The signals replication process in Social Trading
The signals replication process in Social Trading may seem elementary, but in reality it hides behind a great work of coordination and interaction.
In this lesson we will describe the replication model of a company that acts as an intermediary between different brokers, like for example, as we have said, ZuluTrade. This model is the most complex, so understanding this process you can automatically imagine also the simpler type of companies like eToro, which do not act as intermediaries, but are themselves brokers.
Let’s analyze it in all the details.
PHASE 1: the start of the signal
Everything starts from the Signal Providers, that is the traders you have decided to follow. If you have decided to follow him, you are choosing to replicate on your account his buying and selling signals.
Let’s suppose the Signal Provider decides to go Long on EUR/USD for one standard lot (if you don’t know what it means or how it works I recommend you to study the Forex course, because knowing these details is critical for your survival).
The Signal Provider then, via his trading platform, notify the broker he wants to open this transaction.
The broker, upon receiving the order, performs immediately two operations. One, he executes the order on the trader’s personal account, at the best price of that moment, let’s assume 1.3000; Two, he notify the Social Trading company he has just received the order from the Signal Provider to buy EUR/USD for a standard lot at best price possible in that moment.
PHASE 2: the modification
The Social Trading Company receives the notice by the broker in reference to that particular Signal Provider.
At that point the Social Trading Company conducts a search for all the investors followers that have linked their account to the Signal Provider’s one, authorizing then the signals replica. Once identified every follower investors, the social trading company sends send to the brokers of each investor a filtered replication command of that order.
“What do we mean by filtered?”
The original command was to buy 1 standard lot of EUR/USD, at a price of 1.3000. Many Social Trading platforms gives the possibility to customize the follower’s operation, in order to adjust as much as possible the risks and investment objectives to the operation of the signal provider chosen for the signals replica.
The filters that can be applied are different: from the inhibition of further signals replication once reached a total number of open positions, to excluding totally the replication of transactions made on a specific currency pair; from replicating the signals of the Signal Provider, but in reverse (with an opposite operation), to replicating them with a proportionate lot size, for hypothesis at 50%, or set at a certain fixed value (eg 0.1 standard lot, as you will see later with Zulutrade).
This means that, before the order is passed to the broker to arrive in the follower’s account, the order is affected by changes made by the Social Trading company, changes that were previously chosen and set by the follower.
To make some examples, in the case of reverse setting, the buy order at 1.3000 will turn into a sell order at 1.3000, ie an opposite operation. In the case of replication of the transaction volume at 50%, we will not talk of one standard lot, but of 0.5 standard lots. In the case of fixed lot size, we will talk of a change from 1 standard lot to 0.1 standard lot, that is one mini lot.
Therefore, the order will start from the Signal Providers, will be taken over by the Social Trading company that will filter and change it, according to the instructions of the follower investor, and then will re-send it, changed as decided, to the investor’s broker.
It may not seem at first glance, but this Social Trading peculiarity of the replication process is a huge advantage for investors, as well as being a very effective tool for risk control.
Let’s make another example to give an idea. The order of the trader was for a standard lot, and this is what has been done on his account.
You know that, with one standard lot, the pip value is about $ 10. Let’s suppose with that operation the Signal Provider took a loss of 10 pips, and that he has an account of $ 10,000. For him, it will be a $ 100 loss, on an account of $ 10,000, ie a loss of 1%. Imagine if you would replicate the same operation, with the same lot size, in your account, but yours instead was of only $ 1,000. For you, the loss at that point would be of 10%. A huge loss for your account, and with only 10 pips. This is really a risky situation and to be avoided completely.
To overcome this problem, the Social Trading company allows you to decide by yourself what will be the lot size with which the Signal Provider’s operations will be replicated on your account, regardless of the choices made by the trader about the lot size.
Remaining in the previous example, you can notify the Social Trading company that you want the operations of that trader to be replicated on your account with a lot size of 0.01 standard lots, which is a micro lot. In that case, a loss of 10 pips for you would correspond to a loss of one dollar, which on a $ 1,000 account would be of a 0.1%. Now we are definitely in more reasonable terms.
Similarly, suppose that your account is instead of $ 50,000. At that point you’d be very well covered, thanks to the size of your account, and you may want to replicate those operations with a lot size even higher than that the trader’s one, maybe with 2 standard lots.
As you can see, Social Trading is made up mostly of these basic concepts mastery about Forex, and the ability to perform the proper calculations to figure out how to properly size your account.
PHASE 3: the reception
Let’s go back to our replication process.
The Social Trading company receives the order from the Signal Provider’s broker, it filters and, if needed, it changes it according to the guidelines of each individual follower investor, and then it sends it back to the brokers of all the followers who were following him.
At that point, the follower investor’s broker receives the order.
The investor had previously authorized the broker to accept and repeat every orders received from the Social Trading Company, so the broker proceeds as communicated and opens the same type of buy order on EUR/USD on the investor’s account, but obviously with the lot size chosen by him.
All of these operations, even though it took a few minutes to read them and they may seem intricate, thanks to the new technologies and Internet, are processed within a few tenths of a second.
Slippage: what is and how it forms
Despite the extreme speed and the increasing precision, performing these operations took a few time anyway, even if minimal.
An exchange rate price, even in a tiny timeframe, can change. This aspect gives rise to the phenomenon called “slippage“.
We have said that the buy order was performed on EUR/USD at 1.3000, because for the trader’s broker that was the best price in that moment. The order starts with the whole process and comes after a few moments to the investor’s broker, who immediately applies for getting the best price for his client.
But, given the high volatility of that moment, as best price he can only find 1.3001, which is a pip difference.
Well, that difference is called slippage.
Obviously, slippage can be both to the disadvantage of the investor, as well as in favor, in the opposite case in which the price comes back a little bit and let us buy that exchange rate at a better price.
Also, time is not the only factor to create the conditions for slippage. As you know, a broker, for executing the orders of his clients, has access to liquidity providers, that are connected to the higher levels of the market, which provide the prices that will be quoted in the transaction. Different liquidity providers could beat different prices, so between brokers with different suppliers the quotations may vary, not only for time variation, but precisely for price itself.
Now that we have seen how accurately the replication process in Social Trading is, we can go on and analyze in detail the investor’s, or follower’s, role, which will be yours, and the Signal Provider’s one.
Let’s start with the latter.