How to Choose the Best Social Trading Platform
Skerdian Meta • 4 min read
Social trading made such a huge splash in the world of online investing that soon enough after its arrival on the scene circa 2010, social trading platforms started to pop up like mushrooms after the rain. Being spoilt for choice is a problem afflicting the very fortunate, but it is a problem nonetheless. After all, how do you commit to trading with just one social trading platform when there is always the possibility of a better one just around the corner, ready to cater to your every whim?
The first thing to do is to determine the criteria that matter most when choosing the best social trading platform for you. However, this too is no walk in the park, as the range of social trading platform is so wide that the selection of various unique features they have on offer can make it hard to zero in on the stuff that really matters.
So make this tough choice easier, we’ve narrowed it down to just a few basic criteria that you should look out for when choosing a social trading platform with which to register.
Size really does matter
The fundamental characteristic of social trading platforms is that they enable you to benefit from the know-how of others trading with the same platform. It stands to reason therefore that the more others there are, the more know-how there is to go around. Moreover, studies have shown that the bigger the variety of trading styles and techniques present in a network, the greater the opportunity for all network members to create balanced and profitable copy trading or manual trading portfolios.
On the other hand, when a network consists of a smaller number of traders, the selection of trading styles is understandably narrower and has a greater tendency to create “copy trading bubbles”, wherein a large percentage of traders in the network all copy the same handful of people and therefore have no way to hedge their investment on the off chance that these traders go bust.
And of course, the larger and more popular a social trading platform is, the more regulatory scrutiny it finds itself under, which for you, as a trader, means that there will be no risk of shady trade manipulations, conflicts of interest and all the other myriad of varieties of online trading fraud. Just in case though, it’s always recommended to read a few social trading reviews before you decide to sign up.
Another major criterion on which social trading platforms differ greatly is the amount of information they give about each trader on their network, including of course yourself, once you sign up. Even though the whole raison d’etre of social trading platforms is to make trading information available to others, some share more data than others, or in more transparent ways.
It is rare, for example, for social trading platforms to exhibit a user’s entire trade-by-trade trading history, since it would simply be too cumbersome to scroll through. So while the actions of closing and opening positions will show up on your feed, there will be no record of closed positions to be viewed later for each individual trader. Instead, past data gets agglomerated into statistics, usually represented through various charts and graphs to make it easier for you to measure each trader’s performance. This is where things get slightly tricky because this type of data can be presented in a million different ways, some of them highly misleading.
The best social trading platforms out there provide you with statistics that reflect each trader’s likelihood of success based on past results, whereas the worst among them try to pump up their traders’ performance in order to attract unwitting copiers. As we’ve discussed in our article “How to choose the best social traders”, stats like “Percentage of profitable trades” is a red herring because they are not even slightly indicative of how much the trader has actually gained over a period of time.
When choosing the best social trading platform for you, look out for a detailed portfolio breakdown, which shows you what instruments the trader invests in and how diversified their portfolio is, as well as a reliable indicator of risk, such as a risk score, as this factor can be quite difficult to estimate on your own.
Social trading platform tools
Finally, just like manual trading, social trading platforms come with different sets of social trading tools that can make all the difference to your trading outcome. Most of these have to do with managing you copy trading activity once you’ve already chosen the traders you wish to copy, although a good search function with lots of different variables is an extremely important tool in and of itself.
One such tool, surprisingly not found in a great number of social trading platforms, is a projection of what trade size you can expect when allocating a certain amount of funds to copying a trader. This might seem like a mere detail, but in fact, it can have a great influence on your decision of how much money to invest in any particular trader. For example, if you were thinking about copying someone with $100 and the projection tells you that with this investment you can expect an average trade size of only $0.5, you might be tempted to raise your investment amount, or find another trader to copy.
Another important tool is Copy Stop Loss. Just like a regular Stop Loss order, this tool enables you to place a limit on how much you’re willing to lose in copying any one trader. It is a surefire way to protect at least a portion of your investment amount against market swings and bad trading. An upgrade to the regular Copy Stop Loss, some platforms also offer Trailing Copy Stop Loss, which moves your Copy Stop Loss limits in relation to how much your investment has grown, thereby securing profits already gained. Naturally, some platforms also have Copy Take Profit orders, which are another handy tool to have at your disposal.
And last but not least, a crucial tool to look out for is the ability to take over a copied trade, thereby detaching it from the copy relationship and transforming it into a manually managed position. If you’re not content to simply keep an eye on your copy profits and are someone who intends to monitor copied positions closely, this tool enables you to have your say if a copied trade is not to your liking. Once you detach the trade you can then increase the margin, edit stop orders or simply close the trade if you have no faith in its future. This grants you additional control over your portfolio so you don’t have to sit idly by while someone else makes decisions you disagree with.
With all this in mind, check out our social trading platform reviews to start picking out the best social trading platform for you!