So, are you curious to find out what is Social Trading (also called Copy Trading or Mirror Trading)?
In these 12 chapters guide you will discover everything you need to know about this innovative form of investment and the brokers which are part of it.
The simplicity of Social Trading has enabled hundreds of thousands of people to approach the world of investment. But be careful. The fact that it is simple, does not mean that it is also so easy to be successful and make money.
It’s a discipline accessible to all, but you still need to become a professional in order to succeed. This free course, combined with the next two, will give you the basics to start your journey into the investment world as quickly as possible.
What are you waiting for?
- What is Social Trading – Complete tutorial for beginners
- The History of Social Trading
- Who are Social Trading’s key players
- The signals replication process in Social Trading
- What a Signal Provider does in Social Trading
- What a Follower does in Social Trading
- Analysis of the characteristics of the Signal Providers
- The 4 (plus 1) Signal Provider categories
- The risk factor in Social Trading
- How Equity line and Drawdown work in Social Trading
- Money management tips and best practice
- What your Expectations should be in Social Trading
- Ready, set, Go! Invest with 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 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.
Investors from which to copy can be selected either by observing their track records their performance, either interacting with other investors inside social trading platforms (among the best, we can mention eToro, ZuluTrade and Ayondo).
Social Trading is therefore a particular form of trading that is made by the investor not on the market but on the traders that operate on the market (or even on a traders’ portfolio with the eToro CopyPortofolios), trying to choose the one that best meets his needs in terms of risk appetite, return on the investment and other useful operational characteristic.
In addition, working via server, operating with Social Trading does not even require to have always your computer turned on and running programs.
This new field born and developed mainly due to the Forex market and the use of MetaTrader platforms, and even today the Forex Social Trading remains the most widely used sector, despite the advent of CFD is enabling the expansion into a number of other derivative instruments (shares, indices, commodities, bonds, interest rates, etc).
This course focuses specifically on Copy Trading, but is also perfect for Mirror Trading, since the latter has just one step less.
However, as we will see, since both sectors have evolved and expanded through the new 2.0 technology of social networks, the trend of the entire industry is to call everything Social Trading. So, we adapted too.
The Social aspect of Social Trading
In Social Trading the user is no longer alone, but is surrounded by thousands of investors who, like him, are trying to make the right choices and avoid following all those traders who are not professional, relying only on the best.
This interaction between users can definitely bring benefit in some cases, but you should not overestimate it.
- Would you accept an advice from someone who is not at all more experienced than you?
- If you knew that the strategy of a trader is very risky, would you trust the positive votes of those who, up to that moment, have made money, but are unaware of the impending danger?
- Would you run with a minivan in the same way you would run with a sports car?
- Similarly, would you make the same choices as those with ten times your capital, without worrying about differences in weight and volumes?
If your answer is no, then you’re already on your way.
The “Social” attribute in Social Trading can be a good thing, definitely innovative and in some ways can be an advantage compared to being completely left to yourself, but you have to take everything very cautiously and be clear about one thing.
This is not about commenting your friend’s photos, sharing your thoughts with the world, discussing of politics, of your passions, or in general interacting in a social network as you would do every day.
Here we are talking about Social Trading networks, we are talking about money. And money is a very serious thing.
When it comes to money there are two solutions. Either you rely on the advices and choices made by other strangers, and with Social Trading is possible (but I have just shown you it’s very risky), or you learn yourself to invest, with methodologies and professional practices, and you become yourself the creator of your fortune.
As the ancient Romans said,
“Homo faber fortunae suae”.
Once this is done, then you can use the social aspect of Social Trading as a side dish, and support your strategy. Investingoal is here for this. Obviously, Social Trading, as any other form of investment, involves risk.
But here’s the good news.
Does Social Trading work? What are the benefits?
You have and will always have the full control over the operations the trader you have chosen will execute, and on your money.
The property of your trading account will always be yours, you will not deliver your money to anybody, you’ll be able to manage every single aspect of your investment and always have everything under control, at all times.
It is not like consigning your money in the hands of some other operator, only to be told at some point, “Sorry, it didn’t go as we thought, your money is not there anymore.” You can control everything, and decide whether to continue, stop or change anything at any time.
This is a huge opportunity, which in contrast, however, requires you to be fully responsible. The reward for this thy duty is that the percentages of return on your investment (ROI) can be much higher than any other traditional method.
In order to be responsible for your success, and get these great returns, it’s necessary that you are well prepared and carefully study the lessons of this course.
But please, don’t worry.
Making Social Trading successfully is not as complicated as doing Forex trading as a retail trader.
Get started now. This guide is the best place to start.
In order to fully understand Social Trading‘s characteristics and the capabilities, we must first learn about its history and its evolution.
Before Social Trading there were Mirror Trading and Copy trading, but first and foremost there were the simple emails. Yes, we can say that emails have created the conditions of the evolution history of Social Trading, up to its present shape.
Originally, some traders communicated to their followers their intention to open or close certain operations at certain levels, through the use of newsletters. When they wanted to open a trade, an e-mail was sent, and all members of that service opened the same trade independently. Then the same procedure for the closure. A communication was made to the mailing list, and everyone closed their positions.
Later the first trading room began to appear. The concept was more or less the same. The trader communicated the execution of a trade, but instead of using the e-mail, he wrote it in a virtual room where the followers were able to read and replicate.
Later, with the evolution of chat room, they could also comment or ask questions live. Obviously, everything implied a constant presence in front of the computer and, in most cases, the payment of a fee to use the service.
An historical turning point: the automatic replication
At that point, some brokers and businessmen began to realize the potential that could be generated if they were able to create a replication system, but this time automatic, 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, with no longer the need to follow or to constantly monitor email or trading room.
The merit of having initiated the real Social Trading history goes to the company Tradency. In 2005 they proposed the first autotrading system, called by them Mirror Trader. A trader could host his own trading strategy on the Tradency systems, provided he supply a long enough record with the performance of that strategy. At that point, if the strategy was accepted, the Tradency customers could observe the data of that strategy, and, if interested, could decide to mirror-copy on their account all the transactions generated from that strategy.
Another important step forward in the history of Social Trading was done by companies like Zulutrade and Etoro. Traders no longer had to submit their strategies in order to be approved and used. It was enough that the traders had connected their personal trading account at the Zulutrade platform, and from that moment each of their action was recorded and made available to the investors users for consultation.
As for the Mirror Trading of Tradency, the new system allowed investors users to check the work and history of the traders on the platform, thanks to new analysis methods and, if interested, to copy on their account the transactions made by that trader on his own account. Hence the term Copy Trading.
Last chapter… but the Social Trading’s story continues
It was an important step, because this way the first real and direct interaction between the user which provides the signal and the user who replicated it was born. The last step of this story came shortly after.
Why not allowing the investors who are making Copy trading to interact with each other, to exchange opinions, to leave comments on the actions of a trader and vote him? Why also not allowing the use of Social Network, connected to the whole Copy Trading business?
Here was born Social Trading.
But of course, the story doesn’t stop here.
Social Trading is constantly evolving. Companies are expanding and new ones are emerging, there are new and more innovative services (for example just have a look at the new eToro CopyPortfolios), the quality of the service is improving steadily, and the general competition drives the whole industry to improve.
If it’s true that we are destined to be more connected with each other, then Social Trading will do its part, and investing will be more and more affordable for everyone.
This story has just begun, and InvestinGoal is here to write it with you.
To understand how really Social Trading works you should first know the key players who take part in this big machine.
Forex Market, the Social Trading’s home
The Forex Market it’s by far the largest market in the world for the daily trading volumes. Any other market in the world don’t even get to half the size of Forex.
In this market you trade money, or rather currency pairs. A currency, such as the dollar, is never bought or sold in absolute terms, but always in relation to another currency. So, if I want to buy dollars I must, for example, sell the euros I possess, and to determine how many dollars I will receive I have to use the euro-dollar exchange, or EUR/USD. This change increases or decreases depending of the increasing or decreasing of demand and supply of the two currencies.
In the Forex market you can invest and make trading (or even better Social Trading) on the increase or decrease in the currencies exchange rate. As they say in the industry, if you buy EUR/USD, or “you go Long” on EUR/USD (buy euro and sell dollars), you want the exchange to increases in value, so to profit from the difference. Conversely, if you sell EUR/USD, or “you go Short” on EUR/USD (sell euro and buy dollars), you want the exchange to do gown to earn the difference.
