What is Social Trading?
Well, let’s get down to basics. At its core, social trading is about sharing information. While every trader in a social trading network retains their private trading account, in order to participate in the social trading environment they agree to share certain details about their trading activity.
These details might include the instruments they trade (currency, commodity, index, stock, etc.), the entry and exit rates at which they bought/sold the instrument, the percentage of gain/loss etc. Not to worry, as far as we know none of the social trading sites divulge the actual monetary amounts of investment in each trade, but if you run into one that does, it’s advisable to stay away as you don’t want to run the risk of becoming a target.
What is social trading good for?
The answer is simple: by seeing what others are trading and the kind of results they are getting from their trading strategies, you are in a prime position to learn new techniques, to gauge market sentiment, and to be exposed to trading ideas from around the world. You are no longer confined to theoretical charts and figures, or market news; instead, you have direct access to what thousands of traders are doing in real time, and can use that information when making trading decisions.
The downside, of course, is that no matter how many times the wisdom of the crowd wins, there will also be times when it fails, so it’s always best not to follow the herd blindly, but rather take the data from your social feed into consideration along with traditional market info sources.
Most social trading platforms stream live information generated by their network through “live feeds” - much like the feeds you’re used to seeing on Facebook. However, some also borrow additional elements to bring you more concentrated information and even data analysis. For example, eToro, one of the more popular social trading platforms, collates the live trading data to create a “profile page” for each trader, that consists, among other things, of trading statistics that give a clearer picture of how successful each trader’s strategies really is.
Copy trading: taking social trading to the next level
Combining online trading with aspects of social networks is all good but when asked what social trading all about, most people will answer: copy trading. You see, while live streaming information is a nice addition to any trader’s routine, copy trading is truly a game-changing way to invest in the markets. It’s a way to take practical advantage of other traders’ know how and use it to advance your own trading game.
As you may have guessed from the name alone, copy trading is copying other traders’ trades automatically - or semi-automatically, depending on the individual social trading platform.
On the most basic level, this involves choosing traders to copy and deciding how much money you wish to invest in copying them. The trades are then copied automatically with the proportionate investment amounts, based on the percentage of funds invested in the original trade. In a sense, copy trading is much like a managed account (in fact several regulatory bodies have officially classified it as such) - even though the traders you copy don’t work directly for you, you are essentially letting someone else make the trading decisions for you.
How is social trading different from other automated trading strategies?
For starters, social trading takes the trading decisions out of your hands and places them in the hands of another person rather than an algorithm - for better or for worse. For better because the real person is staking their own money on the same investments, so they have an extra incentive to do well, and because they have the flexibility to adapt to live market situations. For worse because, well, being human, they are susceptible to human errors and emotional outbursts.
The real difference, however, and what is social trading’s real advantage, is the amount of control you retain over your account. With algorithm or robot trading, once you hand your funds over to the algorithm, most of the time you can no longer make any input in the development of your positions. The same is not true for copy trading. Many platforms will allow you to take a number of steps to control your “copy relationship”, from enabling you to place stops and take profit orders in order to manage risk, to giving the option to take over a copied trade - thereby severing the link between it and the original trade and placing it in your hands entirely.
This is an area where various social trading platforms differ greatly from each other and these differences can be a major deal breaker in your choice of social trading broker.
So, what is social trading all about? It’s about connecting with people and giving you the tools to use the knowledge and know-how of others to your advantage. How much you want to rely on others to make your trading decisions is up to you. You might want to simply use the social trading network of your preference as an indicator of investor sentiment, or you might invest most of you account in copying a variety of traders, there is no right or wrong way to go about it!
The important thing is to understand the benefits of social trading as well as the risks involved so you can make the best out of your social trading experience.