Social trading is a concept that allows market participants to copy or observe the actions of other traders. It is a fast-growing industry that has been embraced by both experienced and newbie traders. In this article, we will look at the history of social trading and how you can use it well in the market.
History of social trading
The idea behind social trading has been around for decades. In the past, it was common for inexperienced traders to watch what their seniors on trading floors were doing.
In 2007, three founders decided to use technology to automate this process on a bigger scale. They launched a company known as eToro, which is expected to go public in 2022 in a deal valuing the firm at $10 billion.
The concept behind eToro was simple. With social media usage rising, many people were looking at how to incorporate it into other areas. In its platform, experienced and profitable traders could become masters. On the other side, interested people could become copiers.
Due to the success that eToro garnered, more forex brokers decided to incorporate social trading into their platforms. Today, many brokers offer social or copy trading as a feature.
Etoro has also diversified its business model from just forex to other assets like stocks and indices. Today, people can track portfolios created by other experienced traders in an easy way.
How social trading works
Social trading is a technology that creates a situation of mutual benefit between experienced traders and the copiers themselves.
There are two parties. First, there is a master trader who has successfully run his trading portfolio for a while. Second, there is a trader who wants to copy trades by the experienced trader.
The middleman, in this case, is the forex broker. These companies have special tools that provide important details to the copier. For example, they provide them with the historical performance of the master and the commissions that they charge.
Finally, after assessing the performance of key master traders, the customer will select one or more traders to follow. By so doing, the master’s trades will be mirrored to that of the copier.
This approach provides a situation of mutual benefit for the copier and master trader. The copier will make money by simply doing nothing. The master, on the other hand, will make extra money by charging a commission for all profits they generate.
Who is social trading for?
Social trading in forex is an idea that can benefit people in all stages. People who will find it more useful are inexperienced traders who find it difficult to analyze and trade forex. For example, if you have tried day trading and failed, you can benefit by leveraging the experience of master traders.
Second, people without adequate time to day trade can also benefit from social trading. For example, if you have a day job, you can find it difficult to multi-task. As a result, you can benefit by using a master trader who does this for a living.
Third, experienced day traders who are active in the market can also use social trading. In this, they can focus on their trades and then diversify by allocating funds to other master traders. By so doing, they will make money from their personal accounts and those that track other master traders.
Finally, social trading can be used by experienced traders who have had a streak of poor performance.
How to become a social trader
The process of becoming a social trader is straightforward. First, you need to find a good online broker that offers social trading features since not all brokers offer them. Some of the best brokers that offer these services are eToro, OctaFX, CMC Markets, Forex Time, and Axi.
Second, you should create an account with your preferred company. Before you do this, you should consider things like the quality of customer service, typical spreads, and the markets offered.
Third, you should then sign-up for the copy-trading feature offered by the broker. The final step is where you analyze the various master traders, identify the best traders, and then follow them. You should also assess the fees that they charge for their trades.
Benefits of social trading
There are several benefits of using social trading:
- Enhanced returns – social trading allows traders of all levels to achieve enhanced returns by following people who have a proven track record.
- Diversified returns – as an experienced trader, you can generate diversified returns by incorporating the experience of other traders.
- Uncorrelated returns – you can generate uncorrelated returns by incorporating your trading with those of other people.
- Participating in forex – if you have failed to achieve success as a sole trader, using social trading can be a good fall-back plan.
- Saving you time – social trading saves you time in many ways. For example, instead of spending hours trading, you can be comfortable knowing that an experienced trader is doing it for you.
- Making money as you sleep – we all want to make money as we sleep. Copy-trading can help you achieve that.
Cons of social trading
While social trading is a good thing, there are some cons to doing so. First, it is not mandatory that your master trader will make you money. Besides, historical success is not always an indicator of future performance.
Second, at times, the fees involved could be relatively high. It is not uncommon for master traders to charge a commission of as high as 30%. These costs could be significantly higher. Finally, your profits are determined by the actions of the master trader. What if they decide to take a month off?
Final thoughts
Social trading is a popular concept in the market. In addition to copy trading, it can be defined as ways of using social media to trade. For example, many traders today use social media platforms like Reddit and Twitter for research. Others use platforms like Investing.com and TradingView that allow people to share their ideas to trade.