How much this difference is worth depends on the PIP, which is the measurement unit of exchange rates. Usually, the pip is the minimum deviation of the fourth decimal place after the decimal point (ex. if EUR/USD rose from 1.3000 to 1.3001 it’s increased by one pip).
Forex market is now very well-known because, thanks to the expansion and explosion of technology and connectivity, the costs and the tools to be able to participate, including Social Trading itself, have become really affordable for everyone.
Moreover, in recent years, thanks to the technology of CFD (Contracts for Difference) some companies, eToro above all, are opening Social Trading up also to the stock market, indices and commodities.
The broker, your travel companion
The broker is the one that allows anyone who wishes to participate in the Forex market to make trading operations, with extreme speed and comfort.
To contact a broker you can use your phone as it was once, your computer as is done now, or even a Social Trading platform as you will be able to do in a short time.
The broker is nothing more than a middleman that stands between you and the market itself.
Let’s suppose you want to go Long on EUR/USD, ie you want to sell your dollars and buy the euro, because you have the intuition that euro will rise in value.
At that point you just have to contact your broker and ask him to buy euros and sell dollars on your behalf, using the money you have deposit into a special trading account. You will give instructions on the amount you want to trade and the broker will take care of all the rest. Same thing when you will want to close the transaction by selling the euros and buying back the dollars.
Everything is always moving through the assistance of brokers. Social Trading makes no exception.
The Retail Trader (or Signal Provider or Guru)
The trader is nothing more than a person who just trade on a market.
Trading on the markets means making transactions with a certain type of goods, with the intention of making a gain from changes in the prices of these goods, provided of course that the change was in the direction the trader had hoped.
As already mentioned, in Forex the trades are done on the variation of currencies exchange rates, and with CFDs a trader can do the same thing with the price of single listed shares, indices or commodities.
There are different types of traders, those who make trading for institutions, or those who do it for large private companies. Those instead that trade by their own and in absolute autonomy are called Retail Trader, and they work on the markets with the help of a broker, as we have seen before.
Usually (but not always) a trader is an experienced person, who has studied the market structure, its characteristics and its functioning. With this supporting knowledge, the trader identifies the favorable periods for taking actions, ie for executing his trading operations.
The methods, techniques and strategies that traders use today are as many as the languages and dialects in the world.
There are those who only rely on the study of macro-economic data in order to understand global trends and to make long-term transactions. There are those who exclusively uses technical analysis tools, thanks to computerized platforms, to make short, medium or long term operations, regardless of the macro economic data. There are those who do a bit of both things.
There are also those who, using computer, create programs that open operations on their behalf, at the occurrence of certain specific conditions on the price performance, even without the trader’s intervention.
When we refer to a retail trader in the world of Social Trading, is preferable to call him “Signal Provider“, but every company then tends to call its own retail traders in its own way. For example eToro until recently used to call them “Guru”, while now they are simply “Investors“.
The investor (or follower)
This is the role you will have.
In the great Social Trading machine, the investor is the one who has chosen to receive the indications of opening or closing certain trades, on certain exchange rates, directly from one or more retail traders previously chosen.
What does it mean?
It means that if you choose a trader, or as he’s better called a Signal Provider, every time that Signal Provider will open an operation on his personal trading account, the same type of operation will also be opened automatically on your trading account, thanks precisely to the Social Trading process.
Identical process when he will decide to close it. If the operation of the trader will made a profit, also your operation will made a profit. Same thing for the losses. Nothing could be simpler.
When referring to an investor in the world of Social Trading we can also call him “Follower“, especially in the case of ZuluTrade.
The Social Trading company
Who makes this magic happen is the Social Trading company.
These companies are concerned, ultimately, with putting in communication respectively the brokers of the Signal Provider with those of the investors.
In practice, the company makes a deal, on one side, with the Signal Provider’s broker, agreeing that whenever the trader makes an operations, that must be immediately communicated to the Social Trading company. On the other side the company agree with the follower investor’s broker that the buy and sell orders on that client’s account will arrive from the Social Trading company itself.
When an operation will be performed by the Signal Provider, the company will pick it up and will turn it respectively to all the brokers of the investors who had decided to follow that trader. Any broker, once received the order, will execute it immediately on the user’s account, according to the details contained in the order.
Another model is instead that proposed by eToro. This company does not connects brokers of traders and investors. EToro is itself a broker in all respects, and its customers have opened an account directly with this company. The trades replication process is basically the same, but everything is handled internally.
And that’s the identity of the participants in the largest market in the world, through the most innovative investment technique, that is Social Trading.
In the next lesson we’ll show you how this replication procedure is carried out in details.
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.
What does being a Signal Provider mean?
Why they do that and what do they gain with Social Trading?
Where do they operate and how can I find the best ones?
Just continue with this post and find the precise answers to these questions.
The origin of a trader
Some traders begin to make Forex trading out of curiosity and then they get passionate, others are simply looking for a way to make money sitting at the computer. Some make trading activities as extra work before it becomes a full-time job, and still others have always done it as a real job.
Understanding the evolutionary journey of a trader is not very important, what really matters is to understand what are its current capabilities and the power of his strategy.
By now we have been in the Forex and Trading world for more than 10 years, and we know a lot of people. We have seen traders that after 20 years of study and practice still had difficulty, because they were committing the same beginners mistakes over and over. We’ve also seen beginners make a mistake just once and don’t commit it ever again, because once was enough for them to learn.
Obviously, a certain number of years are needed to gain experience and acquire the necessary experience to be flexible and be able to react quickly to the market changes.
However, what really matters in the end are the strategy, the results, and the self-control. When a trader studies he does so to create a set of rules. These rules will help him to know if, when, and how to open or close a trading operation.
This set of rules will then constitute his strategy skeleton.
The 3 great Signal Provider’s schools
These rules can be based on three different schools, and on the mergers and contamination of these together.
FUNDAMENTAL ANALYSIS: a signal provider in this field is an expert in interpreting the many news, either monetary, economic and political, that are released every day by the news agencies. When he opens operations, his vision is usually long-term, weekly or even monthly, because usually the news of this kind are not immediately reflected on the price, but in the long run. Sometimes, however, some economic data make the price literally explode in one direction, creating (risky) opportunities of immediate profit. A famous example is the change of the central banks interest rate, like the Fed or ECB respectively on dollar and euro, or the US unemployment data.
PRICE ACTION: a signal provider experienced in the price action does not worry about knowing what are the news moving the market, because he’s convinced that the price action shows everything already inside. In other words, the daily, weekly and monthly movements the price performs are able to show to the trader the intention of the price to take a certain direction in the near future. Doesn’t matter what that specific data says, and how it should be interpreted, the trader believes that the price action has already said everything about what the price want to do, and the direction it want to take.
INDICATORS: indicators are technical tools, often charts, which are used via electronic trading platforms. In the Forex world the most popular and most used by Signal Provider is called Meta Trader 4 or MT4. The indicators available are thousands of different categories. Furthermore, with some computer programming knowledge, they can also be created independently. To name one among all, the most famous is the moving average. The program calculates the values of a certain number of previous periods, chosen by the trader, and reports on the chart the average of these values with a dot. Time passing, these points take the form of a curved line. The trader expert in the use of indicators is able to interpret that behavior and to get indication for guessing the future direction of the price.
Usually we refer to Price Action and the use of indicators as “Technical Analysis“.
In order to respond immediately to a common question, there is no better school than others. It all depends on the trader’s style and his or her preferences.
Most traders, however, specializes in one of these areas, but they also try to fill the deficiencies of each with additional knowledge from the others.
As the trader builds his strategy, he’s able to analyze the results. This doesn’t mean just to look at the results to see if it has gained or not. It means, above all, to analyze how these results have been created, what are the winning percentages, what are the risks of this strategy, what are the weak points, what are the strengths.
This way, that is made also of attempts, testing and results analysis, the trader builds his own strategy, his war machine. On InvestinGoal we show you what are the Signal Provider’s parameters and data to be analyzed in order to understand how his performance take form, but above all, what are the risks in following him.
The best Signal Provider’s quality
Finally, after the strategy and the results, comes the self-control. Yes because, even if a trader has created the most solid and profitable strategy of all time, but he’s not able to comply with those rules, sooner or later he will have big problems, because, as we all know, market does not forgive anybody.
This is one of the main reason why many traders choose to define the rules and turn them into a computer language, creating a virtual machine, a program that trades on their behalf, in a semi or fully automatic way.
These programs, called Expert Advisors or EA, constantly follow the evolution of prices and data, and they open and close operations on the occurrence of specific conditions, previously set by the trader.
