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Social trading has been in the limelight for the past few years and platforms like eToro and ZuluTrade claim to make the process of investing simple and accessible to all.
If you are interested in social trading, this article for you. We’ll go through all the details about it to help you understand the ins and outs of social trading, and for you to see if it’s something you should consider.
What is Social Trading?
Social trading is a way of investing that allows you, as a regular investor, to copy the trading strategies of experts who are also on the same trading network.
While on a social trading platform, you can choose to follow professional investors, and like you would on a social media network, observe the way they handle their investments and even interact with them.
There are even traders that will allow you to completely copy their portfolio.
There are some key components that make a social trading network what it is.
This is where you do your trading – where all traders can exchange currencies, shares, stocks, and more. Financial markets can be overwhelming, especially for beginners.
Even seasoned traders experience losing money on the market every once in a while, as financial markets such as the Forex market are so volatile.
Social Trading Platform
The trading platform is either a mobile or desktop app or a web-based platform that is maintained by the broker. You can think of the broker as the middleman that connects you to the market.
The platform makes it easy for you to do some trading, but you should also be careful in choosing one and make sure it’s secure and that it delivers features that will benefit you.
Signal Providers or Traders to Follow
Signal providers are basically expert traders with a solid trading track record and a deep understanding of how the market works. These are professionals who know how to use trading analysis tools and know what strategies to employ depending on the market condition.
These seasoned traders are the ones that give the signal to beginner traders or their followers. Of course, they do not do it for free!
Often, signal providers get a percentage of the followers’ profits or Assets Under Management (AUM) but others may receive fixed income from their firms.
Those who base their trading decisions on the signals given by experienced traders are the followers. They are often new to the field and have yet to understand the intricacies of the market.
Most of the people on social trading networks are followers. Their success is largely dependent on that of their signal providers.
How Does Social Trading Work?
Once you sign up for an account on a social trading network, you can start interacting with traders on the platform.
You’ll have access to their info, including how long they’ve been trading, the number of followers they have, the products they are trading, how profitable their trades are, and the associated risk levels, among others.
With the information you have, you can choose the traders you want to follow, then fund your account.
After that, you can go ahead and copy the trades they make. Before you do so, though, you might want to check out the features offered by the platform that could help make your transactions smoother or somewhat less risky.
For instance, there may be a feature that lets you close the trade once you make big profits or if you reach the limit of the loss you’re willing to take.
Of course, you don’t have to allocate your money to a trader and mirror what they’re doing as soon as you sign up. It’s a good idea to give yourself some time to learn what you can by observing their financial activities and how they perform.
If you are on eToro, you can do this by adding the trader to your ‘Watchlist’.
To set your expectations, you won’t be able to immediately gain huge profits, unless you also fund your account with a high amount.
But as you learn from your trading experience along the way, you can look forward to having an account with funds big enough to live off of.
Social Trading vs. Copy Trading
You might have heard of social trading as well as copy trading, and wondering if they’re one and the same.
Let’s put it this way. Copy trading is one of the things that you can do when you are on a social trading platform.
Remember that it’s the feature that allows you to “copy” what your signal provider is doing.
But aside from copy trading, social trading also allows you to interact with your chosen traders, receive news, get insights, and more. All these together make up ‘social trading’.
Pros and Cons of Social Trading
As simple as social trading may seem, it’s not necessarily for everyone. And before you jump on the social trading bandwagon, you must first know about its advantages and disadvantages.
- It’s beginner-friendly as it is essentially simply copying the moves of a more knowledgeable trader, you don’t need to be an expert on trading to give it a try.
- It gives you access to expert advice. On social trading platforms, you can interact with traders and learn from them. You can observe their strategies and even ask questions if you want to know more.
- It doesn’t require much of your time. Since you are choosing a trader and copying his or her trades, you won’t have to spend hours watching the market like a traditional trader who needs to strategize. Your trades are automatically made for you when you use platforms like MyFXBook, eToro, or ZuluTrade.
- Seasoned traders are not perfect. When it comes to trading, no one is – no matter how long you have been in the game. There will be times when your chosen trader will make a mistake. It’s not 100% risk-free.
- Choosing a trading that perfectly matches what you’re looking for can be tough. You don’t base things on just your preferences. There are factors to consider, like whether they share the same goals as you do when it comes to how long you want to do trading. Or perhaps they do not have the same capital as you do. It’s important that your chosen trader have similar goals to that of yours.
- You may lose out on the experience itself. Social trading may make things easier, but that also means you would be missing out on the knowledge that you would have gained through traditional trading wherein you have to do things first-hand.
How to Get Started in Social Trading
At this point, you’ve probably already decided to give social trading a try. So where do you start?
- First, you must choose the right third-party social trading platform for you. There are a number of options for you and we’ll talk about them later. Make sure you check them out and see what features they offer so you can make a choice that’s right for you.
- Create and verify your account. For most platforms, there are certain requirements that you need to fulfill before you can start copy trading.
- Go through the risk assessment process. Some platforms like eToro require you to go pass a risk assessment before you are allowed to copy traders. It’s advisable to fill out your risk profile low. While this may keep you from being able to copy high-risk traders, it also protects you from exposed market risks.
- Take your time in searching for the right traders to follow. There’s no rush. Thoroughly check their performances, the risks, and any other detail you need to know to make a wise decision. Even after you have chosen traders, it’s a good idea to regularly check their profile to keep track of their strategies as well.
- Fund your account. The minimum amount may depend on the platform. One reminder when you’re just starting out, invest only what you can afford to lose.
