Social trading has become increasingly popular in recent years with the continued evolution of many social trading brokers and the range of innovative features on offer.
Here, the expert InvestinGoal team has taken an in-depth look at exactly what social trading and social trading platforms and features are, so traders can gain insight and understanding around this form of trading. We have also detailed how to get started with a social trading broker and charted the history of this type of trading through the years.
What is Social Trading?
Social trading is an approach to trading that started around 2005. The approach consists of interacting with other traders who operate in the financial markets. The goal of this interaction is to gain market insight from more experienced people, keep up to date with current and future market trends, understand how professionals operate and share and comment on news.
When social trading is offered by real financial brokers, they often provide the possibility to copy users on the platform.
If you’re looking not only to follow traders but also to copy them, you may be interested in choosing a copy trading broker.
(76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.)
(Your capital is at risk when trading CFDs)
(80.85% of retail CFD accounts lose money)
What is a social trading platform?
A social trading platform is a type of trading platform, the features of which can resemble a social network. Within a social trading platform, it is possible not only to trade but also to interact with other traders.
Depending on the broker, it should be possible to view profiles, share posts and comment on the activities, trades, and posts of other traders using the platform. Many brokers now offer social trading, though eToro was a pioneer in this space and still provides a social trading platform that is recognized as one of the most user-friendly in the world.
Among the other popular social trading platforms that are not directly affiliated with brokers, there is Kinfo, Hashtag investing, and the MQL Community which is a very active community of algo-traders.
How does social trading work?
Social trading works fundamentally through interacting with and following other traders. The essential tool for facilitating this interaction is a social trading platform. This platform, provided by a social trading broker, is a place where social traders can communicate with each other in a variety of ways and ultimately establish a network.
Over time, this network establishes just as with your social network and becomes filled with traders’ interactions, comments, strategies, and news in a feed that may also allow searching by hashtags or other means depending on the features of the social trading platform.
Who are Social Trading’s key players
Some of the key elements of social trading include:
- Interaction: Users can comment on other users’ posts, leaving likes and feedback on their ideas and insights. Direct chatting between users is also facilitated by some brokers.
- Data and Statistics: Insightful metrics such as market sentiment indicators, where the platform shows in real-time how many users are selling or buying a certain asset are often provided.
How to find reliable traders to follow
Here are a few important questions to answer when looking for the best traders to follow. These start with the following.
How long has the signal provider been working?
Experience is important for any trader. More than one year of proven trading experience is a key criteria you should seek in any signal provider you are considering. If the signal provider does not have this experience, it is a good idea to follow and monitor their performance over a period of time before implementing their strategies.
What trading strategy is being used?
Understanding the strategy of other traders helps minimize risk. The following are key factors to take into consideration when evaluating strategy:
- Trading volumes: The higher the volume, the higher the risk. When a trader opens trades in high volumes, more funds are required from those wishing to copy the strategy.
- Trading frequency: High-frequency traders can open multiple positions a day. This means more trades and potentially increased risk.
- Winning percentage: Although a trader with a winning percentage close to 100% is attractive, it may indicate they are following high-risk strategies such as the martingale. Followers in cases like these risk losing a large part of their investment.
- Markets traded: Some markets are riskier and more volatile than others. It’s always important to follow the right traders no matter the market, however, when a trader invests in volatile markets (such as in crypto assets), risk management becomes even more important.
- Leverage: Leverage is a tool that allows you to multiply gains (and losses) on an investment. However, utilizing leverage can lead to heavy losses if you don’t put risk management strategies in place.
Does the trader have a good profile?
While the number of followers a signal provider has is no indication or guarantee of success, it is one of the metrics to check. A high number of followers can demonstrate the trust the signal provider has from other traders. This, when taken alongside other important points like strategy, experience, and risk level, can help potential followers gain a complete picture.
How to get started with social trading
Here are a few important steps to follow in getting started with social trading.