These programs are great ways to remove completely the emotional and the psychological factor from a trader’s operation.
However, the machines, no matter how complex, can never replicate human intelligence and sensibility. There are times in the market, in which only a human being can understand what is happening, and decide what is better to do or, even more important, not to do.
Why deciding to become a Signal Provider
The Signal Provider is a trader who has decided to share his trading strategy with other investors. And to respond immediately to a classic question and dispel all doubt
“Yes, Signal Providers are paid to do what they do, they don’t do it for free.”
It would be strange if someone who has a method to make money would share it with the world without wanting anything in return. Signal Providers make no exception. The interesting thing is that, in most cases, it won’t be you to pay them.
The compensation system for the signal provider usually is structured in such a way that they earn only if there are investors who are following their signals and are replicating them using real money accounts.
This means that only those who produce good performance and good results will be able to attract investors eager to follow their signals, and thus make a profit. Bad Signal Providers very unlikely will be able to earn from their Social Trading activity.
Moreover, we must also say that the Signal Provider, from the moment he decided to collaborate with the Social Trading company, he also give it the permission to record every transaction he make, in every detail. This way the company can show the Signal Provider’s historical data to the potential investors, who can then analyze in advance the possible future performance and the potential risks of the trader. In other words, this situation of constant control pushes a Signal Provider to behave well throughout his career, because he knows that every mistake will be recorded and shown to the present and future investors.
This may sound all roses, and a newbie of Social Trading might think that this way it’s literally impossible to go wrong, since sensitive information is visible in advance. The reality however is different.
First of all, it should be perfectly clear to anyone who wants to invest that past performance are in no way guarantees and certainty of future performances. What can, and should, be certain is the protection the investor has to build to safeguard his investment.
Second, the experience shows that many Signal Provider adopt strategies that, at first glance, may seem very good and convenient, but that actually hide very large inherent risks. The good news is that an experienced eye has the ability to recognize these risks from the analysis of the Signal Provider data.
Where are they and How to find the best ones
To answer this question we will not dwell further.
First, find out what are the best Social Trading networks where to begin to exploit the Social Signals Provider.
Next, we have created two specific lists of the best Social Signals Providers for the two main Social Trading brokers. You can find them here:
Investors who choose to invest their money with Social Trading are called Social Traders, or even “Followers“.
Basically, it’s precisely what they do, ie following traders’ signals.
This doesn’t mean that, to be successful, the only thing a follower has to do is following someone at random, and the game is done. This would not be investing, but tempting fate.
A follower must first arm himself of the right mindset, and then of the right knowledge. In this lesson we will see together the main characteristics that a follower must possess.
A Follower is an investor who has decided to make his own money work for him.
First of all, a good investor invests only the capital that, in the event on being undermined, it would not hurt his financial status. He never puts into play sums of money that could jeopardize the stability of its economic and financial situation.
On the other hand, a follower is aware of what it means to keep all the money in the bank. While this may give security, on the other hand he realizes that all his money is deposited according to the value of a currency, and that the value of his savings, in any case, is subject to the changes in the currency exchange market.
For this reason, diversifying to some extent the use of money is a good technique to increase the financial protection.
A Follower’s goal in Social Trading
What the purpose of a follower could be?
Here we enter into a very relative field, because the goal of a follower investor is something personal and, above all, that must be made clear at the outset.
One of the most common goal in the investment world is to achieve an annual return of 4% or 5% on the investment, in order to shelter the money from inflation and maintenance costs. This is a very conservative and respectable goal.
With Social Trading, however, it is reasonable to aim to much more. A follower knows that with Social Trading he will exploit the potential gain that Retail Traders can achieve with their trading on the Forex market and CFDs. The amounts of revenue that good traders can realize are much higher than any other investing method we have seen in the first course. There is no comparison, and it’s not necessarily true that with these traders or Signal Provider an investor will risk more, compared to entrust his own money to someone else who invests it for him.
We are plenty of incidents of people who have entrusted their own money to the so-called “experts”, and then, all of a sudden, they discovered their money was not there anymore. Not that it was necessarily stolen, but maybe just invested badly in risky operations.
With Social Trading, how much you want risk is up to you, and most of all, money are always in an account belonging to you, and you can check their status and what Signal Providers are doing whenever you desire.
The Retail Trader manage the trading risk in first person, and thanks to this responsibility, his earnings are much higher. A Follower runs the risk in first person too, but not of direct trading, as traders, but of the management of the traders themselves.
That’s why the earnings of an investor Followers may be much more higher than the other instruments.
A follower, then, must know how to manage risk.
He must not know which particular trading technique a Signal Provider uses (if you knows it, however, much better), but it must be able to understand what performance this strategy is able to produce, and especially against which risks.
It’s clear that the risks of a Signal Provider’s strategy will be proportionally reported on the investor Follower’s account, who has decided to follow him. A Follower should always think that when he replicate a Signal Provider’s strategy, he replicates first the risks, and later then, the gains. Reversing this thinking and think first to earnings and then, if appropriate, to risks, can be a very dangerous behavior, if not fatal, for an account.
To make a comparison, we can say that being a follower investor is like being a fund manager and a portfolio manager. The only subscriber to the fund will be you, and you will also be the one who will build the strategy and the portfolio.
As already mentioned, it follows that you will be solely responsible for your money, and your choices will determine the success or failure of your investment.
Having a cutting hedge mentality
Taking these responsibilities upon yourself may seem unnecessary and risky if we think that we may instead delegate them to someone else. On this point, however, it’s necessary to take another step forward regarding the mentality.
The dogma which you must internalize about money and investing is that
the responsibility is always and only yours. Always.
Even when you decide to let someone else invest it. Those who will lose your money cannot be the managers, because by definition that is Your money, not theirs. You can accuse them of everything you want, and maybe you’ll even be right, but you’re the only at the end that have lost that money.
You never have to forget that the responsibility of your money is always and only yours. For this reason Social Trading, which allows direct and constant control on your capital, it’s advantageous from this point of view.
It’s also true that responsibility can cost, because if you’re not prepared to make the right decisions you can take excessive risks and waste money. That’s why we decided to create InvestinGoal.
When you will learn how to handle this huge responsibility, you will also have access to the great Retail Trader’s potential, and you’ll be able to take advantage of their performance.
As we’ll see in the next lesson, your first great responsibility will be to know the factors that characterize the Signal Provider’s style and strategy, and then to know how to analyze them.
Analysis of the characteristics of the Signal Providers
What are the characteristics with which we can describe and then distinguish the styles of different Signal Providers?
It should be stated at the outset that each Signal Provider, or each Retail Trader in general, has his own style.
It’s very difficult to find two traders who do the exact same operations, even if they did the same trading course, with the same instructor, and have the identical knowledge. In the trading style of each person there are also their own personality, their own experiences and their own expectations, all of which will never be the same between one person and another.
If the operations are totally identical, it simply means that both are using an Automated Trading system, ie an Expert Advisor.
That being said, there are certain parameters that a reasonable Follower investor should consider every time he intend to analyze the performance of a Signal Provider, before deciding to follow his signals.
Let’s see the most important in detail.
How long the Signal Provider has been working?
That’s the first point, the most important place to start. The first thing to do when you look at the Signal Provider’s statistics is noticing his age. Not the trader’s chronological age, but how long the trader has been connected to the Social Trading company, and how long his data have been recorded and made available for consultation.
It’s clear that the statistics that are based on data recorded for only one month will be much less relevant and useful, for the purposes of the analysis, of statistics of two or three years. As a general rule, it’s essential not to go below a year, as a minimum. If a Signal Provider shows very good performance, maybe even safe, but has not yet completed a year of “age”, then it’s better to wait to connect him, and observe him again in the future.
The reason is simple. Markets are always changing, and it’s important to see how a Signal Provider behaves in different situations. Usually in a year’s time a Signal Provider will have faced various market’s scenarios, and you’ll be able to look at how he behaved.
Otherwise, if you trust a trader with only a few months of great records, you risk to connect to a strategy that worked well only for that particular moment in favor of the market. But, finished that period, you don’t know what to expect, and there may be unpleasant surprises.
Number of instruments used
There are Signal Providers that trade on several currency pairs or stocks. There are others who specialize exclusively on just one or two.
This is another important point to focus on, not because it’s better or worse to do one or the other thing, this is subjective and each style has its strengths and weaknesses. More than anything else, it’s important to contextualize another details we will see shortly, that is the maximum number of transactions open simultaneously.
