“Does social trading work?” Is a question many beginners have when they first start out.
The short and easy answer to that question is; yes, it does work. Social trading is a great way to learn how to trade while still managing to make some money.
But – and this is very important – if you are considering social trading as an option, first, do not think it’s the solution to all problems, and second, you will want to know a lot more about it and understand the risks involved before you start practicing it.
Ready to discover everything?
What is social trading?
Social Trading, among the various types of investment instruments, is a last generation investment discipline, born thanks to Web 2.0. It allows the investor, even if inexperienced, to copy manually or automatically the financial transactions made by one or more professional investors inside a trading network.
Here’s our personal Top 10 of the best Social Trading Networks by the way.
Essentially, social trading networks are like the Facebook of the trading world and it is an ideal place for beginners to hang out. Most importantly though, it is somewhere where they can imitate professional traders in an attempt to make the same profits. On most social trading networks you will have a news feed that will consist of what other traders are doing, such as opening or closing positions. Usually, you can click other traders profiles for more information about their trades and experience.
Information is usually freely available, however, some platforms use incentives for traders to divulge their trades or those that follow their trades may have to pay some portion of their gains to copy them.
A great advantage to social trading is you can communicate easily with other traders through comments or private messaging and learn from them. If you are confused as to why a trader did something, you can simply ask why. That said, not all traders are sociable and will want to share information with you.
Before social trading, imitating the trades of others was a complicated process that required a lot of technical analysis and, in the time needed to perform such an analysis, the imitated trade would likely not deliver the same results. Today, many believe that social trading makes the transition from novice to pro much faster, though that is debatable.
While it is essential that beginners learn some theoretical background of trading before they start, at some point, you need to put that knowledge into practice to truly understand how trading works. With social trading, a trader doesn’t necessarily need to possess much knowledge of financial markets before they start. That said, it’s not very advisable (more on that soon).
Social trading is also a great way to get over the dreaded ‘analysis paralysis’. Analysis paralysis is where first timers – even the ones who have done their research beforehand – are too intimidated to start making trades because they over-analyze all the data in front of them. They don’t know what to make of all the information flooding their screen. Traders that go through analysis paralysis often start out nervous and end up with a lot of self-doubts and no confidence in their trades, if they even make any. Social trading is ideal for those who are too intimidated to make their first move because they can remove the emotion from their trades.
Types of social trading
There are a number of different ways traders can take advantage of social trading.
Bear in mind, not all strategies work for all traders, each strategy has its own benefits and drawbacks. The primary types of social trading are copy trading and mirror trading.
– Copy trading
Copy trading is where traders follow the opened and closed positions by other more experienced traders. A copy trader can copy as many as trades as they like and stop copy trading whenever they want. Some copy traders may set their account to automatically copy a certain trader or number of traders, though this isn’t advisable as you may lose a lot of money if you do not pay attention.
– Mirror trading
Mirror trading is more related to adopting a strategy of a trader as opposed to just following their open and closed positions like in copy trading. In its essence, it’s very similar to copy trading.
Is social trading profitable?
The answer to this question is a little more complicated.
While you can make money through social trading, it is also very easy to lose money if you don’t know what you are doing. Although social trading simplifies certain things, a lot of newbie traders started social trading too early with no experience, putting in the minimum effort required, and did not understand the risks involved.
In reality, it depends on your trading style, how observant you are, how much you are willing to learn and adapt, and how to utilize the traders you follow.
What type of trader are you?
79.67% of retail CFD accounts lose money
What you need to be aware of
Let this be clear; social trading is not a golden ticket to making heaps of money. There are still plenty of things that can go wrong and you need to be prepared for their possibilities.
– Poor management
Quite simply, be an active trader when using social trading platforms. While you may have managed to find a great trader or two to follow, don’t believe that that is all you need. If you stop paying attention at this point, then you might start making some major losses.
Make sure you put the effort into analyzing some of the trades and strategies you are interested in as well as your own performance. You won’t learn anything if you don’t put any effort into your trades, which will likely mean you will lose out in the long run.
– Lack of portfolio diversity
One of the most common mistakes social traders make is neglecting to diversify their traders. They tend to only follow a select trader or traders in one area. This can be very risky because if that market suddenly becomes bearish, you will not have any other markets to invest in to recuperate those losses.
– Know who to follow
Additionally, if you do follow just one trader, how do you know if they are good or not?
A mistake many new traders fall into is they assume that because a trader has been around for a long period of time or that they have made many trades that they know what they are doing. In reality, this doesn’t indicate any level of success.
Do not rely on the rankings you see on social trading platforms, they can be manipulated and don’t necessarily hold any real value. There are a number of traders who use very risky strategies just to quickly climb up the rankings. Another issue is that some strategies may look great at first glance, promising amazing returns, but neglect to tell you how much you may lose or how low prices may reach at points, which can put you in a lot of trouble.
Here you can find some good examples of what we mean for searching good traders to copy.
Once you have decided to follow a few traders, you need to know how to utilize them effectively. Think of them as your assets or your team. Each one has a special ability and they should be used for the situation they are best suited for. If you don’t utilize them well you can lose out.
– No understanding of risk
Do you know how much are you willing to lose?
A trader must always know when to stop and how much money they can afford to lose when trading. The strategy they decide to follow should take that into account. The trader you are following, if they are at least fairly successful, will most probably be able to stand much larger losses than you and keep trading.
Remember, when you copy the trade of someone else, the trade will not happen at the exact same time, and that’s called slippage. In the worst cases, there could be a delay of a few seconds. Within that time, the price may fluctuate, and you may buy in at a higher price than the original trader.
Likewise, you may also end up selling at a higher price as well, which will reduce your chance of making a profit. This can devastate many individuals expectations. Never expect to make the same exact profits as the trader you are following.
There are scams to be aware of as well. These can often come in the form of binary options and signal trading. When looking online for a service to help you with social trading you need to know how to identify them and a good deal of common sense is required.
To avoid scams, it is worth carrying out plenty of research beforehand. It is highly advisable to test out a demo account first to get an idea of what kind of services they offer and how well they work, if they offer one. Most often the biggest give away is if their platform is poorly designed. You can also assess their customer support services as well. If there is no customer support available, this is a very bad sign. If they do have some support option available, test them, see how responsive they are and how they treat their customers.
Last, but not least, look into customer reviews. What do people say about the service they have received so far? Is it positive or negative? In the worst possible case, they probably won’t have any feedback, which is very suspicious. Be careful when reading reviews though. Some may just be unhappy because they lost money and it was their own fault, not related to the service.
– Reputable services
Familiarize yourself with renowned social trading services.
eToro and ZuluTrade are perhaps two of the best examples of legitimate and functional social trading platforms. If you are thinking of using another service, that’s less well-known, compare the features and any incentives they may be offering.
A great place to look is in online forums where traders discuss the different services they have used.
Conclusion: So, does social trading work then?
In many ways, social trading is the logical next step for beginners after they have gained some knowledge on trading through a course or their own research. After they learn the basics, trading in the shadow of a veteran trader and communicating with other traders can allow them to feel confident and put their knowledge into practice. Once they feel they know what they are doing, they can graduate from social trading and start trading by themselves if they wish.
Can you make money copy trading?
Yes! If you strategize and take an active interest in your trades on a reliable platform without taking risky moves. To get the most out of social trading, be social and ask questions, think of it as a learning environment. Keep in mind that social trading is like a stepping stone to becoming a professional trader. If you stay on that stone you won’t progress to the next level.