Top 5 Popular Social Trading Platforms
This social trading platform was launched in 2007. It’s considered an excellent choice for anyone who wants to try social trading as well as cryptocurrency trading. eToro is beginner-friendly and relatively low-risk. It is known to make the trading experience hassle-free for beginners.
Presently, eToro is among the biggest social trading platforms with more than 6 million investors actively trading. eToro has a set of Copy Stop Loss features that keep your exposure to one trader at a limited amount.
You can set this amount manually. They also have a Copied Trades Stop Loss feature that limits exposure to single copied trades.
You can access eToro via the mobile app or online. With more than 1,000 investment opportunities, CFDs on stocks, commodities, cryptocurrencies, forex, ETFs, and indices, eToro is a platform that you might want to go for your first social trading experience.
Affiliate Disclaimer: We’re an affiliate partner of eToro. We earn through commissions when people sign up and fund their account using our link (above). The earnings we get from the commissions is solely used to maintain this website, but if you’d prefer for us to stay poor, here’s the non-affiliate link
Either way, we know that eToro deserves to be on our list’s top spot – based on our experience using and trading within their platform.
Started by MetaQuotes Software Corporation in 2005, MetaTrader 4 has become one of the pioneer trading apps for forex trading. It’s also among the most widely used platforms for CFDs and retail forex trading worldwide.
Through MetaTrader 4 and MetaTrader 5, you can copy the trades of established signal providers live. However, there’s a subscription fee for that and signal providers may charge differently.
The platform is majorly for forex trading but depending on the broker, MetaTrader may come with other symbols like CFDs on indices, futures, commodities, metals, and energies.
AvaSocial is an app that was created to integrate with the execution platforms of AvaTrade and to allow traders to show other users their performance history. With AvaSocial, you can trade cryptocurrency, commodities, forex, indices, and shares 24/7.
On the platform, traders can also build a community of followers who are allowed to observe their trading strategies, and more importantly copy their signals either manually or automatically. Communication between traders is also allowed and the instant messaging feature makes it convenient to do so.
ForexTime (FXTM) started in 2011. It’s considered one of the safest platforms as it is regulated by the biggest financial authorities.
The platform offers a variety of tools that could help you learn the ropes faster. There are live webinars as well as a demo account that you can try. It’s also easy to set up an account on FXTM.
There are some drawbacks, though, as there are withdrawal and inactivity fees. Also, compared to others, it’s quite lacking when it comes to product portfolio; it’s missing asset classes like bonds, ETFs, and mutual funds, among others.
5. IC Markets
This agency broker which was founded in 2007 is better fitted for high-frequency algorithmic pro traders who prefer speedy execution. IC Markets offers 230 CFDs and 61 currency pairs for a total of 291 instruments for trading.
It is worth noting that trading of cryptocurrency is only available through CFDs. It cannot be traded as is, though.
5 General Tips Before You Begin Social Trading
1. Choose the Right Trading Platform for You
Before making any decisions, you should have an idea of what assets you want to invest in, whether it’s CFD’s, stock indices, or currency pairs, for instance. Then you want to make sure that the platform you choose has that.
You must also consider the features. Would you like a platform that only has a manual trading feature or would you like it automatically done once you’ve chosen your trader? Some platforms have minimum funds required so that’s something to think about as well.
Lastly, there are still platforms that are only available online, so if you want the convenience of an app, see if the platform you are considering has one.
2. Practice with a Demo Account
This tip is not just for beginners. When you sign up on a new social trading platform, things can be overwhelming. There are a lot of features to check out, then you might get too excited and follow too many traders that the whole thing can become too congested.
When you start with a demo account first, you’ll be able to familiarize yourself with the way things work on the platform and see potential signal providers to follow.
With a demo account, you’ll have the time to learn how you can best use the platform to your advantage.
3. Observe Reputable Signal Providers
It’s not a bad idea to follow anywhere between 50-100 signal providers. Experienced traders do have different analyses and different strategies.
Take the opportunity to better understand how they trade while you are still using your demo account.
This is the best way for you to learn not only the ins and outs of the platform you are using but to pick up some trading knowledge as well.
4. Limit the Number of Traders to Copy
Copy trading may be easier but it still comes with risks. As a beginner, it’s easy to get carried away and want to make large profits fast.
You have to remember that traders may be experts but they may still make the wrong call. So you have to choose the signal provider you’ll copy carefully.
Go for traders who have at least a year of record gaining average to medium yield every month while incurring the least amount of losses.
5. Think Long-Term
It can be exciting to think of getting rich quickly like winning a lottery. However, trading is not like that. If you really want to be successful, you need to make long-term plans.
This might not make you a millionaire overnight but this slow and steady approach can get you where you want eventually.
Social Trading FAQs
It all depends on the social trading platform you use. While there’s no cost for joining, there may be an annual management fee (This is often for those who want a “managed” service) or a success fee.
To start following traders, most platforms require that you have at least $50 (around Php 2,500) in your account.
The traders that you copy do not have access to your money as it’s held by the broker that you choose. You may withdraw your funds any time you wish directly from the broker, too.
There’s always a risk in commodities and share trading, as well as forex, and it’s important that you understand that before you make any investment.
Again, you should never invest money that you don’t want to lose. Even when you’re really careful and you only choose traders with good records, they can still go wrong. As they say, past performance is not a guarantee of future success.
Social trading is a great way to start in the world of investing as social trading platforms offer simplicity and ease of use that you wouldn’t find elsewhere.
That said, you should still do your homework – do some research and apply smart risk management, choose the right traders, and don’t be in a rush to earn large profits.
If you do these, there’s no reason why you shouldn’t be successful in social trading.