In the case of Forex, but the same goes for CFDs, traders who use different currency pairs usually prefer to decrease the risk incidence by using their technique on multiple currency pairs.
Some simply use the same strategy on several pairs, considering that if with a certain pair at some point it will perform badly, there will be others in which instead it will do fine. On average, this will always lead to a positive result, and in the meantime he will avoid to go through completely negative periods, as it would be in the case of using the strategy on a single pair.
Other Signal Providers, instead, use complex diversification strategies, that take into consideration different parameters and technical data, including the most important positive and negative correlation between instruments. It is called positive correlation when two instruments, in our case two currency pairs, move more or less in unison, in the same direction and at the same time. On the contrary, it is called negative correlation when they move on the contrary to one another.
The other category, instead, refers to those Signal Providers who focus their strategy on one or two currency pairs or company’s stocks. These traders tend to specialize and deeply understand the behavior of the instrument on which they operate, and are able to recognize the various phases that particular instrument is going through, and can therefore adapt their strategy if necessary.
In case they use Expert Advisors, Signal Providers optimize as much as they can the automatic strategy, to reflect as much as possible the peculiar behavior of that instrument, in order to obtain the maximum return.
Number of trades open simultaneously
Most (not all) of the Signal Provider, either if they diversify on different pairs, or if they focus on a single one, at a certain point of their trading life they will end up having more than one operation open on their account at the same time. This can happen for several reasons we will see shortly.
The important thing is to begin to understand that this is one of the most important parameters to consider.
In general, increasing the number of simultaneous trade can quickly increase the level of risk, although this may also not always be true.
Let’s consider a Signal Provider that, historically, had moments when he found himself with a maximum of 20 simultaneous operations. I can already anticipate you that 20 is a value that, taken individually and out of context, could be risky, but let’s move forward in the examination. Indeed, the Signal Provider has diversified its strategy on 10 different currency pairs, and each pair has maximum 2 open simultaneously operations. Now, obviously the value 20 takes a whole different meaning.
As we will see later, however, a large number of Trade opened at the same time it’s often the first detector of a risky strategy. Soon we will see why.
Average number of operations performed
Does the Signal Provider open a few or many transactions per day? Or per week? Or per month? Numerically, how many is “few”, and how many is “many”?
To this type of questions we can answer as we did by referring to the number of simultaneously open trades, saying that everything can be relative. A trader who opens an average of 10 trades per day, and uses 10 different currency pairs, will be different from a trader who will instead open 10 trades per day, but on a single pair.
Understanding why a Signal Provider opens more or less transactions is something that would require the full knowledge of the strategy used by him, which, except for a few cases, is not possible to know.
But what we can do is identify how many transactions the trader makes on average per day, per week and per month. One of the first methods for controlling a Signal Provider’s actions is derived from these parameters. If I notice a significant increase in the number of the daily, weekly or monthly trades, it means that something has changed in the trader’s strategy, or simply that he’s beginning to no longer respect it as before.
In any case, this way you’ll find out right away if there are any changes, and you can make your considerations.
The duration of a trade greatly affects the connotation of a Signal Provider style. As we have seen, even during the forex course, traders can be divided into three main categories.
There are the Trend Follower traders, that implement long-term strategies. Here, each operation is open to ride the long trend movements, and they can remain open for several days or even a few weeks or months.
Then, there are the Swing Traders, those who open positions to earn from the market swing, which are usually closed in a few days, usually within a week.
Finally, there are the Day Traders, whose operations are always closed by the end of the trading day, and among these, Scalpers, the fastest ever, that open and close many transactions that are maintained for a few minutes, if not seconds.
The number of operations that a trader will be able to close with profit will form the Signal Provider’s winning percentage.
This is a number that can be very relative, and that needs to be contextualized with another parameter to make a concrete contribution to the analysis, as we will see shortly.
The key thing to do with this percentage is to be wary of extremes. Obviously, it’s easy to be wary of a Signal Provider who terminate in profit less than the 30% of the trades, because it means that his strategy is very week. But we must be wary also and especially when percentages are too high, generally ranging from 70% upwards.
Some might argue that the higher the percentage the more the trader’s strategy will be safe, because it never loses. Well, the problem is precisely that. A no-losing trader has never existed, and will never exist. Losing every so often, when trading in the markets, it’s a normal thing.
If you find a trader with a winning percentage of over 70%, it doesn’t mean he’s very good, but simply that he tends to avoid of closing the losing operations, leaving them open for a long time in order to not take the final loss, in the hope that sooner or later the price will return on the right side.
This is a very risky strategy, because the market can go against you much longer than what your capital can support, regardless of how much liquid you are.
To cut losses is crucial, those who do not run a very big risk, and if you decide to follow this kind of strategies, you will inevitably run it too.
Remember, the market takes no prisoners, and those who are not willing to suffer a small loss are destined, sooner or later, to suffer the biggest loss of their life.
Risk / Reward
The risk/reward is calculated by relating what an operation aims to gain with what is willing to risk.
If a trade has 100 pips target and the stop loss is set at -50 pips, the risk/return ratio will be 2:1, or directly 2 making the division 100/50 = 2.
Another example, if the expected profit is 75 pips and the stop loss is set to -60, the risk/reward will be 1.25 (75/60 = 1.25).
When the risk/reward ratio is greater than 1 it means that the expected profits are greater than the losses, as a number of gained or lost pips. Conversely, if the risk/reward is less than 0 it means that losses outweigh gains, as a number of pips.
This value is very useful when correlated with the winning percentage. In fact, in addition to knowing if the operations of the traders get a number of pips higher than what they lose, it’s essential to know how many times, on average, that trader gains or loses, because the scenario could change a lot.
Let’s consider a risk/reward of 2. It means that a successful operation can earn twice of what it can lose. This sounds great, but then we discover that the winning percentage is only 30%. So, despite the fact that the Signal Provider, when he wins, take much more pips compared to when he loses, the times when it loses are much more than the times in which he wins. Such a strategy has a major deficiency.
Another example. A risk/reward ratio of 0.70, so with losses greater than gains, but with a very high winning percentage of 68%. A trader of this type has stop wider than profit, but the times the stop is taken are much lower than when the trade goes into profit. Most likely, such a trader will be profitable in the long run.
Using risk/reward ratio is very useful when we find Signal Providers that have a very precise operation style, with average levels of profit and stop always equal. In such cases, doing the calculations is very easy and convenient.
Now that we have listed the main parameters for which a Signal Provider can be analyzed, in the next lesson we will look at the most popular categories of traders.
The 4 (plus 1) Signal Provider categories
We have said that every trader, ie each Signal Provider, is unique, because each person carries in trading the total sum of his experiences, mentality and psychology.
This is why it will be difficult to find two traders completely equal, unless they both use the same Expert Advisor, but that’s another story.
However, using the parameters we saw in the previous chapter, we can classify Signal Provider into categories. Let’s see the most famous.
Long Term Signal Providers
Trading over the long term means trying to ride big price movements, also called trend. These movements can last for days, weeks, sometimes even months.
A Signal Provider that applies this kind of strategy usually makes several attempts to try to take the right start of the trend. During these attempts, he often undergoes a lot of stop-loss, which, however, are usually small in terms of pips. When, instead, the trend starts, then with some positions he remains steady inside the movement, trying to ride it as much as possible, then he closes those few operations with large profits.
These characteristics make sure that the statistics usually show a low winning percentage, because of the different attempts to find the start of the trend, but compensated by a very high risk/reward, because the average amount of pips of the profitable transactions are much higher than that one of the losing operations.
Day Trading Signal Providers
A Day Trader usually opens one or more positions during the day, with the intent to close them in the same day or at least on the next day, rarely two days later. Therefore, the duration of his trade goes from a few hours to two/three days maximum.
This Signal Provider is trying both to ride those little trends that sometimes forms in a single day, and also to take advantage of the many days of range, ie where the price continues to bounce within certain levels, without taking a definite direction.
By closing all his positions within the day, the average pip size, both of profits and stops, will be lower than the average range value for that particular currency pair. For example, if we consider that EUR/USD moves on average in a range of 160 pips per day, a day trader who operates in this pair will always have an average values of profit or stop below this value.
Swing Trading Signal Providers
Swing Trading is somewhere half way between the long-term trend following and the daily day trading.
This trader looks, with all the technical tools at his disposal, to identify the beginning of those market movements, sudden and decisive in a particular direction, called precisely swing.
