokers
Since there are numerous social trading brokers out there, choosing the most ideal one for you might require some research and thought process as each broker has its pros and cons. It is a guide for you to understand the basics and necessary information quickly.
Trading Costs – Comparing the total costs of trading between two firms is a crucial factor, and this needs the utmost clarity before jumping on the social trading bandwagon.
Spreads and Fees – Every broker charges a trading fee that increases or builds up with time, especially if you trade Forex or ETFs. The process of choosing a broker based on the trading fees is not as easy as it may seem because a lot of other factors go into it as well.
The trading plan and other essential features which will be used along with the costs of each particular activity are the things that need to be deeply considered.
It is advised to conduct ample research on pricing plans of brokers, such that you do not lose most of your earnings this way. Even if the initial steps of opening an account and making the first trade might be free of cost, activities like making withdrawals might be attached with high fee charges. Everything needs to be carefully considered.
Minimum Deposit – The minimum deposit or minimum trade sizes of different brokers matters a lot and needs to be taken into account.
Brokers charge less on minimum demands if they are designed for newbies, but if the broker is made to cater to the experienced crowds, it may be cheaper and might provide improved leverage. Your trading style is also a vital feature upon which the selection of a brokerage depends.
Deposit and Withdrawal Terms – Banking methods hold immense value while choosing a broker for yourself. The older banking methods like bank wiring still are quite popular as these are highly secure and safe due to their association with your banks.
However, modern banking methods like Paypal, Skrill, Neteller, etc., have made it more convenient for making deposits and withdrawals due to their friendly and fast services.
Trading Platforms – While choosing your broker, it is vital to consider the kind of platform you are looking for. If you need automated Forex trading features or charting functions or any other relevant features, you have to select a platform accordingly.
Ease-of-Use – Ease of use depends on the interface of your trading platform, and it is crucial to select a broker that provides you a user-friendly interface. Usability is the first criteria that any investor takes a look at, which could either be designed by the broker or purchased through another brand.
Configurability – A display with functional breathing space that covers everything systematically and in a well-organized manner are some of the features that traders consider while selecting their broker. Quick shortcuts, useful buttons, and links, easy to read displays are particularly important.
If you are unable to find one trading platform which contains everything according to your preferences, then using a configurable interface with many trading windows is the next, most suitable alternative.
Trading Performance – As soon as the display specifications are settled upon, then come the basics. It would help if you decided whether the chosen platform covers all the crucial basics and works as per your demands or not.
Execution Speed – Focusing on the services offered by a platform is equally important. Questions to ask yourself include whether there is timely conduction of trades in comparison to other platforms and if the deals that you try to make are executed in the same manner or not.
Security – As fraud surrounds any online portals where there is the involvement of money, ensuring that your broker is as safe and secure as possible is necessary. It can be done by thorough research on the broker, along with checking out their security policy, which would guide you regarding the strength of the protocols in place.
Strict financial checking may be accompanied by two-factor authentication or guaranteed deposit protection, which makes the broker more reliable. Check that the broker you intend to use is registered in your country as a trader and whether they are legally allowed to function locally, or else you may end up losing a lot of money while getting yourself in legal trouble.
So many brokers offer high-security levels and proven credibility scores. The dilemma arises when you have to narrow down this list further. It is where you start checking out the variable features offered by the brokers that fit your criteria for selection.
Trading Hours – A few brokers are operational only during specific hours, and this could pose a problem for you if those hours do not allow you to trade in a local market as per your intentions. It is essential to consider the trading hours of various brokers to see whether trading is possible during the time the markets are open or not.
Assets List – The asset list has to be checked out to determine the number and kind of markets available at your chosen broker. If you like any particular asset list, brokers offering markets like Forex, cryptocurrencies, and CFD should be ideal for you.
Even if an asset or cryptocurrency is available on multiple brokers, in the end, it is your market’s trading strategy that comes in handy in narrowing down your top brokers. It varies from person to person.
Functionality – It is always smart to figure out the feature that you are looking for in a broker. It could range from new tools and widgets, advanced analytics, automated trading, trading bots, etc. All those brokers offering your desired features can qualify to be your final choice.
Risks Management – Risk management tools help minimize losses during trading and instead. Provide ample guidance to increase your profits. Many brokers offer risk management tools, which are quite beneficial.
Mobile App Availability and Research Tools – Even though you may feel content with the bare minimum, if you are getting a reasonable price for a wide array of trading services in tools, we recommend you to consider them. Platforms which serve as meta traders are too much to handle while a binary platform is not also updated.
Brokers who are doing well generally and are updated with the investing industry will offer mobile application services along with analysis features. During your research, keep this in mind at all times. The application’s interface matters equally along with the kind of analytical functions that are available.
Account Types – Choosing the account type is also a headache. Whatever type that you lean towards, remember that it always has an impact on how your trading experience will be like. Understand the account types and then determine your final choice.
Margins and Leverage – Account types can significantly influence the experience of any platform. Therefore, it is vital that you read up on the types of accounts there are, and which account type will serve your best interest and unlock your full potential. This factor needs to be compared with others as well.
