How to Choose the Best Social Trading Platform
An excellent broker is an indispensable tool for any trader! Do you need to select a reliable social broker or social trading platform? This piece is a must-read that covers the most important considerations.
Broker’s Size and Number of Users
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 that the more other users 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.
Size matters – a large social broker often has more benefits to offer.
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.
*New to social trading? Take a look at ‘What is Social Trading’.
Of course, the larger and more popular a social trading platform is, the more regulatory scrutiny it finds itself under. As a trader, this 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.
Commission Structure For Copied Traders/Popular Investors
Different social brokers have different commission structures in terms of what popular investors (copied traders) earn. For example, ZuluTrade, a really popular social trading facilitator/broker, offers a fixed commission to its copied traders of 0.5 pips for a round turn trade (except for traders with U.S. followers, who are recompensed by a variable monthly membership fee). That means, that for every standard lot copy-traded by the people who copy these traders, the copied traders will receive about $5.
Investors and traders should be aware that different commission structures offered to copied traders could affect the way these traders manage their portfolios.
ZuluTrade is an excellent social broker and offers a variety of features and forex trading tools.
eToro, another fantastic social broker compensates its popular investors in different ways including the following:
- Fixed monthly payments according to the popular investor’s level.
- 2% commission on the annual dollar amount under management (AUM). (Only for Elite level popular investors).
- Spread rebates of up to 100%.
- Monthly marketing allowances.
- Quarterly education allowances.
- Allowances for annual events.
*All of the above benefits, fixed payments, and commission depends on the level of each popular investor.
Tradable Financial Instruments
The variety of assets offered by social brokers is an important consideration when choosing a social broker. The variety of financial instruments offered by social brokers affects the level of diversification that may be achieved by traders and investors. Also, it may have a significant effect on their earning potential because a wider variety of tradable instruments could present more opportunities to profit from.
*Recommended reading: What is a CopyFund?
Compatible Brokers and Trading Platforms
ZuluTrade is a social broker/social trading facilitator that connects to different forex brokers via the MT4 trading platform. That means that traders can use their own broker’s MT4 trading platform to trade with ZuluTrade. ZuluTrade also offers its own trading platform called ZuluTrade Platform.
On the other hand, eToro and Ayondo only offer their own trading platforms to trade with (eToro platform and TradeHub, respectively). These platforms are better equipped for social trading than MT4 but many users prefer MT4 because they are used to it and may have an MT4 expert advisor which they use to provide trading signals to followers who copy their trades.
Is Automated Trading Allowed by the Social Broker?
Some social brokers like ZuluTrade allow automated trading with expert advisors (trading robots). Both manual trading and automated trading have their own advantages and disadvantages. Copied traders and copiers may have different preferences and opinions about automated trading and should make sure that automated trading is facilitated by their social broker if they want to use it.
*Don’t know how to approach copy trading? Take a look at ‘Copy Trading Strategies’ for some handy tips.
Are Copy Trading Signals from Demo Accounts Allowed?
Many social brokers require copied traders/popular investors to provide their trading signals from real money trading accounts. An example of such a social broker is eToro. Then, other brokers like ZuluTrade and Ayondo allow copied traders to provide trading signals with a demo account.
With Ayondo’s volume-based remuneration option for its Top Traders (copied traders), these traders may use a demo or live account to provide trading signals.
Although traders and investors who copy other traders generally prefer to copy traders who trade from real trading accounts, there certainly are copied traders using demo accounts who perform really well. Traders shouldn’t necessarily exclude copied traders using demo accounts. In the end, performance is what really matters.
Spreads and Commissions
Social brokers generally charge a bit more commission on trades than standard retail brokers. The difference is usually not too much and when the great benefits of social trading are considered, this extra cost is really worth it. Traders who want to engage in social trading may want to compare the spreads and commissions between different social brokers, though.
Another major criterion on which social trading platforms differ greatly is the amount of information they give about each trader, 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 display a user’s entire trade-by-trade trading history since it would 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.
eToro has excellent analytical tools and accurately conveys trader performance.
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 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
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 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.
Does your social trading broker equip you with the appropriate trading tools?
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. Some platforms also offer Trailing Copy Stop Loss, an upgrade to the regular 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.
Last but not least, a crucial tool to look 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!