Usually, the time horizon of this kind of trades is one to four trading days, in any case within a week.
Scalper Signal Providers
Traders who do scalping are the fastest of all. In a single day they can even make hundreds of transactions, but that usually last from a few seconds to a few minutes.
With a so limited time horizon, the expected profits per transaction are obviously of very few pips, as well as the stop. Everything takes place in a few minutes, for a few pips, for many times a day.
It’s a frantic trading, and very few traders are able to bear certain rhythms, and be in profit at the end of the day, without the use of Expert Advisor or automated programs.
Usually the winning percentage of these Signal Provider is high, but against a minimal extension of profit and a high number of transactions per day. The speed of positions handling and the minimum profits for operation make these traders, in many cases, difficult to replicate successfully.
Martingale Signal Providers
The martingale is not a specific traders category, but rather a trading technique that all four the above categories can use.
The trader who uses martingale technique has a special operations management when they get in loss. In practice, when a trade goes in loss is not closed, but left open. In addition, another one is opened in the same direction of the first one.
In other words, let’s suppose to have a buy operation , ie a bullish perspective. The more the price goes against the first operation, ie it falls down, the more the Signal Provider will open other operations in the same direction of the first one (Long), in order to lower the average entry price, or the break-even level.
In practice, when at some point the price will turn in the favorable direction and will begin to rise, the trader won’t have to wait for the price to go back to the price level of the first trade to be at least at break-even, since there will be the other transactions that will begin to earn pips.
The price, at which the sum of wins and losses of the various trades is equal, will be lower, so more achievable, compared to the price of the first trade, which will be much higher. This means “to lower the entry price” or “averaging down”.
These are the main categories under which, more or less, all the Signal Providers can be categorized. Obviously, there are many nuances in between these categories and boundaries are not always so definite.
In fact, many of the Signal Provider could easily fall into more categories, or could simply use, at the same time, techniques that belongs to different categories.
In the next lesson we will see what are the risks for a follower investor with each of these categories.
Like any type of investment instrument, Social Trading also has a certain amount of risk.
Each Signal Provider category has some parameter characteristics of strengths and, of course, of weaknesses. In this chapter, we will concentrate on the latter.
In addition, a Signal Provider’s operation is not the only risk-carrier, but there are others too. However, don’t worry. Once you will know it, it will no longer be risk, but only another element of the puzzle, to be considered together with all the others.
Risk with a long term Signal Provider
Rather than risk, for a followers investor who decides to use this kind of Signal Provider, we should talk about the need to have the right mindset.
The problem, if you choose to set up a long-term strategy, is that most likely, for a long initial period, you won’t see any particular profits, but rather small losses.
In general, Signal Providers who seriously use long term techniques are the least risky among all, because they never leave losses to run, but instead they cut them trying instead to let profits run. It won’t be an immediate process, and many losses will be cut before you see some nice profits exploding into your account.
For many followers investors this can be a problem because they may think they have made the wrong choice, and they may leave the Signal Provider without giving him enough time to express its potential, perhaps missing an important opportunity.
The Long Term Signal Provider, therefore, are not good for those who cannot wait. However, as said many times in the first investing course, the ability to manage risk, and so to be able to wait and have the right patient, is one, if not the most important, among the qualities that a good investor should have.
Risk with a day trader Signal Provider
As mentioned for the Long Term, even for Day Trading Signal Providers we don’t properly speak of risk, but rather of right mindset.
If for the Long Term you could see a long series of small losses before seeing a profit explosion, with Day Trading you could encounter some series of losses and profits very similar to each other, before seeing a real and permanent capital increase.
In other words, in the day trading techniques is very common, for certain periods, for profits and losses to be equivalent, and that the account balance continues to rebound without rising, remaining fairly stable, or maybe down a little bit.
Again, it’s just a matter of having patience in the strategy of the Signal Providers you have previously analyzed. If his modus operandi has not changed, it probably means his strategy is going through a non-convenient cycle, but that, given the statistics on which it was founded, sooner or later it will come back to bring new profit to the capital.
It’s all about controlling risk and have the right patient.
Risk with a swing trading Signal Provider
This category, as always, is a little bit half-way between the long-term trend follower and the day traders.
As with the long term, there may be several attempts to catch the swing ending with stop loss. As with day trading, profit and loss (although the extent of profits is usually much greater than the losses) may be equivalent, or lead to meager gains even for long periods. So, here also you need a good dose of patience and acceptance of the strategy.
Risk with a scalper Signal Provider
From the scalping category onwards, we can rather talk about real risk.
The main problem in applying such a strategy lies mainly in the slippage. As you know, the slippage is that very small difference between the price at which the Signal Provider’s trade was executed with respect to the price at which the follower’s trade was executed on his account.
It’s a very small difference, often against you, caused by the inevitable passage of time, although very short, during the replication process, and by the small price differences that may exist between different brokers.
With a Scalper Signal Provider you will have a huge amount of replicated trade, each one with its intrinsic level of slippage. Considering that the profit margins of Scalpers are very tight, even in the order of less than ten pips or just a couple of pips, if moreover you’ll have to to subtract each time the slippage, you run a real risk of compromising the strategy’s performance.
For this reason, extreme scalping strategies must be avoided in order not to see the potential gains eroded by the multiplication of slippage without brakes.
Should be further noted that some Social Trading company make sure to not allow Signal Providers to use extreme scalping strategies.
Risk with a martingale Signal Provider
In no uncertain terms, for us these are the most risky of all.
But we must also recognize that, to an inexpert eye, they are the most attractive, and it is here that the trap can be triggered.
By not accounting their losses, they are the only traders that, for several days, even in a constant way, could give you only profits. In addition, since the losses are recorded rarely, you will often find them in the top positions of the Signal Provider’s ranking proposed by the Social Trading companies.
As mentioned before, the methodical willingness to not cut losses is the most risky thing you can do in trading and investing in general. On the other hand, it’s also true that such a technique, very often, could prevent to account a loss when the price takes another direction. It just takes to wait a few days, and the martingale takes its course, quickly recovering all the losses in order to save the situation and return at break even, maybe even with a small gain.
The problem is that this does not always happen. As said and repeated many times, the market, despite all the statistics a person can study, is an irrational creature. There will be times, and you can bet that sooner or later they will come, when the price will not retrace his steps, even after weeks, running violently in the opposite direction than desired.
While increasing the trades number allows you to recover quickly, I’s also true that, in a situation in which the price won’t come back, that high number of losing trade will dramatically increase the risk due to the level of overall losses.
If you are not sufficiently prepared, these situations can be fatal for your account.
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The commissions risk
Up to now we have seen the psychological or technical risk of following one of these Signal Provider categories. Now is time to speak of another possible risk, which can be found in all the Signal Provider categories seen so far, but that affects the most the scalping and martingale Signal Providers.
To let you understand, I have to, first of all, explain in detail how usually a Signal Provider gains sharing his signals through a Social Trading’s company.
For sure you remember, from the lesson in Forex course, that when you open and close a trade via a broker, every time he makes us pay a spread, which is calculated by simply adding a small amount to the real market spread. In the case of Forex, usually the broker adds about 1 to 3 pips as spread, but this can vary both for the broker, or for the currency pairs taken into account.
In any case, the spread is the profit that the broker puts in his pocket every time you open and close a trade. Regardless of whether your trade has gained or lost, you always pay the spread.
In Social Trading the earnings, both for the company and for the Signal Provider, derive precisely from that spread.
In practice, when a follower connect his account to the Social Trading company, this company contacts the follower’s broker, and an agreement is signed. This agreement usually concerns the operations that will be open on the follower’s account.
All the spreads the broker will earn depend on the fact that his client is following the Signal Provider via the Social Trading Company. The broker therefore agrees to pay the Social Trading company a part of the spread paid by the follower in every transaction, in the form of commissions. The Social Trading company, in turn, will correspond a part of the spread to the Signal Provider that generated the signal.
I’m sure that now everything starts to be clear. We can now make two observations:
- A Signal Provider gains if and only if he’s followed by follower investors with a live account, with real money. All those who follow him with demo account won’t make him earn anything
- The more operations a Signal Provider open, the more fees he collects, regardless of whether his operations made the followers gain or not. The spread is always paid.
It’s obvious that, given these conditions, many presumed traders are not landed in the Social Trading circuit to share their experience and, at the same time, to earn some extra money, but rather to gain only thanks to the fees, even though they knew very little or nothing about trading.