It is entirely up top you to either opt for the basic accounts or go for the VIP and Professional accounts, which offer more services and unique features as compared to the basic one. Also, those accounts possess more credibility, which has been paid for. With paid accounts, you get the option of being able to trade additional assets, more than you may ever possess.
Account Currencies – There are various currency types available to trade. These range from the classics like the Dollar, Yen, Pound, and Euro, to the exotic and unique ones like Dinar, the Real, Zloty, Canadian Dollars. Trading options are also improved with the availability of cryptocurrencies for use, such as Ethereum, Dash, Bitcoin, and Litecoin.
Copy Trading – Before you take upon a brand for good, it is a good idea to do a thorough search on the variable offers of copy trading.
Follow and Lead – One of the most critical factors about your platform is the quality of copy trading that it offers as social trading is all about how well trades can be copied.
With copy trading being a valuable part of social trading, traders can follow the direction of the professional ones, take guidance, and build their way. Once the beginners develop their routes, their skills can be very profitable at any good platform.
Trade Volume – The more significant the pool, the easier it will get to find traders to copy who are like-minded and seem appealing to you. The volume of the pool of traders matters immensely, especially while comparing platforms.
Amount of Data – Before finally choosing someone to follow, it is always a smart move to gather up information on the trader’s history and past strategies. It ensures that you do not jump blindly in the well.
Flexibility – It is also quite essential to be able to follow as many traders as you like, without the platform limiting your numbers or types at all. Therefore, choosing those platforms with minimum restrictions is a smart idea.
What are the Main Determinants of Trader Satisfaction
Feedback – Feedbacks from other traders are proven and authentic reviews and can guide you better regarding the pros and cons of any broker. A good broker will have positive reviews and a higher rating while being compared to other brokers on comparison websites.
Social media websites also display information regarding the reputation of the broker and the user experiences of traders of the respective brokers.
Security of Broker – Brokers that do not have social media presence are shady and should not be trusted. If there are limited reviews about the broker, it means that the broker is fishy and unsatisfactory.
By checking out official credentials mentioned on the broker’s website, you can take a sufficient glance at their licenses, affiliations, security policies, trading policies, etc.
All codes of practice, membership of the regulatory bodies, data, and financial security rules and regulations are always readily available on official broker websites. Always ensure to check the financial stability no matter what thoroughly.
Losing Percentage – Low percentage brokers are generally the best for beginners. A low percentage refers to the portion of the number of traders who lose money at a broker in the EU. The broker is supposed to provide an adequate percentage list.
The majority percentage of traders tend to lose in the markets, but if any broker has a high loss rate, it points to the harder trading conditions, increased costs of trading, and spreads at that broker.
Education – Any broker that helps you, guides you, and motivates you to become a more skilled and better Trader, regardless of the status at which you start, is the best place for you to be.
Brokers offer various educational methods to their traders. These can be in the form of classes, online tips, events, video tutorials, etc. All basics and essential topics, tips, and tricks are covered in these, from diversification to the management of risk, and so on. Therefore, it is vital to benefit from a broker’s educational resources.
The History of Social Trading
Another idea behind social trading is that it is a sort of communication between traders regarding their trading activities and related progress every day.
For example, try to think back in time where traders are chatting in a wine bar in the 1980s. The markets were not active that day, and one trader mentions how he made a profit in the market by opening a specific position. Now the other trader finds it exciting and copies the same trade the next day.
This conversation’s content remains static, but the only modes of transmission have evolved in the past forty years. Now, these same trading gimmicks are being shared through internet forums, chat rooms, emails, etc., with the audience growing wider each time.
With further advancement, people decided to put a fee on providing complete access to this particular trading conversation. Facebook and other social media platforms were already making a wave in the 2000s, so it was apparent that someday, trading will also develop its own social media methods and platforms.
The first of its kind, OpenBook platform, was launched in 2010 by the company called eToro. Openbook is a one-stop-shop where traders merrily share their daily trading activities, along with people being able to watch the experts perform trades live and learn better.
It allows real-time copying of trades. People easily profit now from the trading floor tricks as this information is generally out in the open and more easily accessible.
Forms of Social Trading
Various types of social trading are offered on a diverse range of platforms. The most important ones are as follows:
Copy Trading – Social trading and copy trading are considered the same thing. However, it needs to be clarified that all copy trading is part of social trading, but not all social trading is part of copy trading.
Many copy trading platforms let investors view and follow traders, along with allowing them to copy the trades automatically. Some platforms include ZuluTrade, eToro, and Ayondo.
A substantial criterion is used to rate the traders. It includes assessing them based on their level of career, their profitability, number of followers, risks, maximum drawdown, etc. A maximum reduction refers to the highest monetary value that a trader has lost while making poor trades.
Less skilled and experienced traders can capitalize on this information by following a trusted trader and investing a certain capital percentage by opening similar positions.
Let us use an example here, that Trader A invests in Stock Z and you are following Trader A. If Trader A makes a $100 investment, you can set the broker’s platform to make a $10 investment in the same trade.