1. Choose a social trading broker
The first is choosing the correct social trading broker. There are many brokers to choose from, but only some who facilitate social trading. eToro and ZuluTrade are both pioneers in the space and still remain very popular with traders. Recently other platforms such as AvaSocial (offered by the Irish broker AvaTrade) have become increasingly popular users.
2. Try the broker’s service
Trying out the service of a broker through a demo account is extremely important. eToro and the majority of other social trading brokers offer demo accounts. These accounts can often be opened quickly and easily with just an email and password. A demo account is risk-free trading with virtual funds and without obligation to open an account. Such demo accounts can be limited or unlimited depending on the broker.
Visit eToro (76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.)
3. Verify your account
When you are ready to open an account trading with real money, the broker will require the account to be verified. This means completing the KYC procedure and submitting proof of identity with a passport or national ID, and proof of address with a utility bill or bank statement.
4. Open a real trading account
Brokers will often require a minimum deposit once account verification has been completed. This amount varies depending on the broker and can usually be deposited through a bank transfer, credit/debit card (Visa, MasterCard), or eWallets such as Skrill, Neteller, and Paypal. The deposit methods available again depend on the broker. These deposits typically require 1-3 business days to complete.
5. Find traders to follow
With an account open, the next step is to find traders to follow. This allows you to build your social trading network with traders to learn from and eventually copy if the features of the platform facilitate it.
Key characteristics of a good social trading platform
The essential characteristics of a good social trading platform are that it be regulated. This means traders’ funds are protected and the platform can be trusted to operate with a certain level of trasparency.
It is important that a social trading platform is user-friendly. This makes trading and interacting within the platform easier for traders at all levels to understand.
Finally, possessing social features is vital. The role of a social trading platform is to facilitate interaction and sharing as much as just purely copying trades.
Is social trading legit? The risks of social trading
Social trading is legit and does not directly carry any risk as the concept is to facilitate interaction among traders with a broker. The risk is introduced if you choose to copy the trades or strategies of other traders. This is why extensive due diligence is recommended on any trader or strategy you choose to implement.
Another element of risk may come from the broker. Most brokers offer a risk-free demo account, though opening a real, live trading account requires a real money deposit.
Is social trading effective?
Social trading can be effective in helping traders grow their knowledge of trading and facilitating the process of learning about trading and different strategies. It ultimately is a tool that can facilitate individual users to make more informed decisions on average than when trading on their own.
Scientific research on Social Trading
In regard to scientific research, MIT has conducted a scientific experiment, with the participation of eToro.
Results showed that the traders participating in the experiment performed 10% better than those who traded with no indication from the network, and 4% more than those who only followed the signal providers.
Users, on the other hand, shouldn’t simply follow the best traders. As Gregor Dorfleitner points out in his study of social trading platforms, using this strategy tends to lead to losing money.
In contrast, when done right by taking multiple factors into account along with other variables such as risk and consistency over time (such as the Woonyeol Lee and Quiang Ma’s W2F criteria), social trading is effective.
The history of social trading
Prior to social trading as we know it today, there was mirror trading and Copy trading, though it can be said that email was the first iteration of social trading.
Originally, some traders communicated to their followers their intention to open or close certain positions, often through the use of newsletters. When they wanted to open a trade, an email was sent, and all members of that group opened the same trade independently. Then the same procedure for the closure.
Later the first virtual trading rooms began to appear. The concept was more or less the same. The trader communicated the execution of a trade, but instead of using email, he wrote it in a virtual room where the followers were able to read and replicate.
Later, with the evolution of chat rooms, traders could also comment or ask questions live. In most cases, these evolved to become fee-charging services.
At that point, brokers began to realize the potential in creating an automatic replication system where a single entity could generate the trading signals, and all the other parties linked to it could replicate them automatically on their trading accounts.