Now you understand why especially Scalper and Martingale are a high risk from this point of view, in particular martingale. Many of these alleged traders rely on this rather simple mathematical procedure, which in the short term can yield excellent and very attractive performance to the inexperienced follower.
Imagine. A very high percentage, or even the 100%, of profit trades. Almost no losse. Steady profits every day. This may sound a dream, and in fact it’s just that, a dream, or rather a mirage.
Many followers investors, who have tried Social Trading without any knowledge and experience, have come across these sharks. You can imagine how it ended for almost all of them. A very brief period of happiness before the great sword scythe their accounts.
The hard Social Trading truth
Your legitimate consideration may be “But, by doing so these Signal Provider will also risk their own money. While they earn commissions, on the other hand they will lose their capital.“
Let me reveal the last piece to make you fully understand the risk of those who make Social Trading only for the commissions: in some cases, (not always and not with everyone) the Signal Provider can operate and send his signals even from a demo account.
That’s right, from an account with virtual money, so without risking anything of his own capital. Of course, the Social Trading company will highlight this factor, and it will be definitely something to keep in mind when you will do your evaluations.
Moreover, even in the case of companies that do not allow Signal Providers to use demo accounts, but only real accounts with their own money in, the risks are not entirely eliminated. Thanks to leverage and the new usable quantities (once there was only the standard lot, now there are also mini, micro and nano lots, that are 1/10, 1/100 and 1/1000 of a lot) a Signal Provider can open an account with a few hundred dollars and still have a high level of margin to be able to use these risky techniques. If all goes well, the profits from commissions could be very high, while in the event of a failure, their loss would be only on the small open account.
I won’t deny that this kind of alleged Signal Providers still exist today, and that many novice investors still eventually fall into these traps.
Now, however, this is no longer your problem.
With what you’ve learned, and what you still have to learn with Investingoal, you’ll discover how to recognize and avoid these risks with no difficulty, going rather to find and appreciate those traders who work seriously and professionally, for the common benefit of Signal Providers and follower investors.
Our common mission
Let me add one more very important thing.
Now that you know how this mechanism works, and what is the risk for an inexperienced investor, it’s your duty to make sure that as many people as possible will know how to defend themselves. One of the most ambitious Investingoal’s goal is to be able to make aware of these risks anyone who wants to try, or is already using, Social Trading, and ensure that all the sharks chasing commissions will die of starvation.
Only then can we have a clean Social Trading, really founded on knowledge and professionalism.
There’s an easy way for you to be able to do this. Continue your journey with Investingoal, share our content with your social networks, and above all, join our community in order to make it grow.
This will ensure that more and more investors will come on Investingoal and will find out how to protect themselves. We, of course, we will be happy for obvious reasons, but I think you will be too, because you would have done the right thing.
Because of you, those who will arrive will be able to save themselves from the possible dangers. At the bottom, of the spirit of a community is just that.
Protecting ourselves together from the risks, and sharing together all the benefits.
We have seen the positive and negative characteristics of each Signal Provider’s category.
Now we just have to discover the two pillars, the two main components, those we will always analyze first whenever we will approach a Signal Provider.
We’re talking about the Equity Line and the Drawdown.
These two figures will be the first great divide between “interesting” and “to be discarded“. Your question at this point could be: “But, if they are the 2 main elements, the ones to start with, why do you speak about them only after the other parameters?“.
Here is why. As we have found through various feedback, many people make the mistake of relying solely on a rough analysis of these two elements, avoiding to go deeper in the analysis of what we saw in Chapter 6, or, even worse, not being even aware of it.
Equity Line and Drawdown are the two basic elements but, for the avoidance of doubt, they are not enough to make a good choice. These are the two essential elements to start, but, after the analysis, you absolutely have to analyze all the others. Otherwise, the possibilities of following a risky Signal Provider grow a lot.
In chapter 6, 7 and 8 we’ve clarified what are the elements which you must consider every once in a Signal Provider, now we’re going to see the two that will help you decide which among the thousands of traders to analyze further.
The Equity Line is a graphical representation of the Signal Provider’s account balance.
The chart that represents an Equity Line has, on the ordinate axis, the account balance, and, on the abscissa axis, the time, or the serial number of performed operations. The combination of the various points creates a line that represents the evolution of the balance, and it’s called precisely Equity Line.
We can make the first big division between:
- the Equity Line that show the trend for each trade
- the Equity lines that shows the daily performance, that is the final balance of what has been done during a trading day.
With the latter we might find times when the Equity Line is flat. This is because if the Signal Provider makes no operation during that time, the line will mark precisely the same constant value corresponding to the last balance. In the first case, instead, we can never find flat periods, because it doesn’t take into account the passage of time, but only the trade’s earnings or losses when it actually get closed.
Another division we might do is between:
- the Equity Line that shows the balance trend only for closed positions
- the Equity Line that also include the open positions movements.
For the Equity with only closed positions, in the case of daily progression, it will be clearly a balance formed by the sum of only the transactions closed during the day. These equities are the classic and the most famous ones, and they are very useful in understanding certain types of behavior of Signal Providers.
However, an untrained eye may sometimes misinterpret this kind of classical Equity Line. To explain better, if I close an operation, but I have other 10 open positions on the account, my balance situation could be very different than the one shown by an equity line with closed-positions only.
To give a practical example, let’s think about that who almost never closes a losing operations (the famous martingale). His classic Equity Line could be perfect and always climbing, since he closes his trades only when they are in profit or, if added together, they are at break even. In fact, the trader could have at the same time many other trades open at a loss, but the classical Equity Line would show only the “+10 pips” of the day, while it would now show the “-1000 pips of open positions.”
That’s why there are other types of Equity Line, which in addition to the balance of the closed positions only, they integrate within them also the real balance values, in view of all the open positions. There may be various types, such as Equity Line that includes only the open positions at a loss, or that include also those in profit.
The key thing when you look at an Equity Line is to know according to what criteria it has been designed, in order to have a clear view of the data you are looking at being able to make the right considerations.
The complementary element to the Equity Line, which extends the analysis opportunities, is the drawdown.
In simple terms, the drawdown represents the losses of a trading asset, or rather, the level of losses incurred before returning to profit.
Looking at a normal Equity Line, which has ascent moments and descent moments, the drawdown are all those descents that have occurred and that have been followed by new ascents, with new highs in the profit balance.
“How many losses the trader had to bear before being able to generate new maximum of profit on his account?“
This is the question to which the Drawdown responds accurately.
The drawdown can be expressed in two ways:
- we can consider the losses in absolute terms, such as money or pips
- we can consider it in terms of percentage.
The percentages help us with the analysis of the effective capacity of the Signal Provider’s trading strategy, while the absolute values, of money or pips, will help us mainly in the construction of our portfolio. Both factors, in any event, concur to support the decisions about money management, as we shall see in particular in the next lesson.
In our view the percentage Drawdown must always be calculated in two ways, or better said, taking two different references. Once you’ve identified a drawdown, you can calculate what is the percentage amount both using the total accumulated profits, both using the amount of profits achieved just before the Drawdown itself began. Both values are very important, and can describe this aspect of the trader’s performance from two different angles.
Percentages help us to observe the drawdown from another interesting point of view. If a Signal Provider loses 50% of his pips, in order to return at least to break even, he will not have to produce a new performance of just the 50%, but rather of the 100%. Yes because, if he loses 50%, he has halved his gains, therefore he has half the capital. To make sure that half will come back to being a whole, he will have to double it, in other terms, to do a performance of the 100%. We must therefore always be careful, because the higher the drawdown, the more difficult is to recover the profits.
As we have seen for the Equity Line, also the drawdown can be calculated and expressed in different ways, depending on what is considered, if only the closed positions, or if there are also the still-open positions.
The classical Drawdown in based on the classical Equity Line losses, caused by the closed and accounted operations only, while the one that include the open position too calculates how much the balance actually dropped in terms of capital, against all open positions.
Both these ways can give indications but as you can image, the main interest must be given to the Drawdown that include the open positions, because in this way we can actually observe the risks that have been susteined. Each operation, before being closed, oscillates. To calculate the possible risks I need to know how deep the downwards oscillation was, and then to know how deep the downward oscillation of the whole account was, considering the sum of all the trades open at any given time or day.
Beyond all the ways in which it can be represented, the value that interests us the most is the Max Drawdown, ie the maximum capital reduction before returning to create a new profit high in the balance.
Other values that may be useful are also the Average Drawdown and the Drawdown frequency, that is how often they occur.