This way, you will similarly make a profit like that of Trader A, and whenever the position of trader A closes, yours will close too.
Mirror Trading – Forex trading regularly makes use of mirror trading. Mirror trading may sound similar to copy trading. Still, there are many significant differences, such as the biggest difference being that in copy trading, a trader is followed. In contrast, in mirror trading, a strategy is being developed or copied.
Mirror trading depends on the trading strategy that the investor plans to use to conduct currency trades and make profits. When a strategy developer opens the position in a deal, an investor’s account will automatically open the same position.
Usually, skilled forex traders use mirror trading as it is automated. It requires more capital compared to copy trading and also enables traders to make trades in large volumetric capacities.
Signals and Tips
Signals and tips are a form of social trading that is not that automated. Usually, these are free of cost and are easily accessible. It could be in the form of YouTube videos, Internet trading rooms, web sites, and even chat forums.
Subscription services for forex signals are also readily available. Either these signals arise from algorithms or by an analysis performed by people. Whenever a similar investment profile gets generated in the market, a sign will be delivered to forex traders via email alerts or text messages.
Signal services come in the form of subscriptions, and brokers tend to charge for them. However, communication technology is a personal preference and choice which depends upon trader-to-trader. One of the most important factors to consider is the speed of the signals.
The Pros and Cons of Social Trading
Social trading is affiliated with multiple benefits and disadvantages. The most important ones are as below:
Pros:
- Collective knowledge: Collective knowledge is generated through social trading quite adequately. Any beginner trader who joins social trading platforms will be surrounded by a considerable amount of information gathered from many sources. The more the data is, the more a trader will be able to learn.
- Trading histories: Since professional traders are ranked on social trading platforms according to vast criteria, their trading credentials will easily be visible to the new beginners, and this provides a sense of security and safety for people.
- Watch and learn: Now, with advanced technology, real-time social trading can be conducted as new traders have the chance to monitor and learn from other traders and make their trades. The real-time feature of social trading makes it extremely appealing and attractive for traders on a generally broader scale.
- Confidence building: Social trading collectively includes people who are experienced and can provide beneficial learning and knowledge. It enables the growth of confidence in new traders because if beginners try to perform trading on their own, it could become a lonely and confusing experience leading to the trader feeling unmotivated. Therefore, confidence significantly stems from social trading activities.
- Emotion-free decisions: Mirror trading is emotion-free, and it is best said that investments should be made directly from the brain. The heart should not be involved in making such vital financial decisions.
By using automated algorithms, traders use logic instead of emotions to make sound trading decisions, and these usually reap ample benefits.
Cons:
Social trading also has multiple disadvantages, just like it has its list of advantages. These are as follows:
- Hidden aspects: Even though traders may show their trading activities on social trading platforms, yet there are still some features that remain hidden from the general public. These include things like the amount of capital owned by these traders. Regardless of the level of ranking given to professional traders, it does not reveal everything about them or their basics. For example, you may miss it, but if professional traders open high-risk positions, this indicates that they have the right amount of capital. Similarly, these expert traders do not mention how much they have lost in trading. The best method to discover these hidden elements is by conducting in-depth research on your own before you get started. Furthermore, you can not predict how much success these professional traders accumulate in the future.
- The false sense of security: Beginner traders follow experts around on social trading platforms, which manifests in the form of a false sense of security. Like you would never trust claims that enable you to make large amounts of money with less risk; similarly, you should be careful with social trading. Social trading is not secure but can lead to the accumulation of massive profits if appropriately done and cautiously. Unless you have a solid idea about social trading, do not be fooled by how easy it seems to follow professional traders because, despite all the transparency, it is highly possible to make significant losses instead of profits.
- Overconfidence: If you are regularly following top-ranked traders and have copied their trades to make some profits, this could still lead to overconfidence. To prevent experiencing massive drawdowns, ensure to keep a strict watch on how the traders perform their trading activities and do not let overconfidence get in the way. It is because experienced traders have enough capital to risk as much as they like, but you may not be in the same boat as them. To cut losses and keep them to a bare minimum, here are a few critical tips and tricks:
- A reliable and robust risk management strategy needs to be employed.
- While performing copy trading or mirror trading, keep a strict watch on your trading platform.
- Always indulge in thorough market research to stay updated with the latest trends and tricks.
So far, the only multi-asset platform offering cryptocurrency assets, stocks, and CFDs is eToro. CFDs are associated with increasing leverages. Due to this, there is a substantial risk of losing money over here.
While trading CFDs with this specific platform, 62% of investors have been noted to lose money. Before jumping into the business of CFD trading, ensure that you are capable of taking such risks and know what you are doing.
Never judge someone’s future capabilities, depending on their past. The tables can turn quickly with time, practice, and adequate knowledge.
Not all investors can make social trading with cryptocurrencies as these are quite unpredictable and vary tremendously in multiple short time frames. The EU regulatory framework does not regulate or supervise the trading of crypto assets and CFDs.
