Social Trading is a process through which online traders rely on user generated financial data gathered from various web platforms as a primary information source for making trading decisions. This new and revolutionary way of analyzing financial data provides a ground to compare and copy trades, strategies and techniques.
Online trading and social networking are the internet’s leading two activities, and therefore it is no surprise that sooner rather than later someone was going to think of a cocktail of the two. The combination of the two activities also allows traders to share experiences with others, along with the other aspects of trading as outlined above.
In auto trading, traders simply followed other without the opportunity to interact. Social trading changes all that. Statistics have shown that with the increase in social media interactivity, forex social trading is also on the rise. The demand is so much that a personal survey done has shown that about 80% of brokers are now tapping into the opportunity, unlike just three years ago when one could count the number of brokers providing social trading services on the fingers of one hand.
Forex social trading can be of immense benefit to both providers and followers in a symbiotic relationship.
Providers: Lead traders who are followed by others are compensated according to a model that is usually agreed on between brokers on whose platform the social trading activity is carried out and the traders themselves. This can be a great way to earn from forex for those who are masters in the game.
Followers: Those who follow other traders are charged for the service. The charges are not so high, and are usually incorporate into the trading spreads that they incur when they engage in social trading. We have already mentioned the benefits of being in a social trading network. They are immense.
Social trading is broadly discussed as one subject but when we get down to the nitty-gritties, it has sub-categories.
The word social comes into play in the aspect of interaction between traders either via a forum, comments and blogs. However, over the last few years, the social trading platforms have now added the various forms of trading including Copy Trading and Mirror Trading.
In most cases, the term copy trading is used interchangeably with social trading with the reference to the same thing, thus making it the most popular form of social trading both in theory and numbers.
Copy trading is whereby traders are allowed to automatically copy positions opened and managed by a selected investor normally in the context of a social trading network.
It links the amount invested by the copy trader to the account of the copied trader, which leaves virtually every trading decision from allocation of stop loss, take profit limits or closing of orders at the mercy of the copied trader.
Trader can also open individual trades personally but those are displayed separately from the select portfolio of copied trades.
One of the biggest flows in copy trading is the timing differential between when the copied trader’s trade executes and when the copying traders order goes through. In most cases it takes only a few seconds and as such no much damage in terms of profit/loss outcome.
However, in some cases this differential can be huge and as such resulting into a big gap between the return made by the copied trader and the return the copied trader receives.
The main difference between mirror trading and copy trading is the process involved in identifying targets. With mirror trading, traders assess various investments strategies and historical returns, and then select the strategy that they wish to follow.
After that, they can then replicate the trades of the strategy developers to their trading accounts, in what now draws similar comparisons with copy trading.
However, as discussed, with copy trading traders simply select a trader whom they wish to follow based on success while in mirror trading, it has more to do with the strategy including (whether the copied trader is a swing trader, day trader or a position trader etc.), as well as, risk levels, leverage, and asset types among others.
Social trading has been welcomed by many especially novice traders over the last couple of years. It is a form of trading that has enabled some traders to improve their trading profits by significant levels especially those that copied trades of recommended traders.
One of the biggest benefits of social trading is that traders do not require any trading experience to do it. All that is required is to identify a trader with a good win-rate ratio and you are most likely to profit.
Social trading has the potential of shortening a trader’s learning curve. A trader can be transformed from novice to experienced trader. Rather than attend courses and seminars which do not deliver all the trader needs to learn in the few hours that such interaction takes place, social trading provides an opportunity for novice traders to follow the lead traders, copy their trades, and interact with the lead traders to understand why certain positions have been taken. It is simply a question of watch, copy, ask questions and learn. It is far better than auto trading, which is the precursor to social trading.
Unlike trade alert services where the subscriber to the service simply follows the trade alerts like a robot with very little personal interaction between the trade alert provider and the subscriber, social trading is a more personalized approach to the concept of trading in a community.
Additionally, Social Trading takes emotion out of the equation thereby reducing trading risk associated with psychological inclinations. Social Trading also helps traders share experiences via the various social platforms, such as forums, community websites and blogs, as well as, via comments sections.
Social Trading makes the game easy for new and novice traders. As such, it almost certainly curtails their efforts towards learning how to trade, which means they can only trade by copying others. Therefore, while trading can be an intense and high emotion activity, social trading takes out some of the fun that traders who trade manually experience.
The bottom line is that social trading has brought in a new lease on life for new and novice traders especially given the rate at which most traders blow up their accounts shortly after funding them. Metaquotes Inc, makers of the popular MT4 and MT5 software, have begun to incorporate functions on these platforms that will allow traders the ability to follow other traders in a social trading capacity.
We are now seeing mergers, acquisitions and innovations in the area of social trading. New demographics of measuring the performance of lead traders are being introduced so as to enable follower’s better gauge the performance of traders they are following. Social trading has established means for beginner traders to turn profits despite their lack of trading experience by capitalizing on the experience of others.
Social trading has also contributed to a great deal in helping various traders overcome difficult situations as the platforms encourage engagement between traders thereby sharing experiences that can be a source comfort for others.