Equity Line, Drawdown and all the other elements of analysis we have seen so far, when combined intelligently they concur to help the follower investor in his decisions about how to handle his money allocated in his portfolio, namely, about his Money Management.
In the next lesson we’ll make the following question.
“Given all these premises and these characteristics of the Signal Provider I have chosen, how can I best use my money to get the biggest possible returns?“.
Money management tips and best practice
Money Management is the management of the money used in all of our assets, and its primary goal is to control risk.
Managing your money wisely is the real dividing line between success and failure, and that is why many trader or followers investor have difficulties at first, because they underestimate the importance of money management in their investment strategy.
Even the most profitable and successful strategy in history could cause you serious problems if you don’t have a clear idea of how to manage risk, and therefore your capital.
Let me make an extreme example to let you understand properly. Let’s suppose you’ve found a strategy that wins 99 times out of 100, a real prodigy, almost a miracle. Enthusiastic, you take your 10,000 usd account and you bet everything of this strategy. Unfortunately, the first transaction made was that single losing operation out of 100. After that one, the system started with the other 99 winning trades in a row. Too bad for you though, because by betting everything, on that first trade you have burned your balance and you have set yourself out of the game just before you were about to get rich.
Now you have clear the concept of what it means Money Management for risk management.
Any investment, any strategy, any Signal Provider carries a certain level of risk. It’s inevitable and it’s part of the game. The ability of the investor is to assign the right amount of capital to each piece of the strategy, so that the whole structure can continue to operate efficiently and with as little risk as possible.
In Social Trading, since it’s a real form of investment, we must decide which and how many Signal Provider to include in the portfolio, how much capital to assign each, which Lot Size to assign to each Signal Provider according to the assigned capital’s share, and finally, the control levels for making future management decisions.
All of these actions concur to shape our Money Management.
How much capital to assign to a Signal Provider
Any Signal Provider brings with him his strategy and his performance, with its relative parameters, peculiarities, performance levels, but especially risks. From all these parameters derive the Money Management reasoning, designed to indicate what is the ideal piece of capital to be allocated to the trader, so that he will produce his best performance, putting the least possible at risk the portfolio stability.
How much to assign also depends on your initial investment objectives. It’s clear that, if you have a conservative goal, you will give more space to very quiet Signal Providers, and you will diversify with a smaller slice assigned to some more aggressive Signal Providers. Conversely, in case you want to instead aim at a great return on the investment.
Speaking in terms of percentages, a good money management strategy could be to allocate 50-60% of the portfolio in Signal Providers suited to your goal (aggressive or conservative), 20-30% in opposites Signal Providers (or with different characteristics) in order to diversify, and leave the remaining part of your balance as protection capital.
We believe a lot in the protection capital. Social Trading is an investment that allows incredible returns on your capital, but it also brings risks that should not be underestimated, especially when you consider the fact that the management is entirely in your hands, and you may not have the slightest experience in this field, but only theoretical concepts.
To keep a slice of capital out of the game means to protect yourself further, in the event of serious errors or unexpected events. Should you encounter some obstacles along the way, that slice of capital will always be ready to give you back a bit of oxygen. You will then see in more detail what we mean.
Deciding these percentages is more an art than a mathematical process, and the experience is definitely what will help you the most in finding the best investment portfolio calibration and the right money management strategy.
However, there are also mathematical formulas that can help you figuring out how much percentage of capital a Signal Provider can handle according to his performance.
Obviously, the percentage values will impact on the number of Signal Providers you can use. If you have decided to dedicate the 60% to aggressive Signal Providers, then you cannot use 5 traders that, according to certain mathematical formulas, should occupy a slice on your account equal to the 20% each.
How many Signal Provide to use
So, now you’ve decided the percentage of capital to use for your strategy.
The next step for a good money management is deciding how many Signal Provider to use. In addition to what has been said in the preceding paragraph, we must also think about the account’s balance capacity, because if you have a small account and you follow too many Signal Provider, you may not have enough margin coverage to replicate all the transactions, as explained in Forex . This is Money Management too.
In general, it’s better not to overdo with the number of Signal Providers, for the sake of simplicity in the management, and for what Warren Buffet said: Wide diversification is only required when investors do not understand what they are doing.“
you don’t need tens of Signal Provider to give an impression at the portfolio according to your goal. Study many Signal Providers, but in the end choose your favorite, focus on those, and learn to know them as much as possible.
Which lot size to assign to a Signal Provider
This is one of the most important topics about Money Management in Social Trading.
“How many lots, or mini lots or micro lots should be assigned to each Signal Provider?”
The answer is not easy, but math and logic can offer a great help.
- The lot size must reflect primarily the percentage of capital we have decided to assign to that trader.
- It must reflect the level of risk of the trader himself.
Again, to combine these elements perfectly is a practice you can acquire with time and experience, but to create for you an excellent starting point for a good money management you can start using some calculations.
The most important value in this case is the Max Drawdown, and it’s easy to guess why.
If past performances are not a guarantee of future performances, it’s still true that they are a possible preview of what you can expect. In any case, they are what you should rely on to make your best decisions. With this in mind, the Max Drawdown value is a very good indicator of the worst you might expect from a Signal Provider.
The worst Signal Provider’s experience is what , for translation, you might experience too, if the trader will replicate such a moment.
This means that the Signal Provider’s Maximum Drawdown is the fundamental value to understand how much risk we can tolerate, how much money we are willing to risks, and therefore what lot size that Signal Provider can handle.
Money management monitoring levels
Now that you’ve clear all the parameters for setting the Signal Provider’s operation within your portfolio, let’s see what is left to do about money management.
It remains to establish what the levels of control for your capital’s evolution should be.
Let’s say that a Signal Provider encounters a drawdown period that has never occurred so far, thus creating a new Max Drawdown level. At that point you should go to review the trader’s statistics, and maybe also update all his settings.
You also need to be clear about the level of expectation on the maximum general and cumulative losses of the account. Imagine if all the Signal Provider should produce at the same time their worst historical performance, and calculates how much your account may be affected by that. If you were to reach that level, it means that it’s time to reconsider the whole portfolio structure, and particularly the choices about the Signal Providers.
These can be two negative scenarios. Now it comes the good one.
There will come a time when your earnings will allow your portfolio to make a step further. Your capital will be raised enough to support an increase of the Lot Size assigned to that Signal Provider, therefore to begin to deal with larger capital for the progressive growth of your account.
Also being clear about this level is part of a good money management strategy.
Before proceeding to the conclusion of this course on Social Tradidng and beginning the next one, we need to spend some words about factors like time, resources and expectations.
Many investors wonder what the timings are when it comes to investing their money with Social Trading.
On one hand, an investor could easily take his money, give it to someone else to handle it, pay him, and then wait, with all the risks and low returns that follow. This method, which is the classic one, would require a minimum investment in terms of time.
Or, on the other hand, you can choose to invest a bit of your time for a while, learning how to invest on your own, and how you do it via Social Trading.
This method will definitely take more time, but on the other side you’ll never lose the total control over your money, and you’ll have access to potential returnes beyond compare.
How long does it take to learn Social Trading?
A how much time it takes to be able to start operating successfully depends on you.
For sure there is a fact. By arriving on Investingoal and following our courses you are drastically reducing the time needed for your education. To start with no educational material exposes you to the dangers of highly risky choices, dictated simply by your lack of knowledge of the topics.
By starting alone, you would need to learn by doing experiences. From one point of view, it’s a great thing, but unfortunately here there’s your money involved, and risking them to make experience would make no sense. Starting with Investingoal instead allows you to have, from the very beginning, all the basic knowledge you need to start safely, excluding the risk of threatening immediately your capital with very risky choices, dictated by the total lack of experience.
In addition, all your following experiences will have a different and greater value, because, thanks to your solid base knowledge, you’ll be able to contextualize them in a much more organized and useful manner for your field education.
Making mistakes is normal, it happens to everyone, even after years of experience. The important thing is that an error never has to put at risk your account stability and your resources, and that from that mistake you can really learn something.
The knowledge you’ll get with Investingoal has been precisely designed for this.
How long to succeed?
In reference to the time factor, there’s another important issue to deal with. And it’s about how long it takes to be able to make money.
Here too it can be personal and it depends largely on the type of strategy you have decided to pursue. If you have a Long Term Strategy, you cannot expect to see results after only one month. But even if you have designed a Short Term strategy, thinking you can get great results after just two weeks will put you in a dangerous situation.