Tradency was among the pioneers in social trading. In 2005 they proposed the first autotrading system, which they named “Mirror Trader”. A trader could host their own trading strategy on the Tradency system, provided they supply a long enough record with the performance of that strategy. At that point, if the strategy was accepted, Tradency customers could view the data and, if interested, could decide to mirror-copy the strategy trades on their account.
Another important step forward in the history of Social Trading was made by companies like Zulutrade and eToro. Traders no longer had to submit their strategies in order to be approved. It was sufficient that the traders had connected their personal trading accounts to the platform, and from that moment each of their actions was recorded and made available to the investors who followed these traders
As for the “Mirror Trading” of Tradency, the new system allowed users to check the work and history of the traders on the platform, thanks to new analysis methods and, if interested, to copy the transactions made by that trader to their own account. This helped coin the term Copy Trading.
It was an important step, because this way, the first real and direct interaction between the user who provided the signals and the user who replicated them occurred.
Allowing the investors who are copy trading to interact with each other was the next evolution. This allowed investors to exchange opinions, to leave comments on the actions of a trader, and more. This form of social interaction combined with trading is ultimately what led to social trading as we now know it.
Though even now, social trading is constantly evolving. Companies are expanding and new ones are emerging, there are new and more innovative services like eToro CopyPortfolios, and the general competition continues to drive the whole industry to improve.
Social trading restrictions around the world
Before engaging in social trading, it is important to always observe the local laws. In some countries, giving advice considered as unqualified investment or financial advice could cause problems. Here, we will clarify some restrictions but should always double-check the regulations in the area you intend to trade.
United States of America
Many social trading platforms like eToro and others, also integrate copy trading features. That is not possible in the United States due to local regulations. With that said, there are many solely social trading platforms in operation in the USA. Popular and legal choices here include Kinfo and Hashtag Investing.
How MiFID II impacted social trading
From the perspective of European authorities, the evolution of this form of trading raised legislative concerns.
Despite the trading account remaining owned by the investor, the capital was being moved and managed by an external entity, and this was enough for the authorities to classify both copy trading and mirror trading as asset management disciplines.
There was only one distinction made:
If the trading signal generated by the trader or strategy was then replicated automatically and without any confirmation from the investor, then that was classified as asset management.
Alternatively, if the investor had to confirm the buying or selling signal, and operate manually, this was no longer considered asset management, but simply advice.
This led to all the companies that were offering copy trading or mirror trading services having to adapt to the same MiFID regulations planned for asset management companies.
This change impacted many brokers including ZuluTrade which, prior to the regulatory update, was considered an IB (Introducing Broker) and a service provider. Essentially, the company was the medium through which customers were finalizing the opening of trading accounts from various forex brokers. It also provided an automatic signals replication service.
Now, with the update to MiFID II, ZuluTrade is still an IB, and service provider, but it’s also classified as a type of asset manager, and had to update its services as such.
Visit ZuluTrade (Your capital is at risk when trading CFDs)
Pros and Cons of Social Trading
- User-friendly platforms
- Highly Accessible
- An opportunity to learn from experienced traders
- Copy trading may also be offered depending on broker and local area
- Limited control of trading decisions
- Potential negative influence from unskilled traders
Who is social trading for?
Social trading can be for all traders. Beginners, as well as experienced traders, can engage in this form of trading. For beginners, it is possible to learn from more experienced traders by asking questions, studying strategies, and even copying trades while experienced traders can earn commission by becoming signal providers.
What is the best social trading platform?
To date the best social trading platform is the one provided by eToro (76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money), although more and more modern social trading platforms are coming out in recent years, such as the one from AvaTrade .
What is crypto social trading?
Crypto social trading is a subcategory of social trading that focuses on exchanging ideas and information about the crypto world instead of the markets in general. To date, eToro and ZuluTrade have a significant community of crypto-social traders, with eToro having even created a crypto-themed basket called eToro Investment Portfolios for traders to copy
76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Cryptoasset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply..
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