As said before, we are talking about investment, not about betting or gambling. If you want to double your capital on a night, I suggest you to try the casino roulette. For sure you will have more chances, and it will take much less time, in the sense that, within a single evening, you will know right away if you have doubled your capital, or if, more likely, you will have lost it miserably. This can also be a method for saving time, perhaps not very intelligent.
All good things take time and care, the art of investing especially.
Both when you study or when you set up your portfolio, take your time, do not rush. Think hard about all the possible variants, about all the possible problems, do a brainstorm of everything that can be connected to your strategy, pros and cons, best and worst moments, timing, and above all the rules that your Signal Provider shall comply with, penalty a Lot Size reduction or the total disconnection.
Investing means to be patient
Once you’ve done all this, the hardest part of an investor’s psychology is called into question: the ability to be patient and to wait.
It takes time for your diversified investment portfolio to work. If, on one hand, to see your capital status whenever you want is a great thing, on the other hand it may also create a possible stress.
Imagine you set a long-term strategy. As mentioned above, it may take months to see the results. If you cannot stay calm and you frantically checks your account several times a day, I assure you that you will suffer some kind of stress and dissatisfaction.
If the conditions and motivations that have led you to choose certain Signal Provider, and to assign certain values, are still valid after weeks or months of no profit, then it might mean that your mind is starting to suffer the passage of time.
When you begin to feel this discomfort you must be very careful with the actions you’ll decide to take, because if you decide to change strategy at once, you will risk to lose the moment when you would have finally begun to realize the long-awaited profits.
I can assure you, there’s no worse anger and frustration than the regret of not being able to wait a little bit longer, and having lost the chance to realize what was about to come true.
On the other hand, if your strategy conditions should disappear according to the rules that you have placed at the beginning, then you should act without hesitation. This is the flip side, stand still and don’t take decisions out of fear of change is what in psychology is called “maintaining the status quo“.
This calls for clear rules established at the beginning, for not having doubts about what you should do. The ability of a good follower investor is precisely this, to set rules not too hard and not too lascivious, so that he can move wisely into the possible scenarios, and especially so that he can respect them.
The first year
In principle, however, if the follower investor have properly studied all the arguments, have taken all the time to proceed with all transactions in these courses, and have checked the accuracy of all its settings, assuming his Signal Providers will do their duty without making mistakes along the way, then the minimum time to leave the portfolio working before making considerations will be of at least 6 months, but much better a year.
These are the minimum timescales for your thoughts and feedback on performance to be reliable.
Always taking a Long Term strategy as example, it would make no sense to complain about the performance after only 5 months, knowing how these strategies work. Evaluations of this kind are not so much logical, for the simple fact that it has not been left enough time to the portfolio to show its real potential, or perhaps also to reveal its real problems or deficiencies.
For both, the right time is needed. Otherwise you are not acting in a sensible way, but only by making decisions based on emotionalism, which is very destructive in the investing world.
To reiterate, this doesn’t mean that if a Signal Provider betrays his own strategy, or you see that losses are endangering your account, you still have to wait 6 months before taking any action. The rules you have set at the beginning answer just to that: to understand when and why you need to take action out of the ordinary.
The initial capital
We must now consider arguments of a monetary nature.
Another question that many people ask is “with how much money should I start?”. By now you should know, these are all relative topics which may vary from person to person. However, we can make some general observations.
With Social Trading, thanks to the financial leverage, you can start with just a few hundred dollars. With Zulutrade precisely 250 usd, with eToro 200 usd. On one hand this aspect is great because it allows the access to this investment tool really to everyone. On the other hand, however, as usual, it can be cause of risk.
Starting with such a small amounts of money can cause frustration. The percentage of returns that can be obtained are the same as those obtainable with large capital, but it’s obvious that the 50% of $ 300 is very different from the 50% to $ 30,000.
To obtain a 50% a year, but even more as we will see, is an obtainable result with Social Trading, but what this 50% represents in monetary terms depends only on your initial investment. Having a too small capital can cause a certain level of frustration, which then can bring you to take bad decisions, the worst of which to increase the exposure and the lot size, for trying to increase profits.
As you know, this increases also and above all the losses, and therefore the entire risk related to your portfolio. In addition, with a small capital you may not have enough coverage, in terms of margin, in order to follow more Signal Providers with safety parameters.
To have a good starting capital allows you to obtain significant results, which will enable you to live in peace the evolution of your investment, and above all, not to take any unnecessary risk caused by the impatience of getting immediately substantial profits.
As a general rule, you should always invest a sum you won’t have trouble if lost, and that would not ever jeopardize your financial security and financial stability. But at the same time, you should make sure that this sum is as large as possible.
Much better to save money the necessary period while studying and you practicing on paper, rather than starting with the little you have, running all the above risks. Or, you can always start with small amounts, but with plans to pour new money whenever possible, as explained in this lesson of the Investing For Dummies course.
How much can you earn?
Finally, we arrived at the last topic, for sure one of major interest.
“How much can I earn with Social Trading?”.
Among those we set ourselves so far, this is certainly the most personal and relevant question of them all.
Obviously, we want to try to think about how much you can earn “at maximum” with Social Trading, what are the major percentage of return obtainable. This is not an easy question to answer. The reason is simple.
The decisions on what lot size to use are taken by you, so how much to earn it’s your choice, but as you know, when you choose, you do it also on the related risks. You can even design to achieve the 500% return in a year, you can do it, the tools are at your disposal. But, either you have found truly exceptional Signal Providers, ultra-profitable, and above all ultra-safe strategies (in that case, please tell us who are they 🙂 ), or if, most likely, you have not, you’re risking too much.
How much you can earn should always depend on how much you are risking, and in order to minimize the risks and maximize your profits you have to be especially good at finding the suitable Signal Provider and professionally building your strategy.
We have already shown you that the Retail Forex or CFDs Traders can get great returns on their capital, then it means you can do it too. The important thing is to know how to handle this huge potential and not get burned.
Your expectations with Social Trading can be very high, but please try not to overdo. I won’t give you limits on what return you can get, because it would not make sense. You can aim at anything you want.
However, I want to be sure you are aware that every goal always hides potential risks for your capital preservation, risks that you must be able to identify, analyze and control. If this has been done, and these risks are acceptable, or they are not, but you still decide to run them knowing what the consequences may be, then go right ahead.
I wish you always, and in any case, good luck and good investment.
This being said, we always recommend to not overdo. As you will see very soon, with Social Trading you can get good returns on capital, not accessible by other classic investment method, still maintaining the risks moderated.
Do you want to increase the money you earn? Pours more capital and thus increases the base on which the portfolio is working, keeping the same rate of risk exposure.
This is true investing.
Here we are finally to the conclusion of this course on investing with Social Trading.
It’s been a long journey, but this way we have been able to really touch the key topics that are critical for the success in this discipline.
If you have followed all the path we have suggested in this “Learn” section, now you have all the information to really know what the art of investing is, how it’s applied in Social Trading, and the market in which you will operate mostly, that is Forex, the foreign exchange market.
You can open a demo account with both, to begin working with the exact same features you can find in a real account. We recommend that you open your demo account through our affiliate links, with NO additional cost:
- ZuluTrade: http://www.zulutrade.com/index?ref=1288530
- eToro: http://partners.etoro.com/A66463_TClick.aspx (66% of retail CFD accounts lose money)
It’s time to invest with Social Trading
So, here we are.
Now it’s time for you to really begin to invest with the Social Trading.
With your demo account in hand, we recommend you to explore all the available features and practice in general as much as possible. Do not make the mistake of starting to take decisions lightly, or even worse randomly, just because “the account is demo…”
Get used immediately to make smart and reasoned decisions, even though you may not have yet all the advanced knowledge required to operate as a true professional.
For now you have to get familiar with Social Trading, with the tool you will use. Start to observe the Signal Providers and the investors, try to interpret their performances through what you have learned so far.
I know you won’t resist the temptation to start following some traders, and I would say it’s the case that you do it. A demo account is also made for this. Just don’t be surprised if by chance strange things happen or your start losing without even realizing it. It’s ok, it can happen if you don’t have the right advanced knowledge.
But this is definitely not a problem.
You’ll have the chance to understand how to analyze practically a trader, which are specifically his strengths and weaknesses and how to identify them, how to really calculate possible risks, and above all, how to build a well-balanced people-based portfolio and how to manage it over time.
Then, you have two free courses to start demo-investing with both these companies:
This is a journey that, if done properly, can give you a lot of personal, emotional, but of course, for what matters us the most, especially economic satisfactions.